-----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, GGDCktQQFQ+hXCuK2Z9u0XNWg192MUB8d1ZX35MyQyPimVYHAs+4Zzxt/U0/DGfl EqiYbK0RS94WWvzXy+UGcg== 0000912057-00-015702.txt : 20000403 0000912057-00-015702.hdr.sgml : 20000403 ACCESSION NUMBER: 0000912057-00-015702 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 35 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICON HEALTH & FITNESS INC CENTRAL INDEX KEY: 0000934798 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 870531206 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-93711 FILM NUMBER: 591586 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357507737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICON INTERNATIONAL HOLDINGS INC CENTRAL INDEX KEY: 0000785312 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 841425493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-93711-01 FILM NUMBER: 591587 BUSINESS ADDRESS: STREET 1: C/O ICON HEALTH & FITNESS INC STREET 2: 1500 SOUTH 100 WEST CITY: LOGAN STATE: UT ZIP: 84321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL TECHNICAL SERVICES INC CENTRAL INDEX KEY: 0001101200 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 870468754 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-93711-02 FILM NUMBER: 591588 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357507737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JUMPKING INC CENTRAL INDEX KEY: 0001101201 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 870481821 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-93711-03 FILM NUMBER: 591589 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357507737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 510152 N B LTD CENTRAL INDEX KEY: 0001101202 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-93711-04 FILM NUMBER: 591590 BUSINESS ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 BUSINESS PHONE: 4357507737 MAIL ADDRESS: STREET 1: 1500 SOUTH 1000 WEST CITY: LOGAN STATE: UT ZIP: 84321 S-4/A 1 S-4/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH , 2000 REGISTRATION NO. 333-93711 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ICON HEALTH & FITNESS, INC. (Primary Registrant) (Exact names of Registrant as specified in its charter) DELAWARE 3949 87-0531206 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
------------------------ 1500 SOUTH, 1000 WEST, LOGAN, UTAH 84321, (435) 750-5000 (Address, including ZIP code, and telephone number, including area code, of each Registrant's principal executive offices) ------------------------------ BRAD BEARNSON, ESQ. 1500 SOUTH, 1000 WEST LOGAN, UTAH 84321 (435) 750-5000 (Name, address, including ZIP code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: MICHAEL A. SCHWARTZ, ESQ. GREGG B. SHULKLAPPER, ESQ. WILLKIE FARR & GALLAGHER 787 SEVENTH AVENUE NEW YORK, NEW YORK 10019 (212) 728-8000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER NAME OF ADDITIONAL REGISTRANTS* STATE OF INCORPORATION CLASSIFICATION CODE IDENTIFICATION CODE - ------------------------------- ---------------------- --------------------------- ------------------- Jumpking, Inc................................ Utah 3949 87-0481821 510152 N.B. Ltd.............................. Canada 3949 N/A Universal Technical Services, Inc............ Utah 3949 87-0468754 ICON International Holdings, Inc............. Delaware 3949 84-1425493
- ------------------------ * Address and telephone number of principal executive offices are the same as ICON Health & Fitness, Inc. EACH REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL EACH REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT OFFER THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, , 2000. ICON HEALTH & FITNESS, INC. EXCHANGE OFFER $44,282,000 12% NOTES DUE 2005 This exchange offer will expire at midnight, New York City Time, on , 2000, unless extended. TERMS OF THE EXCHANGE OFFER: - WE ARE OFFERING A TOTAL OF $44,282,000 OF EXCHANGE NOTES, WHICH ARE REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION, TO ALL HOLDERS OF OLD NOTES. - WE WILL EXCHANGE THE EXCHANGE NOTES FOR ALL OLD NOTES THAT ARE VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER. - YOU MAY WITHDRAW TENDERS OF OLD NOTES AT ANY TIME BEFORE THE EXCHANGE OFFER EXPIRES. - WE WILL NOT RECEIVE ANY PROCEEDS FROM THE EXCHANGE OFFER. - THE TERMS OF THE EXCHANGE NOTES ARE SUBSTANTIALLY IDENTICAL TO THOSE OF THE OLD NOTES, EXCEPT FOR TRANSFER RESTRICTIONS AND REGISTRATION RIGHTS RELATING TO THE OLD NOTES. - THE OLD NOTES ARE, AND THE EXCHANGE NOTES WILL BE, GUARANTEED BY THE SUBSIDIARY GUARANTORS SET FORTH IN THIS PROSPECTUS. - THERE IS NO EXISTING MARKET FOR THE EXCHANGE NOTES, AND WE DO NOT INTEND TO APPLY FOR THEIR LISTING ON ANY SECURITIES EXCHANGE. See the "Description of Notes" section on page 57 for more information about the exchange notes. THIS INVESTMENT INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK FACTORS" THAT BEGINS ON PAGE 9 FOR A DISCUSSION OF THE RISKS THAT YOU SHOULD CONSIDER PRIOR TO TENDERING YOUR OLD NOTES FOR EXCHANGE. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is , 2000 TABLE OF CONTENTS Prospectus Summary.......................................... 1 Risk Factors................................................ 9 Use Of Proceeds............................................. 16 Capitalization.............................................. 16 Unaudited Pro Forma Financial Data.......................... 17 Selected Financial Data..................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business.................................................... 29 Management.................................................. 36 Security Ownership of Certain Beneficial Owners and Management................................................ 41 Transactions Between Our Company and Officers, Directors and Principal Stockholders.................................... 45 The Exchange Offer.......................................... 49 Description Of The Notes.................................... 57 Book-Entry; Delivery And Form............................... 98 Description Of Material Indebtedness........................ 99 Material United States Federal Income Tax Consequences...... 101 Plan Of Distribution........................................ 105 Legal Matters............................................... 106 Experts..................................................... 106 Where You Can Find More Information......................... 106
i PROSPECTUS SUMMARY THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT ICON HEALTH & FITNESS, INC. AND THE EXCHANGE OF NOTES. IT MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND RELATED NOTES, AND THE DOCUMENTS TO WHICH WE HAVE REFERRED YOU BEFORE MAKING AN INVESTMENT DECISION. THE TERMS "ICON," "WE," "OUR" AND "US," AS USED IN THIS PROSPECTUS, REFER TO ICON HEALTH & FITNESS, INC. AND ITS SUBSIDIARIES AS A CONSOLIDATED ENTITY, EXCEPT WHERE IT IS CLEAR THAT THESE TERMS MEAN ONLY ICON HEALTH & FITNESS, INC. THE TERM "IHF HOLDINGS" REFERS TO IHF HOLDINGS, INC., OUR FORMER PARENT COMPANY, AND THE TERM "ICON FITNESS" REFERS TO ICON FITNESS CORPORATION, IHF HOLDINGS' PARENT COMPANY. THE COMPANY We are one of the largest manufacturers and marketers of home fitness equipment in the United States. Our focus is to address consumers' interest in a healthy, active lifestyle with a broad range of high quality products at a variety of price/value relationships specifically targeted to meet different consumers' health and fitness needs. Our line of home fitness aerobic products includes treadmills, elliptical cross-trainers, which offer a low-impact, high-intensity aerobic workout which harnesses the momentum of a natural gliding motion and eliminates the impact of typical running or walking, exercise bikes, stair steppers, skiers and upright rowers and our line of anaerobic fitness products includes home gyms and weight benches. We also offer trampolines, recreational sports products, sports medicine products and fitness accessories. We market the majority of our products under the brand names NordicTrack, ProForm, HealthRider, Image, Weider, and JumpKing. In addition, we manufacture a complete line of premier home fitness equipment under the Reebok brand name, under a licensing agreement. SEPTEMBER RECAPITALIZATION We originally issued the 12% notes on September 27, 1999 in connection with a restructuring of our capitalization that included an approximately $40 million equity investment in our company. The principal equity investors included affiliates of Bain Capital and its designees, members of our management and Credit Suisse First Boston and its affiliates. Our September recapitalization also included a refinancing of our then existing bank credit facility. Prior to our September recapitalization, we were a wholly owned subsidiary of IHF Holdings, which was, in turn, a wholly owned subsidiary of ICON Fitness. As part of our September recapitalization, we closed a private exchange offer and consent solicitation in which: (1) participating holders of our then outstanding 13% Senior Subordinated Notes due 2002 received the following consideration for each $1,000 principal amount of 13% notes held: - $395 in cash, - $444 principal amount of 12% notes, - an additional cash payment equal to the sum of (i) interest due on the tendered 13% notes on July 15, 1999 (with additional interest thereon from July 15, 1999 to the closing of the exchange offers at the rate of 17% per annum) and (ii) interest accrued after July 15, 1999 on the tendered 13% notes to the closing of the exchange offers at the rate of 17% per annum, and - warrants to purchase 4.25 shares of common stock of our new parent company, HF Holdings, Inc. ("HF Holdings"). 1 (2) participating holders of 15% Senior Secured Discount Notes due 2004 of IHF Holdings received the following consideration for each $1,000 principal amount at maturity held: - warrants to purchase 5.26 shares of HF Holdings common stock (3) participating holders of 14% Senior Discount Notes due 2006 of ICON Fitness received the following consideration for each $1,000 principal amount at maturity held: - warrants to purchase 1.24 shares of HF Holdings common stock Prior to our September recapitalization there were issued and outstanding $101,250,000 principal amount of our 13% notes, $123,700,000 principal amount at maturity of 15% notes of IHF Holdings and $162,000,000 principal amount at maturity of 14% notes of ICON Fitness. All but $1.5 million principal amount of our 13% notes and $7.0 million principal amount at maturity of 14% notes of ICON Fitness were tendered and accepted for exchange in the September private exchange offer and consent solicitation. Those untendered notes remain outstanding under amended indentures. In connection with the September recapitalization, we became a wholly owned Subsidiary of HF Holdings, Inc. ------------------------ We were incorporated in Delaware in August of 1994. Our principal executive offices are located at 1500 South 1000 West, Logan, Utah 84321, and our telephone number is (435) 750-5000. 2 SUMMARY OF THE EXCHANGE OFFER As of the date of this prospectus, $44,282,000 aggregate principal amount of unregistered 12% notes are outstanding. Simultaneously with the September recapitalization, we entered into an exchange and registration rights agreement with the initial holders of the 12% notes in which we agreed to deliver this prospectus to you and to complete this exchange offer. You should read the description under "--Summary of the Exchange Notes" and "Description of the Notes" for more information about the registered notes. We believe that the notes to be issued in the exchange offer may be resold by you without compliance with the registration and prospectus delivery provisions of the Securities Act, unless you are an affiliate of our company. You should read the discussion under the heading "The Exchange Offer" for further information regarding the exchange offer and resale of the notes. The Exchange Offer................ We are offering to exchange $1,000 principal amount of our 12% notes due 2005 which have been registered under the Securities Act for each $1,000 principal amount of our outstanding 12% notes due 2005 which were issued in September 1999 in a private offering. In order to be exchanged, an old note must be properly tendered and accepted. We will exchange all notes validly tendered and not validly withdrawn. Expiration and Exchange Dates..... This offer will expire at midnight, New York City time, on , 2000, unless we extend it, and we will consummate the exchange on the next business day. Exchange and Registration Rights Agreement....................... You have the right to exchange the old notes that you now hold for exchange notes with substantially identical terms. This exchange offer is intended to satisfy these rights. After the exchange offer is complete, you will no longer be entitled to any exchange or registration rights with respect to your notes. Conditions........................ This offer is conditioned only upon compliance with the securities laws. The offer applies to any and all old notes tendered by the deadline. Withdrawal Rights................. You may withdraw your tender of old notes at any time before the offer expires. Federal Income Tax Consequences... The exchange will not be a taxable event for United States federal income tax purposes. You will not recognize any taxable gain or loss or any interest income as a result of the exchange. Resale Without Further Registration.................... We believe that the exchange notes may be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act so long as the following statements are true: - you acquire the exchange notes issued in the exchange offer in the ordinary course of your business;
3 - you are not an "affiliate," as defined under Rule 405 of the Securities Act, of our company; - you are not participating, and do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the exchange notes issued to you in the exchange offer. By tendering your notes as described below, you will be making representations to this effect. Transfer Restrictions on Exchange Notes........................... You may incur liability under the Securities Act if: (1) any of the representations listed above are not true; and (2) you transfer any new note issued to you in the exchange offer without: - delivering a prospectus meeting the requirements of the Securities Act; or - an exemption from the Securities Act's requirements to register your exchange notes. We do not assume or indemnify you against such liability. Each broker-dealer that is issued exchange notes for its own account in exchange for old notes that were acquired as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the exchange notes. A broker-dealer may use this prospectus for an offer to resell, a resale or other retransfer of the exchange notes issued to it in the exchange offer. Procedures for Tendering Old Notes........................... Each holder of old notes who wishes to accept the exchange offer must: - complete, sign and date the accompanying letter of transmittal, or a facsimile thereof; or - arrange for the Depository Trust Company to transmit required information to the exchange agent in connection with a book-entry transfer. You must mail or otherwise deliver such documentation and your old notes to The Bank of New York, as exchange agent, at the address set forth under "The Exchange Offer--Exchange Agent."
4 Failure to Exchange will affect you adversely................... If you are eligible to participate in the exchange offer and you do not tender your old notes, you will not have any further registration or exchange rights and your old notes will continue to be subject to some restrictions on transfer. Accordingly, the liquidity of the old notes could be adversely affected. Special Procedures for Beneficial Owners.......................... If you beneficially own old notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your old notes in the exchange offer, you should contact such registered holder promptly and instruct it to tender on your behalf. If you wish to tender on your own behalf, you must, before completing and executing the letter of transmittal for the exchange offer and delivering your old notes, either arrange to have your old notes registered in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Guaranteed Delivery Procedures.... You may comply with the procedures described in this prospectus under the heading "The Exchange Offer--Guaranteed Delivery Procedures" if you wish to tender your old notes and: - time will not permit your required documents to reach the exchange agent by the expiration date of the exchange offer, - you cannot complete the procedure for book-entry transfer on time, or - your old notes are not immediately available.
5 SUMMARY OF THE EXCHANGE NOTES The exchange notes have the same financial terms and covenants as the old notes, which are as follows: Issuer............................ ICON Health & Fitness, Inc. Maturity.......................... September 27, 2005. Interest.......................... Interest accrues from September 27, 1999 at the rate of 12% per year, payable semi-annually in arrears on each January 15 and July 15, beginning on January 15, 2000. Ranking........................... The exchange notes are general unsecured obligations of ICON, subordinated in right of payment to all of our existing and future indebtedness outstanding under our credit facilities. The indenture governing the exchange notes limits senior indebtedness to indebtedness under the credit facilities. For a description of the credit facilities, see "Material Indebtedness--Credit Facilities." In addition, the exchange notes are effectively subordinated to all secured obligations to the extent of the assets securing those obligations, including the credit facilities. The indenture for the exchange notes permits us and our subsidiaries to incur additional indebtedness, including senior indebtedness, subject to limitations. The exchange notes are also effectively subordinated in right of payment to all existing and future liabilities of any subsidiaries of ICON which do not guarantee the exchange notes. Optional Redemption............... We have the right at any time to redeem all (but not part) of the exchange notes and old notes at the redemption prices listed in "Description of the Notes" under the heading "Redemption--Optional Redemption." Change of Control................. If an event treated as a change of control of our company occurs, including for example, a sale of all or substantially all of our assets or the acquisition by a third party of a majority of HF Holdings' common stock, we must make an offer to purchase any and all of the exchange notes then outstanding from you at a purchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, if any, to the date of purchase. We cannot assure you that we will have the financial resources necessary to purchase the exchange notes upon a change of control or that the purchase will be permitted under our credit facilities. For a summary of what constitutes change of control please see "Description of the Notes--Covenants--Change of Control." Covenants......................... The indenture for the exchange notes contains covenants that, among other things, limit our ability, and the ability of our subsidiaries, to incur additional indebtedness, pay dividends or make other distributions, make investments, dispose of assets, issue capital stock of subsidiaries, create liens securing indebtedness, enter into transactions with affiliates, or enter into mergers or consolidations or sell all or substantially all of our or their assets.
6 Subsidiary Guarantors............. Each of our domestic subsidiaries is a guarantor of the exchange notes. Our foreign subsidiaries are not guarantors of the notes unless they guarantee our indebtedness or indebtedness of another subsidiary guarantor of the exchange notes. The subsidiary guarantees are joint and several, full and unconditional and general unsecured obligations of the subsidiary guarantors. The subsidiary guarantees are subordinated in right of payment to all existing and future senior indebtedness of the subsidiary guarantors, including guarantees of the credit facilities, and are also effectively subordinated to all secured obligations of the subsidiary guarantors to the extent of the assets securing such obligations, including the credit facilities. The indenture for the exchange notes permits the subsidiary guarantors to incur additional indebtedness, including senior indebtedness, subject to limitations.
For additional information regarding the notes, see "Description of the Notes" and "Material United States Federal Income Tax Consequences." RISK FACTORS See "Risk Factors" immediately following this summary for a discussion of risks relating to the exchange notes, all of which apply to the old notes as well. 7 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA (IN MILLIONS)
FOR THE YEAR ENDED MAY 31, FOR THE SIX MONTHS ENDED ------------------------------------------------------------- ------------------------------ NOVEMBER 28, NOVEMBER 27, 1995 1996 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- ------------ ------------ (1) (2) (3) OPERATING DATA: Net sales................... $530.8 $747.6 $836.2 $749.3 $710.2 $ 331.5 $ 334.3 Cost of sales............... 378.4 541.5 597.8 536.0 514.0 239.0 243.7 ------ ------ ------ ------ ------ ------- ------- Gross profit................ 152.4 206.1 238.4 213.3 196.2 92.5 90.6 Operating Expenses: Selling................... 68.7 93.9 132.4 120.7 107.6 46.2 43.1 Research and development............. 5.2 6.8 7.6 7.8 7.7 3.6 3.8 General and administrative.......... 31.1 47.8 56.7 60.9 53.4 26.3 30.8 Weider Settlement & HealthRider integration............. -- -- 21.5 -- -- -- -- Compensation expense attributable to options................. 39.0 2.8 -- -- -- -- -- ------ ------ ------ ------ ------ ------- ------- Total operating expenses.... 144.0 151.3 218.2 189.4 168.7 76.1 77.7 ------ ------ ------ ------ ------ ------- ------- Income from operations...... 8.4 54.8 20.2 23.9 27.5 16.4 12.9 Interest expense............ (17.3) (27.9) (33.6) (35.0) (33.0) (16.0) (17.0) Amortization of deferred financing fees............ (1.2) (2.5) (2.5) (4.3) (7.0) (3.0) (2.0) ------ ------ ------ ------ ------ ------- ------- Income (loss) before income taxes and extraordinary item...................... (10.1) 24.4 (15.9) (15.4) (12.5) (2.6) (6.1) Provision for (benefit from) income taxes.............. (3.6) 10.8 (4.0) (5.9) 12.1 (0.8) 2.8 ------ ------ ------ ------ ------ ------- ------- Income (loss) before extraordinary item........ (6.5) 13.6 (11.9) (9.5) (24.6) (1.8) (8.9) Extraordinary loss on extinguishment of debt.... -- -- -- -- -- -- (1.2) ------ ------ ------ ------ ------ ------- ------- Net income (loss)........... $ (6.5) $ 13.6 $(11.9) $ (9.5) $(24.6) $ (1.8) $ (10.1) ====== ====== ====== ====== ====== ======= ======= OTHER DATA: Depreciation and amortization.............. $ 6.9 $ 7.2 $ 13.4 $ 16.7 $ 17.4 $ 8.8 $ 8.2 Capital expenditures........ 8.0 15.4 16.0 11.8 11.6 6.8 6.8 Deficiency to cover fixed charges(4)(6)............. 10.1 --(5) 15.9 15.4 12.5 2.6 8.1 BALANCE SHEET DATA (AT THE END OF THE PERIOD): Cash........................ 4.1 19.3 5.6 3.9 4.3 5.7 Working capital............. 137.7 157.3 220.1 152.9 108.0 210.4 Total assets................ 281.9 306.5 456.9 363.1 331.9 463.9 Total indebtedness.......... 207.8 213.6 327.0 274.5 260.6 332.2 Stockholder's equity (deficit)................. (14.8) 2.0 (10.7) (20.3) (47.8) (19.2)
- ------------------------------ (1) In fiscal 1995, a $39.0 million compensation expense was incurred with respect to management stock options. (2) In fiscal 1996, a $2.8 million compensation expense was incurred with respect to management stock options (3) In fiscal 1997, the Company incurred a $14.0 million step-up in value of HealthRider inventory purchased. This item was a non-cash expense and was required for purchase accounting per GAAP. The Company also incurred Weider settlement expenses of $16.6 million related to the settlement of various disputes. This cash expense item includes one-time payments to various Weider affiliates as well as associated legal expenses and professional fees. The Company also incurred HealthRider integration costs of $4.9 million. (4) Earnings consist of income (loss) before income taxes and extraordinary item plus fixed charges. Fixed charges consist of interest expense on debt, interest portion of rentals and amortization of deferred financing fees. (5) Ratio of earnings to fixed charges is 1.8. (6) The Company's deficiency to cover fixed charges was $9.7 million for the pro forma year ended May 31, 1999 and $5.5 million for the pro forma six months ended November 27, 1999. 8 RISK FACTORS The exchange notes, like the old notes, entail the following risks: WE HAVE SUBSTANTIAL EXISTING DEBT AND DEBT SERVICE REQUIREMENTS AND WE MAY NOT GENERATE SUFFICIENT CASH FLOW TO MAKE PAYMENTS ON AND TO REFINANCE SUCH DEBT, INCLUDING THE EXCHANGE NOTES, WHICH COULD ADVERSELY IMPACT OUR BUSINESS AND YOUR INVESTMENT. We have a significant amount of indebtedness. As of November 27, 1999, and after giving pro forma effect to the September recapitalization, our consolidated indebtedness was approximately $332.2 million, of which $44.3 million was senior indebtedness. On a pro forma basis, our earnings were inadequate to cover fixed charges for the six months ended November 27, 1999 by an amount equal to $5.5 million. Further, the terms of the indenture for the exchange notes permit us to incur substantial indebtedness in the future. Our ability to make payments on and to refinance our indebtedness, including the exchange notes, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow from operations and available borrowings under our credit facilities will be adequate to meet our liquidity needs over the next several years. We cannot assure you, however, that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule, in the amounts projected or at all, or that future borrowings will be available to us under our credit facilities in amounts sufficient to enable us to pay our indebtedness, including the exchange notes, or to fund our other liquidity needs. If we cannot generate sufficient cash flow from operations to make scheduled payments on the exchange notes in the future, we may need to refinance all or a portion of our indebtedness, including the exchange notes, on or before maturity, sell assets, delay capital expenditures, or seek additional equity. We cannot assure you that we will be able to refinance any of our indebtedness, including the exchange notes, on commercially reasonable terms or at all or that any other action can be effected on satisfactory terms, if at all. Our substantial indebtedness could have other important consequences to you. For example, it could: - make it more difficult for us to satisfy our obligations with respect to the exchange notes; - increase our vulnerability to general adverse economic and industry conditions; - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, thereby placing us at a competitive disadvantage compared to our competitors that may have less debt; - limit, by the financial and other restrictive covenants in the exchange notes, together with those in the credit facilities, among other things, our ability to borrow additional funds; and - have a material adverse effect on us if we fail to comply with the covenants in the exchange notes and credit facilities, because such failure could result in an event of default which, if not cured or waived, could result in a substantial amount of our indebtedness becoming immediately due and payable. 9 THERE IS NO PUBLIC MARKET FOR THE EXCHANGE NOTES, SO YOU MAY BE UNABLE TO SELL YOUR EXCHANGE NOTES. The exchange notes are new securities for which there is currently no market. Consequently, the exchange notes will be relatively illiquid, and you may be unable to sell your exchange notes. We do not intend to apply for listing of the exchange notes on any securities exchange or for the inclusion of the exchange notes in any automated quotation system. Accordingly, we cannot assure you that a liquid market for the exchange notes will develop. YOUR RIGHT TO RECEIVE PAYMENTS ON THE EXCHANGE NOTES IS SUBORDINATED TO OUR SENIOR DEBT, WHICH DECREASES THE CHANCES THAT YOU WILL RECEIVE DISTRIBUTIONS IN THE EVENT OF A BANKRUPTCY, LIQUIDATION OR REORGANIZATION OF OUR COMPANY OR THE SUBSIDIARY GUARANTORS. The exchange notes and the subsidiary guarantees are subordinated in right of payment to the payment in full in cash of all indebtedness under the credit facilities, which will be secured by substantially all of our and our subsidiaries' domestic assets. As a result, upon any distribution to our creditors or the creditors of the subsidiary guarantors in a bankruptcy, liquidation or reorganization or similar proceeding relating to our company or our subsidiaries or our company's and our subsidiaries' property, the lenders under the credit facilities will be entitled to be paid in full under the credit facilities before any payment may be made with respect to the exchange notes or the subsidiary guarantees, other than payment consisting of securities subordinated to indebtedness under the credit facilities to the same extent as the exchange notes. All payments on the exchange notes and the subsidiary guarantees will be blocked in the event of a payment default under the credit facilities and may be blocked for up to 179 out of 360 consecutive days in the event of non-payment defaults under the credit facilities. In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to us or the subsidiary guarantors, the holders of the exchange notes will share with trade creditors and all other holders of our unsecured debt and of our subsidiary guarantors in the assets remaining after we and the subsidiary guarantors have paid all indebtedness under the credit facilities. Because the exchange notes indenture requires that amounts otherwise payable to holders of the exchange notes in a bankruptcy or similar proceeding be paid to lenders under the credit facilities, holders of the exchange notes may, in the event that senior indebtedness is not fully secured, receive less, ratably, than holders of trade payables in any such proceeding. Our foreign subsidiaries, other than our Canadian subsidiaries, will not guarantee the exchange notes. In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries, holders of their indebtedness and their trade creditors will be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to us. European revenues accounted for approximately 4.9%, 5.4% and 5.3% of revenues in Fiscal 1997, 1998 and 1999, respectively. The exchange notes are not secured by any of our assets or those of our subsidiaries. We have granted a security interest to the lenders under the credit facilities in all of the capital stock of our domestic subsidiaries and in 65% of the capital stock of our foreign subsidiaries, as well as in all of our tangible and intangible assets and those of our domestic subsidiaries. If we become insolvent or are liquidated, or if the lenders under the credit facilities accelerate payment under any of the credit facilities, they will have a prior claim with respect to these assets. A HOLDER OF NOTES MAY NOT BE ABLE TO REQUIRE US TO REPURCHASE ITS NOTES AS A RESULT OF A SALE OF LESS THAN ALL OF OUR ASSETS. The indenture governing the notes contains a provision that if a "Change of Control" occurs, we will be required to make an offer to each holder of notes to purchase all of the then outstanding notes and then purchase all notes validly tendered pursuant to such offer. The definition of Change of 10 Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of our company's and some of our subsidiaries' assets taken as a whole. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, a holder of notes may not be able to require us to repurchase such notes as a result of a sale of less than all of our assets. WE RELY ON A LIMITED NUMBER OF MAJOR CUSTOMERS, THE LOSS OF ANY OF WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. Our three largest customers together accounted for approximately 39.6%, 42.0% and 54.1% of our revenues in fiscal years 1997, 1998 and 1999, respectively. Our largest customer, Sears, Roebuck and Co., accounted for 29.0%, 32.5% and 38.4% of our revenues in fiscal years 1997, 1998 and 1999, respectively. The level of our sales to these customers depends in large part on consumers' continuing commitment to home fitness equipment products and on the success of the customers' efforts to market and promote our products, as well as our competitiveness in terms of price, quality, product innovation, customer service and other factors. Consistent with industry practice, we do not have long-term purchase agreements or other commitments as to levels of future sales. The loss of, or a substantial decrease in the amount of purchases by, or a write-off of any significant receivables due from any of our major customers would have a material adverse effect on our business. WE RELY HEAVILY ON PRODUCT INNOVATION TO MAINTAIN CONTINUED INTEREST IN OUR PRODUCTS. Product life cycles can be short in the home fitness industry and innovation is an important component of competition. While we emphasize new product innovation and product repositioning (i.e., design changes or revised marketing strategies), we may be unable to continue to develop competitive products in a timely manner or to respond adequately to market trends. In addition, we may not be able to ensure that repositioned products will gain initial market acceptance, that interest in our products will be sustained, or that significant start-up costs with respect to new products will be recouped. Moreover, although our management believes that fitness and health activities have become important for consumers, we cannot ensure that interest in any particular fitness activity will be sustained. We were one of the first companies to introduce motorized treadmills for home use and believe that we are currently the largest manufacturer of motorized treadmills, with motorized treadmill sales in fiscal years 1997, 1998 and 1999 of $452.9 million, $474.0 million and $437.0 million, respectively, representing 54.2%, 63.3% and 61.5%, respectively, of our revenues in each of such years. We could be adversely affected if we experienced a significant decline in the popularity of our motorized treadmills and were unable to develop and introduce other successful products in a timely manner. OUR BUSINESS ENVIRONMENT IS HIGHLY COMPETITIVE. We operate in a highly competitive environment. We compete in the U.S. with a number of domestic manufacturers, domestic direct importers and foreign companies exporting products to the U.S. Some of our competitors, which include LifeFitness, Precor, Schwinn and Canstar Sports Inc., a subsidiary of Nike Inc., are better capitalized than us and may have greater financial and other resources than those available to us. There are a number of companies who produce products for the institutional fitness markets (spas and gyms) with considerable expertise in manufacturing who have become competitors in the home market. There are also manufacturers of home exercise equipment in Europe and Asia who may also increase or commence efforts to sell their products in the U.S. market. In addition, there are no significant technological or manufacturing barriers to entry into some segments of the home fitness equipment market, although many companies in the industry, including our company, have sought and received numerous patents in an effort to protect their competitive 11 position. We believe that the principal competitive factors affecting our business include price, quality, brand name recognition, product innovation and customer service. OUR SALES ARE HIGHLY PRICE SENSITIVE, WHICH CAN PREVENT US FROM PASSING COST INCREASES ON TO OUR CUSTOMERS. Sales to mass merchandisers, which are among our primary customers, are highly price sensitive. We set many product prices on an annual basis but in most cases we purchase raw materials and components under purchase orders providing components for periods less than one year. Accordingly, we set prices for many products before we have complete knowledge of the costs of raw materials and components and sometimes before product development is complete and production costs have been firmly established. After we have established prices, we may be unable to pass cost increases along to our customers, or to compete as effectively if we seek to pass such costs along, which could have a material adverse effect on us. OUR BUSINESS IS RELIANT ON FOREIGN SUPPLIERS. Since we purchase components and finished products from foreign suppliers, we are subject to the general risks of doing business abroad, including delays in shipment, work stoppages, adverse fluctuations in currency exchange rates, increases in import duties and tariffs, changes in foreign regulations, changes in most-favored-nation status and political instability. In addition, although we seek to maintain dual sources for the material and components required for our products, we rely on single sources for certain of our component parts, including electronic consoles and controllers, and finished products. The occurrence of any such events relating to our foreign suppliers or the loss of certain of these suppliers could adversely affect our business until alternative supply arrangements could be secured, particularly if such loss occurred during our key production periods. We may be unable to ensure that we would be able to obtain products and supplies on substantially similar terms should any of these risks materialize. ECONOMIC CONDITIONS FOR RETAIL BUSINESSES IN GENERAL CAN AFFECT OUR BUSINESS, AND WE RELY ON CONTINUING CONSUMER INTEREST IN FITNESS ACTIVITIES. Our customers are primarily retail businesses. Retail businesses may be adversely affected by unfavorable local, regional or national economic developments which result in reduced consumer spending. We cannot ensure that an economic downturn would not have a material adverse effect on our customers and, therefore, on us. In addition, we cannot ensure that consumer interest in fitness and health activities will be sustained. OUR SALES FLUCTUATE BY SEASON. Historically, we have sold the majority of our products to our customers in our second and third interim reporting periods (I.E., from September through February). Increased sales and distribution typically have occurred in the Christmas retail season and the beginning of a new calendar year because of increased customer promotions and consumer purchases. We have frequently incurred operating losses in the first and fourth interim reporting periods of our fiscal year. If actual sales for a period do not meet or exceed projected sales for that period, expenditures and inventory levels could be disproportionately high for such period and our cash flow for that period and future periods could be adversely affected. The timing of large orders from customers and the mix of products sold may also contribute to quarterly or other periodic fluctuations. 12 WE DEPEND ON KEY MEMBERS OF OUR MANAGEMENT TEAM. Our success depends to a considerable extent on the performance of our senior management team. While we believe that our senior management team has significant depth, the loss of services of our senior executives, particularly the loss of either Scott Watterson, our Chief Executive Officer, or Gary Stevenson, our Chief Operating Officer, could have a material adverse effect on us. Although we entered into three-year employment agreements with Messrs. Watterson and Stevenson in September 1999, they will be able to terminate their employment immediately for cause (as defined) or without cause upon six months' notice or, under certain circumstances, three months' notice. WE ARE CONTROLLED BY CERTAIN STOCKHOLDERS WHO MAY SUBSTANTIALLY INFLUENCE OUR BUSINESS. HF Investment Holdings, LLC ("HF Investment Holdings") owns approximately 79.7% (51.6% on a fully diluted basis) of the outstanding capital stock of HF Holdings, our parent company. Affiliates of Bain Capital, Inc. own 59.8% of the membership interests of HF Investment Holdings (49.8% assuming the exercise in full of a warrant to acquire membership interests by Credit Suisse First Boston). Through such ownership of HF Investment Holdings and the provisions of the stockholders agreement and operating agreement for HF Investment Holdings, these affiliates of Bain Capital have the ability to elect a majority of the Boards of Directors of HF Holdings and our company and to determine the outcome of significant corporate transactions or other matters submitted to the stockholders for approval. WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS AND OTHER LITIGATION. Due to the nature of our products, we are subject to product liability claims involving personal injuries allegedly related to our products. Our involvement in the trampoline business through our JumpKing subsidiary has especially exposed us to such claims. We currently carry an occurrence-based product liability insurance policy. The current policy provides coverage for the period from October 1, 1998 to September 30, 2001 of up to $25 million per occurrence, and $25 million in the aggregate. The policy has a deductible on each claim of $250,000 for claims related to trampolines and $100,000 for claims related to all other products. We believe that our insurance is generally adequate to cover product liability claims. Nevertheless, currently pending claims and any future claims are subject to the uncertainties related to litigation and the ultimate outcome of any such proceedings or claims cannot be predicted. Due to uncertainty with respect to the nature and extent of manufacturers' and distributors' liability for personal injuries, we cannot ensure that our product liability insurance is or will be adequate to cover such claims. In addition, we cannot ensure that our insurers will be solvent when required to make payments on claims. Furthermore, we cannot ensure that insurance will remain available, or if available, that it will not be prohibitively expensive. The loss of insurance coverage could have a material adverse effect on our results of operations and financial condition. EXERCISE MACHINE RECALLS. On July 14, 1997, in cooperation with the Consumer Products Safety Commission, we recalled approximately 78,000 exercise machines sold under the brand name, ProForm R-930 Spacesaver Riders, Model No. PFCR6406. The machine was designed to close horizontally for easy storage. In several reported incidents, when the handle bar was pulled against the seat during use, the machine unexpectedly closed into the storage position. As such, consumers were advised to stop using the machine until a free repair kit had been installed. Any claims filed by a consumer in conjunction with this product have been and continue to be handled in the normal course of business. To date, we have not suffered any material adverse effect relative to this product recall, but we cannot ensure that we will not suffer such material adverse effect. On April 15, 1999, in cooperation with the Consumer Products Safety Commission, we recalled approximately 75,000 exercise machines sold under the brand names, Weider Shapeglider (Model No. WECR4306), Weider PowerGlide (Model No. WECR4406), and the Weslo Total Body Trainer (Model 13 No. WLCR4356). In several reported incidents, the link arm supporting the seat on these exercise gliders disconnected during use, causing the user to fall abruptly. As such, consumers were advised to stop using the machine until a free repair kit had been installed. Any claims filed by a consumer in conjunction with this product have been and will continue to be handled in the normal course of business. Some consumers have asserted punitive damages which may not be covered by insurance. While we do not believe that we will incur any material adverse effect relative to this product recall, we cannot ensure that we will not suffer such material adverse effect. WE MAY BE SUBJECT TO CLAIMS FROM HOLDERS OF OUR 13% NOTES AND THE 14% NOTES OF ICON FITNESS WHO DID NOT PARTICIPATE IN OUR SEPTEMBER RECAPITALIZATION. In connection with the September recapitalization, we amended the indentures governing the 13% and 14% notes to delete substantially all restrictive covenants contained in those indentures, and holders who still hold 13% or 14% notes may seek to challenge the validity of those amendments and the September recapitalization. One entity which claims to be a non-tendering holder of $1.5 million principal amount of 13% notes has informed us of its intention to pursue a claim against our company, our directors and investors who participated in the September recapitalization. Although we intend to vigorously defend any such claims and while we do not believe that these claims are material to our company, we cannot assure you that these claims would not have a material adverse effect on our company. We have agreed to indemnify our directors and officers, these participants in the September recapitalization and their respective affiliates with respect to any such claims. OUR STRATEGY OF OPERATING RETAIL STORES HAS RESULTED IN NET LOSSES AND MAY NEVER BECOME PROFITABLE. We currently operate 72 retail store and kiosk locations where we offer equipment directly to consumers. Our retail store strategy has resulted in net losses and a negative cash flow to our company since we acquired our stores in connection with the HealthRider and NordicTrack acquisitions. In addition, our retail store strategy of selling goods directly to the consumer may be viewed negatively by our traditional retail customers as a competitive effort against them, causing them to reduce or cease the purchase of our products. OUR DIRECT SALES TO CONSUMERS OVER THE INTERNET MAY BE VIEWED AS COMPETITIVE BY OUR RETAIL CUSTOMERS. We currently conduct business directly with the consumer through eight Web sites over the Internet. We expect to continue and expand our sales efforts via the Internet. Our expansion strategy over the Internet may not, however, be successful, and our traditional retail customers may view this strategy as a competitive effort against them causing them to reduce or cease the purchase of our products. WE ARE BEING AUDITED BY THE INTERNAL REVENUE SERVICE. We are under examination by the Internal Revenue Service for our taxable year ended May 31, 1996. This examination remains in process and has not been completed. Because we carried forward losses claimed on our 1995 tax return to our 1996 return and carried back losses claimed on our 1997 return to our 1996 return, the IRS, as part of its examination, is reviewing our tax returns for our years ended May 31, 1995 and 1997. In connection with this review, the IRS has given us preliminary written notice of its intention to disallow approximately $26 million of option-related deductions claimed in our taxable year ended May 31, 1995. Although our taxable year ended May 31, 1995 is closed due to the statute of limitations, such disallowances (if successful) would affect the amount of our net operating loss carryforwards. We intend to vigorously and aggressively defend our position on this issue and believe that we will prevail. The IRS has also indicated that it intends to challenge the timing of other deductions in our taxable year ended May 31, 1997. If the IRS were to prevail in respect of both these issues, due to the interplay of our net operating loss carryforwards and carrybacks from other years, 14 there would be a potential tax liability for the taxable year ended May 31, 1996 in an amount, through February 29, 2000, of approximately $4.2 million, including interest. In addition, there would be a substantial reduction in our net operating loss carryforwards. The IRS has also inquired about our treatment of a substantial amount of banking, professional and other fees incurred in our taxable year ended May 31, 1995. We are deducting the amount of those fees over the terms of the debt that we incurred in that year. The IRS has just recently preliminarily indicated that it intends to disallow the deduction of such fees and has asked us to respond with our position. We have indicated that we believe that a substantial majority of such fees are properly amortizable over the terms of the debt we incurred in 1995 and are in the process of discussing with the IRS the merits of its preliminary position. We cannot ensure that the IRS will not raise other issues in the course of its examination. If the IRS were to prevail in its position that the 1995 option-related and the 1997 deductions should be disallowed, as noted above, our available net operating loss carryforwards would be substantially reduced and there would be a potential liability for the year ended May 1996 of approximately $4.2 million (including interest calculated through February 29, 2000). Based on information currently available to us, we do not believe that the reduction in our net operating losses should materially adversely affect our financial condition. However, a reduction in our available net operating losses could materially adversely affect our financial condition if the IRS were successfully to assert other issues (including the deductibility of our 1995 banking, professional and other fees) on audit or if it were to be determined that we recognized additional cancellation of indebtedness income upon the exchange of the 13% notes for the old notes as a result of the old notes being determined to have been issued with original issue discount, or OID. As discussed more fully under "Material United States Federal Income Tax Consequences," it is our belief that the old notes were not issued with OID and that, therefore, we did not recognize such additional cancellation of indebtedness income. WE ARE SUBJECT TO POTENTIALLY COSTLY ENVIRONMENTAL REGULATION. Our operations are subject to federal, state and local environmental and health and safety laws and regulations that impose workplace standards and limitations on the discharge of pollutants into the environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of materials, substances and wastes. The nature of our operations exposes us to the risk of claims with respect to environmental matters and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. We believe that the cost of achieving and maintaining compliance with such laws and regulations will not have a material adverse effect on our business or financial position. However, future events, such as changes in existing laws and regulations or enforcement policies or the discovery of contamination on sites operated by us, may give rise to additional compliance costs or operational interruptions which could have a material adverse effect on our results of operations or financial condition. 15 USE OF PROCEEDS We will not receive any cash proceeds from the issuance of the exchange notes as described in this prospectus. We will receive in exchange old notes in like principal amount. The old notes surrendered in exchange for the exchange notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any change in our indebtedness. We issued the old notes in connection with our September recapitalization in exchange for our then outstanding 13% notes. We did not receive any cash proceeds from the issuance of the old notes. CAPITALIZATION The following table sets forth, as of November 27, 1999, the consolidated capitalization of our company:
NOVEMBER 27, 1999 ------------------ (IN MILLIONS) Long-term debt (including current portion of $7,804): Revolving credit facility................................. $ 99.5 Term loans................................................ 180.0 12% Subordinated Notes.................................... 44.3 Other..................................................... 8.4 ------- Total long-term debt...................................... 332.2 ======= Stockholder's equity (deficit): Common stock and additional paid-in capital............... 204.3 Receivable from Parent.................................... (2.2) Accumulated other comprehensive loss...................... (1.2) Accumulated deficit....................................... (220.1) ------- Total stockholder's equity (deficit)...................... (19.2) ------- Total capitalization.................................... $ 313.0 =======
16 UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data for the year ended May 31, 1999 and the six months ended November 27, 1999 have been derived by the application of pro forma adjustments to the historical financial data. The following pro forma financial data show the effect of the following (dollar amounts in thousands): (1) the exchange of the outstanding 13% Notes for new 12% Notes, cash and warrants of HF Holdings, (2) the initial borrowings under the New Credit Facilities, (3) the repayment of the existing Credit Agreement facility, (4) the issuance of senior management equity and the making of loans under the senior management non-recourse notes and the junior management notes, (5) the payment of fees and expenses related to the September recapitalization and (6) the capital contribution from HF Holdings. These unaudited pro forma financial statements should be read in conjunction with the historical financial statements and notes thereto included elsewhere in this prospectus. The pro forma financial data do not purport to represent what our company's results of operations would have actually been had the September recapitalization in fact occurred on such dates, or to project results of operations for any future period. The unaudited pro forma financial data is based on assumptions that we believe are reasonable and should be read in conjunction with the interim financial statements and the consolidated financial statements and notes accompanying them that are included elsewhere in, or annexed to, this prospectus. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS (IN THOUSANDS)
HISTORICAL PRO FORMA SIX MONTHS SIX MONTHS ENDED NOVEMBER ENDED NOVEMBER 27, 1999 ADJUSTMENTS 27, 1999 -------------- ----------- -------------- Net sales........................... $ 334,308 $ 334,308 Cost of goods sold.................. 243,735 243,735 Operating expenses.................. 77,677 $ 54 C 77,731 --------- ------ --------- Income from operations............ 12,896 (54) 12,842 Interest expense and amortization of deferred financing fees........... (19,035) 2,668 A (16,367) --------- ------ --------- Income (loss) before income taxes and extraordinary item............ (6,139) 2,614 (3,525) Provision for (benefit from) income taxes............................. 2,804 1,019 E 3,823 --------- ------ --------- Loss before extraordinary item...... (8,943) 1,595 (7,348) Extraordinary loss on extinguishment of debt........................... (1,174) -- (1,174) --------- ------ --------- Net loss.......................... $ (10,117) $1,595 $ (8,522) ========= ====== =========
17 UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS (IN THOUSANDS)
HISTORICAL YEAR PRO FORMA YEAR ENDED MAY 31, ENDED MAY 31, 1999 ADJUSTMENTS 1999 --------------- ----------- -------------- Net sales............................. $ 710,249 $ 710,249 Cost of goods sold.................... 514,018 514,018 Operating expenses.................... 168,750 $ 108 C 169,358 500 D --------- ------ --------- Loss from operations................ 27,481 (608) 26,873 Interest expense and amortization of deferred financing fees............. (40,048) 3,506 B (36,542) Other expense......................... (34) (34) --------- ------ --------- Income (loss) before income taxes... (12,601) 2,898 (9,703) Provision for income taxes............ 12,084 1,130 E 13,214 --------- ------ --------- Net loss............................ $ (24,685) $1,768 $ (22,917) ========= ====== =========
NOTES TO THE UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS) A. Net adjustment for the elimination of historical interest expense and amortization of deferred financing fees of $18,124 and recognition of interest expense and amortization of deferred financing fees of $15,456 on the new debt incurred in connection with the Exchange Offer. B. Net adjustment for the elimination of historical interest expense and amortization of deferred financing fees of $40,048 and recognition of interest expense and amortization of deferred financing fees of $36,542 on the new debt incurred in connection with the Exchange Offer. C. Reflects the incremental amount of salaries of senior management under their new employment agreements as a result of the Exchange Offer. D. Compensation for the $500 loan to junior management that is to be forgiven in six months subject to continuing employment. E. Reflects the estimated income tax provision resulting from the pro forma adjustments. 18 SELECTED FINANCIAL DATA (IN MILLIONS) The selected financial data set forth below with respect to our statements of operations for each of the three years in the period ended May 31, 1999 and balance sheets at May 31, 1998 and 1999, have been derived from our financial statements included elsewhere in this prospectus that have been audited by PricewaterhouseCoopers LLP, independent accountants, as indicated in their report included elsewhere in this prospectus. The statement of operations data for the years ended May 31, 1995 and 1996, and the balance sheet data as of such dates, have been derived from the financial statements audited by PricewaterhouseCoopers LLP but not included in this Prospectus. The financial data for the six months ended November 28, 1998 and November 27, 1999 have been derived from unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations for these periods. Operating results for the six months ended November 27, 1999 are not necessarily indicative of the results that may be expected for the entire year ending May 31, 2000. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes related thereto included elsewhere in this prospectus.
FOR THE YEAR ENDED MAY 31, FOR THE SIX MONTHS ENDED ------------------------------------------------------------- -------------------------------- NOVEMBER 28, NOVEMBER 27, 1995 1996 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- ------------- ------------- (1) (2) (3) OPERATING DATA: Net sales................. $530.8 $747.6 $836.2 $749.3 $710.2 $331.5 $334.3 Cost of sales............. 378.4 541.5 597.8 536.0 514.0 239.0 243.7 ------ ------ ------ ------ ------ ------ ------ Gross profit.............. 152.4 206.1 238.4 213.3 196.2 92.5 90.6 Operating Expenses: Selling................. 68.7 93.9 132.4 120.7 107.6 46.2 43.1 Research and development........... 5.2 6.8 7.6 7.8 7.7 3.6 3.8 General and administrative........ 31.1 47.8 56.7 60.9 53.4 26.3 30.8 Weider Settlement & HealthRider integration........... -- -- 21.5 -- -- -- -- Compensation expense attributable to options............... 39.0 2.8 -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ Total operating expenses................ 144.0 151.3 218.2 189.4 168.7 76.1 77.7 ------ ------ ------ ------ ------ ------ ------ Income from operations.... 8.4 54.8 20.2 23.9 27.5 16.4 12.9 Interest expense.......... (17.3) (27.9) (33.6) (35.0) (33.0) (16.0) (17.0) Amortization of deferred financing fees.......... (1.2) (2.5) (2.5) (4.3) (7.0) (3.0) (2.0) ------ ------ ------ ------ ------ ------ ------ Income (loss) before income taxes and extraordinary item...... (10.1) 24.4 (15.9) (15.4) (12.5) (2.6) (6.1) Provision for (benefit from) income taxes...... (3.6) 10.8 (4.0) (5.9) 12.1 (0.8) 2.8 ------ ------ ------ ------ ------ ------ ------ Income (loss) before extraordinary item...... (6.5) 13.6 (11.9) (9.5) (24.6) (1.8) (8.9) Extraordinary loss on extinguishment of debt.. -- -- -- -- -- -- (1.2) ------ ------ ------ ------ ------ ------ ------ Net income (loss)......... $ (6.5) $ 13.6 $(11.9) $ (9.5) $(24.6) $ (1.8) $(10.1) ====== ====== ====== ====== ====== ====== ====== OTHER DATA: Depreciation and amortization............ $ 6.9 $ 7.2 $ 13.4 $ 16.7 $ 17.4 $ 8.8 $ 8.2 Capital expenditures...... 8.0 15.4 16.0 11.8 11.6 6.8 6.8 BALANCE SHEET DATA (AT THE END OF THE PERIOD): Cash...................... 4.1 19.3 5.6 3.9 4.3 5.7 Working capital........... 137.7 157.3 220.1 152.9 108.0 210.4 Total assets.............. 281.9 306.5 456.9 363.1 331.9 463.9 Total indebtedness........ 207.8 213.6 327.0 274.5 260.6 332.2 Stockholder's equity (deficit)............... (14.8) 2.0 (10.7) (20.3) (47.8) (19.2)
- ------------------------------ (1) In fiscal 1995, a $39.0 million compensation expense was incurred with respect to management stock options. (2) In fiscal 1996, a $2.8 million compensation expense was incurred with respect to management stock options (3) In fiscal 1997, the Company incurred a $14.0 million step-up in value of HealthRider inventory purchased. This item was a non-cash expense and was required for purchase accounting per GAAP. The Company also incurred Weider settlement expenses of $16.6 million related to the settlement of various disputes. This cash expense item includes one-time payments to various Weider affiliates as well as associated legal expenses and professional fees. The Company also incurred HealthRider integration costs of $4.9 million. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the historical audited financial statements and the related notes thereto appearing elsewhere in this report. Our fiscal year ends on May 31 of the corresponding calendar year. For example, fiscal 1999 ended on May 31, 1999. "EBITDA" is defined herein as income before provisions for (benefit from) income taxes, depreciation, amortization and interest expense. EBITDA as presented may not be comparable to similarly titled measures by other companies due to differences in the computations. EBITDA is presented because we believe it is frequently used by security analysts in the evaluation of companies. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. RECENT DEVELOPMENTS During the year ended May 31, 1999 we incurred significant net losses, and as of May 31, 1999 had significant accumulated deficits. We also experienced a decline in our revenue base and were unable to service our debt obligations. In that regard, we were unable to make the interest payment on the 13% notes due on July 15, 1999 and were in violation of the following financial covenants of our credit agreement: - minimum adjusted net worth - minimum interest coverage ratio - minimum debt service ratio - maximum funded debt to adjusted net worth To provide ongoing funding for our operations and debt repayment requirements, on September 27, 1999, we consummated a troubled debt restructuring of our capital structure that included an approximately $40 million equity investment in our company. The principal equity investors included affiliates of Bain Capital and its designees, members of our management and Credit Suisse First Boston and its affiliates. Our September recapitalization also included a refinancing of our existing bank credit facility. Prior to the September recapitalization, we were a wholly owned subsidiary of IHF Holdings, Inc. ("IHF Holdings"), which was, in turn, a wholly owned subsidiary of ICON Fitness Corporation ("ICON Fitness"). As part of the September recapitalization, we closed a private exchange offer and consent solicitation in which: (1) participating holders of our then outstanding 13% Senior Subordinated Notes due 2002 received the following consideration for each $1,000 principal amount of 13% notes held: - $395 in cash, - $444 principal amount of 12% notes, - an additional cash payment equal to the sum of (i) interest due on the tendered 13% notes on July 15, 1999 (with additional interest thereon from July 15, 1999 to the closing of the exchange offers at the rate of 17% per annum) and (ii) interest accrued after July 15, 1999 on the tendered 13% notes to the closing of the exchange offers at the rate of 17% per annum, and - warrants to purchase 4.25 shares of common stock of our new parent company, HF Holdings, Inc. ("HF Holdings") at an exercise price of $.001 per share. (2) participating holders of 15% Senior Secured Discount Notes due 2004 of IHF Holdings received the following consideration for each $1,000 principal amount at maturity held: - warrants to purchase 5.26 shares of HF Holdings common stock at an exercise price of $.001 per share. 20 (3) participating holders of 14% Senior Discount Notes due 2006 of ICON Fitness received the following consideration for each $1,000 principal amount at maturity held: - warrants to purchase 1.24 shares of HF Holdings common stock at an exercise price of $.001 per share. Prior to the September recapitalization there were issued and outstanding $101,250,000 principal amount of our 13% notes, $123,700,000 principal amount at maturity of 15% notes of IHF Holdings and $162,000,000 principal amount at maturity of 14% notes of ICON Fitness. All but $1.5 million principal amount of our 13% notes and $7.0 million principal amount at maturity of 14% notes of ICON Fitness were tendered and accepted for exchange in the September exchange offers. Those untendered notes remain outstanding under amended indentures. In connection with the September recapitalization, we became a wholly owned Subsidiary of HF Holdings, Inc. RESULTS OF OPERATIONS OPERATING RESULTS FOR THE SIX MONTHS ENDED NOVEMBER 27, 1999 AND NOVEMBER 28, 1998 During the first six months of fiscal 2000, net sales increased $2.8 million, or 0.8%, to $334.3 million from $331.5 million in the first six months of fiscal 1999. Domestic treadmill sales for the first six months of fiscal 2000 accounted for approximately 57.8% of total net sales, versus 57.9% in the first six months of fiscal 1999. For the first six months of fiscal 2000, domestic treadmill sales were $193.1 million compared to $191.9 million for the same period a year ago, which represents an $1.3 million increase. Other increases in fiscal 2000 include an increase in the sales of trampolines of $6.0 million, ellipticals of $1.7 million, benches of $1.7 million, bikes of $0.2 million and international sales of $1.0 million. Sales of light exercise equipment decreased $6.9 million, home spas sales decreased $0.9 million, cardio sales decreased $0.3 million and miscellaneous products decreased $1.4 million during the first six months of fiscal 2000. Gross profit for the first six months of fiscal 2000 was $90.6 million, or 27.1% of net sales, compared to $92.5 million, or 27.9% of net sales, for the first six months of fiscal 1999. The decrease of 1.9 million in gross profit was attributable to the changes in product mix. Selling expenses totaled $43.1 million, or 12.9% of net sales, in the first six months of fiscal 2000, compared to $46.2 million, or 13.9% of net sales, for the first six months of fiscal 1999. This decrease, both in dollars and as a percentage of sales, is attributable primarily to a reduction in advertising expenses that have decreased by approximately $1.1 million for the first six months of fiscal 2000, versus the first six months of fiscal 1999. Other selling expense decreases include reductions in salaries and wages of approximately $0.3 million and trade show and other related expenses of approximately $1.7 million. Research and development expenses totaled $3.8 million, or 1.1% of net sales, for the first six months of fiscal 2000, compared to $3.6 million, or 1.1% of net sales, for the first six months of fiscal 1999. This $0.2 million increase is attributable to management's efforts to continue to develop both current and future products. General and administrative expenses totaled $30.8 million, or 9.2% of net sales, for the first six months of fiscal 2000, compared to $26.4 million, or 8.0% of net sales, for the first six months of fiscal 1999. This increase of approximately $4.4 million in general and administrative expenses for the first six months of fiscal 2000 was attributable to a non-cash equity grant to management of $3.2 million. Other increases in fiscal 2000 include legal and accounting fees of $0.9 million and salaries and wages of $0.3 million. As a result of the foregoing factors, operating income was $12.9 million in the first six months of fiscal 2000, compared to operating income of $16.4 million in the first six months of fiscal 1998. 21 Interest expense was $17.0 million for the first six months of fiscal 2000, compared to $16.0 million for the first six months of fiscal 1999. The increase in interest expense is a result of increased borrowings under the Credit Agreement. The provision for income taxes was $2.1 million for the first six months of fiscal 2000, compared with a tax benefit of $0.8 million for the first six months of fiscal 1999. The provision for income taxes for the first six months of fiscal 2000, compared to the tax benefit for first six months of fiscal 1999, was the result of the September recapitalization. Because the September recapitalization resulted in a change in control for federal income tax purposes, certain tax attributes carried over from prior years were not allowed to be carried forward beyond September 27, 1999. In addition, the Company's operating losses generated prior to the September recapitalization are not available to offset the Company's pretax income generated subsequent to the September recapitalization. The Company therefore reduced its deferred tax asset by $0.8 million to account for these changes. As a result of the foregoing factors, the net loss was $10.0 million for the first six months of fiscal 2000, compared to a net loss in the first six months of fiscal 1999 of $1.8 million. YEAR ENDED MAY 31, 1999 COMPARED TO THE YEAR ENDED MAY 31, 1998 Net sales decreased by $39.1 million, or 5.2%, from $749.3 million in fiscal 1998 to $710.2 million in fiscal 1999. The decrease in sales was primarily attributable to airwalker sales, ab shaper sales and cardio sales which decreased by $10.9 million, $3.4 million and $5.0 million, respectively. Also, elliptical sales decreased by $3.8 million, stepper sales decreased by $0.5 million and sales in Europe decreased by approximately $2.5 million. These decreases were offset by increased bike sales of $10.9 million, increased home spa sales of $2.5 million and relaxation chair sales of $2.0 million. Trampoline sales also increased $3.8 million over the last fiscal year. Other product sales, including soft goods, increased by approximately $11.7 million. Treadmill sales decreased from $474.0 million in fiscal 1998 to $437.0 million in fiscal 1999. Treadmill sales accounted for approximately 63.3% of net sales in fiscal 1998 and 61.5% of net sales in fiscal 1999. The decrease in sales was primarily attributable to inventory reduction by a group of key customers which either changed their inventory policies, suffered severe financial difficulty or ceased sales of these products. Gross profit for fiscal 1999 was $196.2 million, or 27.6% of net sales. In fiscal 1998, gross profit was 28.5% of net sales at $213.6 million, excluding a non-recurring cost of $0.3 million. Selling expenses were $107.6 million, or 15.2% of net sales, in fiscal 1999 compared to $120.8 million, or 16.1% of net sales, in fiscal 1998. The dollar decline was partly offset by the write-off of the Service Merchandise account receivable for $10.5 million which filed for bankruptcy in fiscal 1999. In addition, advertising expense in fiscal 1999 decreased by $13.4 million and salaries and wages decreased by $3.1 million primarily as a result of cost reduction strategies. Research and development expense was $7.7 million, or 1.1% of net sales, for fiscal 1999 compared to $7.8 million, or 1.0% of net sales, for fiscal 1998. This expense reflects our continued efforts to develop both current and future products. General and administrative expense totaled $53.4 million, or 7.5% of net sales, for fiscal 1999 compared to $60.9 million, or 8.1% of net sales, for fiscal 1998. The decrease was primarily a result of cost reduction strategies. Depreciation increased during fiscal 1999 by $1.4 million over the same period during the prior year due to recent acquisitions. Legal expenses and insurance expenses decreased approximately $1.6 million and $1.7 million, respectively, in fiscal 1999 over fiscal 1998. Capital expenditures totaled $11.6 million in fiscal 1999, down $0.2 million from fiscal 1998. As a result of the foregoing factors, EBITDA was $45.3 million, or 6.4% of net sales, in fiscal 1999, compared to $41.1 million, or 5.5% of net sales, in fiscal 1998. Adjusting for the $10.5 million reserve against receivables due from Service Merchandise, EBITDA in fiscal 1999 totaled $55.8 million, or 7.9% of net sales, compared to adjusted EBITDA of $41.4 million, or 5.5% of net sales, in fiscal 1998. 22 Interest expense, including amortization of deferred financing fees increased to $40.3 million for our company in fiscal 1999 compared to $39.9. million in fiscal 1998. The increase in interest expense and amortization of deferred financing fees in fiscal 1999 was the result of additional levels of borrowing under our old credit agreement and accretion of the principal balances of our then outstanding indentures. This interest expense is not representative due to our September recapitalization. Our effective tax rate for fiscal 1999 was an expense of 96% for our company, compared to a benefit of 38% in fiscal 1998. The higher effective rate for fiscal 1999 reflects our provision for a valuation allowance for a portion of our deferred tax assets that will not be realized due to our September recapitalization. The deferred tax assets that make up the valuation allowance are primarily related to net operating loss carryforwards ("NOL's"), future deductible interest and stock compensation expense. As a result of the foregoing factors, our net loss was $24.7 million for fiscal 1999, compared to a net loss of $9.5 million for the same period in fiscal 1998. YEAR ENDED MAY 31, 1998 COMPARED TO THE YEAR ENDED MAY 31, 1997 Net sales decreased by $86.9 million, or 10.4% from $836.2 million in fiscal 1997 to $749.3 million in fiscal 1998. The decrease in sales was primarily attributable to decreased consumer preference for upright rower sales and ab shaper sales which decreased by $77.8 million and by $41.2 million, respectively. Also, airwalker sales decreased by $16.5 million, rower/skier sales decreased by $5.2 million and sales in Europe decreased by approximately $4.9 million. These decreases were partly offset by increased treadmill sales of $21.1 million, increased bike sales of $13.3 million, a new elliptical product introduced in fiscal 1998 which accounted for $21.8 million in new sales and other various product sales including softgoods which increased by approximately $2.5 million. Treadmill sales increased from $452.9 million in 1997 to $474.0 million in fiscal 1998. Treadmill sales accounted for approximately 54.2% of net sales in 1997 and 63.3% of net sales in fiscal 1998. Gross profit for fiscal 1998 was $213.3 million, or 28.5% of net sales. In fiscal 1997 gross profit was also 28.5% of net sales at $238.4 million. Selling expenses were $120.8 million, or 16.1% of net sales, in fiscal 1998 compared to $132.4 million, or 15.8% of net sales, in fiscal 1997. The dollar decline was attributed to a decrease in direct response and other advertising of $6.0 million as well as a one time charge of $6.4 million related to the HealthRider acquisition in fiscal 1997. In addition, commissions expense decreased by $0.9 million during fiscal 1998. These decreases were offset by an increase in bad debt expense of $1.4 million primarily due to a company that filed for bankruptcy in fiscal 1998 and other various increases of approximately $0.3 million. Research and development expense was $7.8 million, or 1.0% of net sales, for fiscal 1998 compared to $7.6 million, or 0.9% of net sales, for fiscal 1997. This increase was due to continued efforts to develop both current and future products. General and administrative expense totaled $60.9 million, or 8.1% of net sales, for fiscal 1998 compared to $56.7 million, or 6.8% of net sales, for fiscal 1997. The largest single increase in fiscal 1998 over 1997 was depreciation expense of $3.1 million, which increased due to the recent acquisition of assets from HealthRider and CanCo. Product liability insurance claims increased $1.4 million during fiscal 1998 due to a concerted effort by the legal department to settle outstanding claims. Also, legal expense and rent expense increased approximately $1.1 million and $0.9 million, respectively, in fiscal 1998 over fiscal 1997. These increases were offset by decreases in the salaries and bonus expenses of $2.3 million in fiscal 1998 compared to fiscal 1997. Capital Expenditures totaled $11.8 million in fiscal 1998, compared to $11.1 million in fiscal 1997. In the second quarter of fiscal 1997, our company and Weider Health and Fitness ("WHF") and its affiliates settled litigation through a number of agreements. The settlement included the release of claims previously asserted by WHF and its affiliates, amendments to agreements existing between our 23 company and WHF and its affiliates and new agreements among our company and WHF and its affiliates. Expenses related to the WHF settlement amounted to $16.6 million for fiscal 1997. There were no expenses related to this settlement in fiscal 1998. HealthRider integration costs totaled $4.9 million for fiscal 1997. These charges were incurred to eliminate the duplication in staff and facilities with those of our company. There were no charges related to HealthRider integration during fiscal 1998. As a result of the foregoing factors, EBITDA was 41.1 million, or 5.5% of net sales, in fiscal 1998, compared to $34.3, or 4.1% of net sales, in fiscal 1997. Adjusted for non-recurring costs of $0.3 million, EBITDA totaled $41.4 million, or 5.5% of net sales in fiscal 1998, compared to $69.6 million, or 8.3% of net sales in fiscal 1997. Interest expense, including amortization of deferred financing fees increased to $39.9 million for our company, in fiscal 1998 compared to $36.7 million in fiscal 1997. The increase in interest expense and amortization of deferred financing fees in fiscal 1998 was the result of additional levels of borrowing under our credit agreement and accretion of the principal balances of our outstanding indentures. The income tax benefit was $5.9 million for our company, for fiscal 1998, compared with a tax benefit of $4.0 million during fiscal 1997. This is a result of the loss before income tax for fiscal 1998 and fiscal 1997. At the end of fiscal 1998, we had a net deferred tax asset of $16.1 million. No valuation allowance was recorded against this asset because we believe that we will generate sufficient future taxable income through operations to realize the net deferred assets prior to expiration of any net operating losses (NOL). NOL's can be carried forward up to 20 taxable years. There can be no assurance however, that we will generate any specific level of earnings or that it will be able to realize any of the deferred tax asset in future periods. If we are unable to generate sufficient taxable income in the future through operating results, a valuation allowance against this deferred tax asset would result in a charge to earnings. See "Risk Factors--We are being audited by the Internal Revenue Service." As a result of the foregoing factors, our net loss was $9.5 million, for fiscal 1998, compared to net loss of $12.0 million for fiscal 1997. Advertising allowances due to retail customers totaled $2.5 million at May 31, 1998. Advertising allowances are generally a fixed percentage of sales to customers. Fluctuations in the balance of this allowance are attributable to changes in customer sales mix and the timing of when allowances are taken. SEASONALITY The following are the net sales and operating income of our company by quarter for the fiscal years 2000, 1999 and 1998:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN MILLIONS) Net Sales 2000........................................ $ 99.5 $234.8 $ -- $ -- 1999........................................ 117.2 214.3 226.7 152.0 1998........................................ 127.5 236.3 252.0 133.5 Operating Income (Loss) 2000........................................ $ (6.4) $ 19.3 $ -- $ -- 1999........................................ (3.4) 19.7 16.0 (4.8) 1998........................................ (7.6) 15.7 21.5 (5.7) Net Income (Loss) 2000........................................ $(11.7) $ 1.6 $ -- $ -- 1999........................................ (13.3) 0.9 (1.6) (10.6) 1998........................................ (10.9) 3.8 6.7 (9.1)
24 We sell a majority of our products to customers in our second and third fiscal quarters (i.e., from September through February). Increased sales and distribution typically occur in the Christmas retail season and the beginning of a new calendar year because of increased promotions by customers, increased consumer purchases and seasonal changes that prompt people to exercise inside. If actual sales for a quarter do not meet or exceed projected sales for that quarter, expenditures and inventory levels could be disproportionately high for such quarter and our cash flow for that quarter and future quarters could be adversely affected. The timing of large orders from customers and the mix of products sold may also contribute to periodic fluctuations. While seasonality has been the trend, it may not be indicative of the results to be expected for this fiscal year or for any future years. LIQUIDITY AND CAPITAL RESOURCES At November 27, 1999, we used $90.7 million of cash in operating activities, compared to $62.5 million at November 28, 1998. The majority of the cash used in operating activities is as a result of an increase in accounts receivable and inventory. We used $9.4 million in investing activities as of November 27, 1999 due primarily to the purchases of upgrades in plant and tooling and purchases of other equipment. We also had an increase of $101.8 million from financing activities as of November 27, 1999, as a result of our September recapitalization. As a result of the foregoing factors, we had a net increase in cash of $1.5 million as of November 27, 1999. Management anticipates that its cash balances, operating cash flows and available credit line will be adequate to fund its anticipated capital commitments and working capital requirements for the next twelve months. In 1999, we were provided $38.0 million of cash from operating activities compared to $47.6 in fiscal 1998. The majority of this cash provided by operating activities is a result of a decrease in accounts receivable. We used $20.1 million in investing activities for fiscal 1999 due primarily to the purchase of NordicTrack for $8.5 million and $11.6 million of cash used for capital expenditures related to upgrades in plant and tooling and purchases of additional manufacturing equipment. Also, we used $17.1 million in financing activities during 1999 as a result of a net reduction in long-term debt long term debt. As a result of the foregoing factors, we had a net increase in cash of $0.4 million from May 31, 1998 to May 31, 1999. In 1998, we were provided $47.6 million of cash from operating activities compared to usage of cash in the amount of $37.7 million in 1997. The majority of this cash provided by operating activities is a result of a decrease in accounts receivable. We received $6.4 million from investing activities for fiscal 1998 due to the sale of a building for $18.3 million, offset by $11.8 million of cash used for capital expenditures related to upgrades in plant and tooling and purchases of additional manufacturing equipment. Also, we used $55.7 million for financing activities during 1998 to pay down lines of credit and other long term debt. As a result of the foregoing factors, we had a net decrease in cash of $1.7 million from May 31, 1997 to May 31, 1998. 25 In 1997, we used $37.7 million of cash in operating activities primarily as a result of increases in accounts receivable. We used $16.0 million in cash for capital expenditures related to upgrades in plant and tooling and purchases of additional manufacturing equipment and building expansion and $6.3 million for repayments of long term debt. We used $25.8 million in cash to acquire HealthRider and $11.1 million to acquire Weider Sports and CanCo. In addition, the effect of exchange rates decreased our cash balances at May 31, 1997 by $1.0 million. During 1997, we had a net decrease in cash of $13.8 million. We made capital expenditures of approximately $11.6 million during fiscal 1999 and expect to make capital expenditures of approximately $13.0 million in 2000. Such expenditures are primarily for expansion of physical plant, purchases of additional or replacement manufacturing equipment and revisions and upgrades in plant tooling. We also made research and development expenditures in 1999 of approximately $7.7 million, and expect to make research and development expenditures of approximately $8.4 million in 2000. Our primary short-term liquidity needs consist of financing seasonal merchandise inventory buildups and paying cash interest expense under our credit facilities and on the 12% notes. Our principal source of financing for seasonal merchandise inventory buildup and increased receivables is revolving credit borrowings under the credit facilities. Our working capital borrowing needs are typically at their lowest level in April through June, increase somewhat through the summer and sharply increase from September through November to finance accounts receivable and purchases of inventory in advance of the Christmas and post-holiday selling season. Generally, in the period from November through February, our working capital borrowings remain at their highest level and then are paid down to their lowest annual levels by April. The 12% notes issued in our September recapitalization are due September 27, 2005 and are guaranteed by each of our domestic subsidiaries. Interest is due each January 15 and July 15 of each year, beginning on January 15, 2000. The 12% notes are redeemable at any time at a premium, as described in this prospectus under the caption "Description of Notes--Redemption". The 12% notes contain restrictive covenants that, among other things, limit our and our subsidiaries' ability to incur additional debt, pay dividends or make other distributions, make investments, dispose of assets, issue capital stock of subsidiaries or enter into mergers or consolidations or sell all or substantially all of our assets. See "Description of Notes." In connection with our September recapitalization, we entered into new credit facilities of $300 million with a syndicate of banks and financial services companies. See "Description of Material Indebtedness" Proceeds of the new credit facilities were used to refinance our existing senior credit facilities and 13% notes and to fund transaction fees and expenses, and will be used to provide for general working capital. As of November 27, 1999, the balance outstanding under the new credit facilities consisted of (in thousands): Revolver.................................................... $ 99,483 Term Loan A................................................. 30,000 Term Loan B................................................. 80,000 Term Loan C................................................. 55,000 IP Loan..................................................... 15,000 -------- $279,483 ========
We have a significant amount of indebtedness. As of November 27, 1999 our consolidated indebtedness was approximately $332.2 million, of which $44.3 million was senior indebtedness. On a 26 pro forma basis, our earnings were inadequate to cover fixed charges for the six months ended November 27, 1999 by an amount equal to $5.5 million. The 12% notes and new credit facilities contain certain restrictive covenants that, among other things, limit our ability to incur additional debt, pay dividends or make other distributions, make investments, dispose of assets, issue capital stock of subsidiaries or enter into mergers or consolidations or sell all or substantially all of our assets. Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We will continue to manage within our financial resources and attempt to balance our working capital needs with cash flow generated from operations and available current financing to provide for our short-term and long-term liquidity needs. MARKET RISK Although we cannot accurately predict the precise effect of inflation on our operations, we do not believe that inflation has had a material effect on sales or results of operations in recent years. We do import some finished products and components from Canada and Asia. All purchases from Asia have been fixed in U.S. dollars and, therefore, we have not been subject to foreign currency fluctuations on such purchases, although our vendors may respond to foreign currency fluctuations by seeking to raise their prices. Purchases of inventory from Canada have been settled in Canadian dollars and therefore we have been subject to fluctuations in the value of the Canadian dollar which could have an impact on the our operating results. In connection with the importation of products and components from Canada, our company from time to time engages in hedging transactions by entering into forward contracts for the purchase of Canadian dollars which are designed to protect against such fluctuations. Our hedging transactions do not subject it to exchange rate risk because gains and losses on these contracts offset losses and gains on the transaction being hedged. The unhedged portion of purchases from Canada is not significant. As of May 31, 1999 and 1998 we had approximately $0 million Canadian and $32 million Canadian, respectively, of open forward exchange contracts to sell Canadian dollars throughout fiscal years May 31, 2000 and 1999, respectively. The fair value of these forward exchange contracts are based on quoted market prices. At May 31, 1999 the estimated unrealized loss on outstanding forward exchange contracts was $0 and at May 31, 1998 the estimated unrealized loss was $459,000. During fiscal 1999 and 1998 we recognized losses of $34 and $449,000, respectively, and in 1997 we recognized gains of $149,000 upon settlement of foreign currency translations denominated in Canadian dollars. YEAR 2000 COMPLIANCE We utilize and are dependent upon data processing systems and software to conduct our business. The data processing systems and software include those developed and maintained by our third-party data processing vendors and software which is run on in-house computer systems. We have reviewed and assessed all hardware and software to confirm that it will function properly in the Year 2000. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Statement of Financial Accounting Standards ("SFAS") No. 133 is effective for all quarters of fiscal years beginning after June 15, 2000, and prohibits retroactive application to financial statements of prior periods. We currently intend to implement the provisions of SFAS No. 133 in the first quarter of the fiscal 2001. We currently have limited involvement with derivative instruments, primarily for 27 purposes of hedging against fluctuations in exchange rates. We cannot at this time reasonably estimate the potential impact of this adoption on its financial position or results of operations for future periods. At the beginning of fiscal year 1999, we adopted SFAS No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In accordance with the provisions of SFAS No. 130, we have presented the components of other comprehensive income (loss) in its consolidated statements of operations and comprehensive loss. The financial statements for all prior periods have been restated to conform to requirements of SFAS No. 130. In fiscal year 1999, we adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. The adoption of SFAS No. 131 did not affect our results of operations or financial position. 28 BUSINESS GENERAL We are one of the largest manufacturers and marketers of home fitness equipment in the United States. Our focus is to address consumers' interest in a healthy, active lifestyle with a broad range of high quality products at a variety of price/value relationships specifically targeted to meet different consumers' health and fitness needs. Our line of home fitness aerobic products includes treadmills, elliptical cross-trainers, exercise bikes, stair steppers, skiers and upright rowers and our line of anaerobic fitness products including home gyms and weight benches. We also offer trampolines, recreational sports products, sports medicine products and fitness accessories. We market the majority of our products under the brand names NordicTrack, ProForm, HealthRider, Image, Weider, and JumpKing. In addition, we manufacture a complete line of premier home fitness equipment under the Reebok brand name, under a licensing agreement. MARKETING AND DISTRIBUTION We market our products under multiple brands through multiple distribution channels, including specialty dealers, sporting goods chains, department stores, warehouse clubs, discount merchants, catalogue showrooms and direct marketing through our own Internet sites, catalogs and retail stores. We believe the marketing of our products through multiple distribution channels provides us with several competitive advantages: - greater growth and increased market access; - the ability to maximize revenue throughout a product's life cycle by repositioning products in different channels and under different brand names as products mature; - feedback on market trends and changing consumer tastes; and - reduced dependence on any single channel of distribution. To enhance our distribution strategy, we target our brands to specific distribution channels. By marketing specific brands tailored to appeal to different demographic groups, we are able to market products with varying designs, features and price ranges and target these products to a wide variety of consumers with different fitness needs and disposable incomes. We believe our brand positioning strategy enables us to: - achieve greater appeal to each market segment; - promote price stability across our distribution channels; and - provide high-quality products with the price ranges and features desired by different demographic groups. We manufacture and distribute a broad line of treadmill, aerobic exercise machines and strength training equipment, and offer a range of technological features, from manual equipment to sophisticated programmable electronic products, at a variety of price points. We also market recreational sports products, fitness accessories, spas and massage products. Our strategy of offering a broad range of products enables us to: - offer categories of fitness products that appeal to consumers with varying fitness needs and disposable incomes; - respond quickly to changes in consumer preferences and fitness trends; - reduce our dependence on any single product category; and - participate in growth opportunities across a wide variety of product categories. 29 AEROBIC PRODUCTS We offer aerobic products, which are designed to promote cardiovascular fitness, under the NordicTrack, ProForm, HealthRider, Image, Weslo and Reebok brand names. MOTORIZED TREADMILLS. We are the leading producer of motorized treadmills. Motorized treadmills allow users to run at speeds of up to 12 mph. The features offered by our motorized treadmills that enhance the home user's experience include programmable speed and incline, electronic feedback on speed, elapsed time, distance traveled and calories burned, and cross-training upper body exercise functions. Other popular features on our treadmill line of products include: CD Coach technology, which allows the user to listen to his/her favorite music while a digital personal trainer motivates him/ her through a programmable workout; cushioned belts for a quieter, more shock-absorbent workout; the SpaceSaver feature for treadmills (introduced in 1996) which enables a treadmill to fold vertically for easy storage; and the CrossWalk line of treadmills, which provides users with upper body exercise for a total body workout. The retail price points of the motorized treadmills range from $199 to $2,499. ELLIPTICALS. In the fall of 1997, we introduced our Elliptical Cross Trainer. This category of aerobic products has been popular in clubs for the last few years, and in the fall of 1997 we introduced the HealthRider brand of Elliptical Cross Trainer. This product offers a low-impact, high-intensity aerobic workout which harnesses the momentum of a natural striding motion, and eliminates the impact of typical running or walking. An innovative mechanism that we developed, which involves a tube within a tube that slides in and out of a crank attached to a flywheel, links upper-body motion with the lower-body motion for a synchronized rhythmic total-body workout. A four-window electronic display provides feedback on speed (steps per minute), time, distance and calories burned. The name "Elliptical" refers to the oval shape of the user's footpath. Retail price points of our Ellipticals range from $199 to $999, and are available in the NordicTrack, ProForm, HealthRider, Image, Reebok and Weslo brands. Our ProForm brand elliptical was rated the number one elliptical in the February 1999 Consumer Reports ranking of home exercise equipment. EXERCISE BIKES. We offer exercise bikes featuring adjustable air resistance or flywheel resistance (which are constructed to interact with the air to provide resistance to movement), electronic monitors which display elapsed time, speed, distance and calories burned, and dual or triple action design which allows the user to exercise upper body, lower body or both simultaneously. Some units add motivational electronics and programmable resistance which allow users to design their own workouts. Some higher end units also contain an electromagnetic drive mechanism, which creates resistance through the use of electro-magnetic current, and which creates less noise and offers smoother action. Retail price points of our exercise bikes range from $99 to $799 and are available in the NordicTrack, ProForm, HealthRider, Image, Reebok and Welso brands. STAIR STEPPERS. Various stair stepper machines sold by our company offer adjustable resistance, self-leveling pedals, motivational fitness monitors, accessory stations to hold water bottles, books and towels, magnetic resistance and total body conditioning, which combines upper and lower body workouts. Other features offered by our stair steppers include the Speed Link adjustable resistance system, multi-window electronic monitors and programmable electronics. The Speed Link adjustable resistance system uses shocks attached to the pedal leg of the stepper which are placed into one of several positions to increase or decrease resistance. Retail price points for our stair steppers range from $99 to $199. UPRIGHT ROWERS. We introduced our Cardio family of upright rowers under the Weslo brand in October 1994. The Cardio family of upright rowers exercises both the arms and legs while providing both an aerobic and anaerobic workout through variable resistance. Retail price points for the Welso brand range from $99 to $199. In addition, the HealthRider brand upright rower is available at $299. 30 ANAEROBIC PRODUCTS Under the NordicTrack, HealthRider, Image, ProForm, Weslo, Weider and Reebok brand names, we offer anaerobic products, which are designed to develop muscle tone and strength. HOME GYMS. Our home gyms range from traditional cast iron or vinyl plate weight stack units to programmable electronic units. New products within this category include home gyms which integrate aerobic functions and electronic adjustability allowing simple adjustment in one pound increments with digital feedback. Selected units are designed to allow multiple users to use the equipment simultaneously, allowing circuit training. Our home gyms range in retail price from $299 to $1,299. WEIGHT BENCHES. We offer a range of weight benches to specialty fitness dealers through the Image and ProForm brands and market a complete of weights and benches under the Weider brand name. Retail price points of these products range from $49 to $299. FREE WEIGHTS. We offer a broad assortment of cast-iron weight plates, vinyl and neoprene dipped weights and dumbbells. We are also innovating dumbbell grips for improved comfort and use and addressing needs of women entering the strength training category. OTHER PRODUCTS RECREATIONAL SPORTS PRODUCTS. Our JumpKing subsidiary manufactures and markets a trampoline line that includes both mini-trampolines for indoor home exercise use and full-sized trampolines for outdoor home recreational use. The mini-trampoline retails at approximately $25; full-sized trampolines have retail price points ranging from $199 to $399. EXERCISE ACCESSORIES. We offer a limited line of back support belts and workout gloves and have introduced a line of exercise accessories, including ankle and hand weights, grip devices and aerobic exercise step decks. These products are sold under the Weider, Reebok, HealthRider, ProForm and NordicTrack brands. RELAXATION PRODUCTS. Beginning in the spring of 1996, we introduced a line of relaxation products such as acrylic and soft-sided hydrotherapy spas, motorized massage chairs and massage pillows. These products are currently distributed through various channels including department stores, mass merchandisers, sporting goods, home-shopping, catalogs and our own direct response efforts. PRODUCT INNOVATION AND DEVELOPMENT Product and design innovation has contributed significantly to our growth. On an ongoing basis, we evaluate new product concepts and seek to respond to the desires and needs of consumers by frequently introducing new products and repositioning existing products. We have 222 full-time employees in the research and development area, hold 178 patents and have 38 patent applications pending. We also hold 96 trademarks registered in the United States and 404 trademarks registered in foreign countries. We have pending 25 trademarks in the United States and 171 in foreign countries. We have research and development expenses of $7.7 million, $7.8 million, and $7.6 million in fiscal 1999, 1998, and 1997, respectively, and have budgeted $8.4 million for research and development in fiscal 2000. We conduct most of our research and development in 40,000 square feet of space in our Logan, Utah headquarters. This facility includes plastic, mechanical and electrical engineering capabilities that are used in creating proprietary designs and features. 31 CUSTOMERS Our largest customer for the past several years has been Sears. In fiscal 1999, Sears accounted for approximately 38.4% of our total net sales, a 5.9% increase over fiscal 1998. While no other single customer accounted for more than 10% of our total sales in fiscal 1999, other important customers include Sam's Wholesale Club, K-Mart and Wal-Mart. In fiscal 1999 and 1998, Sam's accounted for approximately 45% and 50% respectively, of net sales at our JumpKing subsidiary. Although sales to Sears still account for a substantial portion of our sales, the percentage of sales has decreased substantially in the past several years from approximately 68% in fiscal 1989. Nevertheless, the dollar amount of our net sales to Sears has increased during this time period. Sears has distinguished us with several vendor awards for our commitment in providing quality and value to the American consumer. We have more than 2,500 customers, excluding those consumers we sell to directly through our retail or Internet distribution channels. Consistent with industry practice, we generally do not have long-term purchase agreements or other commitments from our customers as to levels of future sales. The level of our sales to large customers depends in large part on our continuing commitment to home fitness products and the success of our efforts to market and promote our products as well as our competitiveness in terms of price, quality, product innovation and customer service. We are not the exclusive supplier of home fitness equipment to any of our major customers. The loss of, or a substantial decrease in the amount of purchases by, or a write-off of any significant receivable due from, any of our major customers would have a material adverse effect on our business. COMPETITION The home fitness equipment market is both fragmented and highly competitive. It is characterized by frequent introduction of new products, often accompanied by major advertising and promotional programs. We believe that the principal competitive factors affecting our business include price, quality, brand name recognition, product innovation and customer service. According to the Sports Marketing Group, Inc. 1998 Annual Report, we account for nearly half of the total industry revenue (based on retail dollars) for the home fitness equipment market. We compete in the U.S. with recreational and exercise activities offered by health clubs, as well as a number of domestic manufacturers, domestic direct importers, foreign companies exporting products to the U.S. and, in our direct sales efforts, with major retailers and distributors. Competitors in these areas include Fitness Quest, Life Fitness, Cybex/Trotter, Precor, Inc. and Schwinn. In Europe, we compete principally with Tunturi, Inc., and Kettle Int'l Inc., a number of Asian importers and some of our domestic competitors. Our products also indirectly compete with outdoor fitness, sporting goods and other recreational products. Competitors in these product areas include Huffy corporation, Canstar Sports Inc. (a subsidiary of Nike Inc.), Reebok International Ltd. and Rollerblade, Inc. Certain competitors are better capitalized than us and may have greater financial and other resources than those available to us. In addition, there are no significant technological, manufacturing or marketing barriers to entry into the fitness equipment or other exercise accessory markets, although many companies in the industry, including our company, have sought and received numerous patents in an effort to protect their competitive position. PURSUING GROWTH OPPORTUNITIES On December 23, 1998, we bought inventory, trademarks and other assets of NordicTrack, Inc., a debtor under Chapter 11 of the Bankruptcy Code, for $10.2 million. In connection with the NordicTrack transaction, our company and Sears executed a license agreement that allows Sears to be the exclusive retailer of NordicTrack branded fitness equipment outside of our own retail and direct marketing channels of distribution. In addition, under the agreement, we granted Sears a royalty- 32 bearing exclusive license to market fitness apparel and sporting goods under the NordicTrack brand. The agreement will run for a term of 12 years subject to early termination provisions in 2005. In August 1996, we purchased substantially all the assets of HealthRider, Inc. We market HealthRider brand fitness equipment and other health-related products primarily through our own specialty retail stores and kiosks, through direct response advertising in print and on television, through our mail order catalogs and through some retail customers. At the end of fiscal 1999, we operated 77 stores in approximately 42 states. In the first quarter of 1996, we began to directly market our products in the U.K., France, Italy and the Benelux countries. Prior to 1996, we had minimal foreign sales. Net sales from European markets in fiscal 1998 and 1999 were $40.4 million and $37.9 million, respectively. Net sales from our Canadian manufacturing facility for fiscal 1998 and 1999 were $22.3 million and $23.7, respectively. MANUFACTURING AND PURCHASING In fiscal 1999, we manufactured or assembled over 80% of our products at our facilities in Utah, Texas, Canada and Colorado. The balance of our products were manufactured and assembled by third parties, principally in the Far East. We have long-standing supply relationships with a number of offshore Asian vendors, many of which have exclusive relationships in the fitness industry with us. The combination of internal manufacturing and assembly capacity and our access to third-party vendors has helped us meet customer demand on a competitive basis. In addition, the third party vendors provide greater flexibility in manufacturing capacity to satisfy seasonal demands. We utilize more than 1.4 million square feet for manufacturing, including a 300,000 square foot facility in Logan where the majority of our treadmills are manufactured or assembled. In the past, the Logan facility has also manufactured stair steppers, exercise bikes and home gyms. We constructed our Logan plant in 1990 and equipped the facility with modern manufacturing and assembly features, including fully integrated metal fabrication, powder coat painting, robotic welding and injection molding equipment. In 1990, we purchased a trampoline manufacturing operation in Dallas, Texas. These facilities produce the JumpKing Trampoline Brand. In 1994, we began operating our Clearfield, Utah manufacturing facility. In 1996, we expanded our manufacturing capacity by 233,000 square feet through the acquisition of our Canadian manufacturing facility in St. Jerome, Canada. The Weidercare facility, formerly located in Denver, Colorado, was relocated in the spring of 1999 to the Dallas area. We apply a management system to control and monitor freight, labor, overhead and material cost components of our finished goods. We emphasize product quality by monitoring operations according to uniform quality control standards. In fiscal 1994, we received ISO 9001 certification for our Logan facility. ISO is a nonprofit association that monitors industrial companies' manufacturing processes, quality assurance controls, personnel management and customer service in order to improve plant efficiency, product quality, customer satisfaction and company profitability. EMPLOYEES We currently employ approximately 4,328 people, 142 of whom are represented by a Canadian labor union. Factory employees are compensated through a targeted incentive system. Managerial employees receive bonuses tied to the achievement of performance targets. Approximately 248 employees are engaged in research and development, 72 in sales and marketing, 2,747 in manufacturing and 768 in other areas, primarily administrative. ENVIRONMENTAL MATTERS Our operations are subject to federal, state and local environmental and health and safety laws and regulations that impose workplace standards and limitations on the discharge of pollutants into the 33 environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of materials, substances and wastes. The nature of our manufacturing and assembly operations exposes us to the risk of claims with respect to environmental matters, and although compliance with local, state and federal requirements relating to the protection of the environment has not had a material adverse effect on our financial condition or results of operations, there can be no assurance that material costs or liabilities will not be incurred in connection with such environmental matters. Future events, such as changes in existing laws and regulations or enforcement policies or the discovery of contamination on sites owned or operated by us, may give rise to additional compliance costs or operational interruptions which could have a material adverse effect on our financial condition. SEASONALITY We sell the majority of our products to our customers in our second and third fiscal quarters (i.e., from September through February). Increased sales and distribution typically occur in the Christmas retail season and the beginning of a new calendar year because of increased customer promotions, increased consumer purchases and seasonal changes that prompt people to exercise inside. We have in the past, from time to time, incurred net losses in our first and fourth fiscal quarters of its fiscal year. If actual sales for a quarter do not meet or exceed projected sales for that quarter, expenditures and inventory levels could be disproportionately high for such quarter and our cash flow and earnings for that quarter and future quarters could be adversely affected. The timing of large orders from customers and the mix of products sold may also contribute to quarterly or other periodic fluctuations. 34 PROPERTIES The location, square footage, status and primary use of our principal properties are set forth below:
SQUARE LOCATION FOOTAGE STATUS PRIMARY USES - -------- -------- ----------------------- ------------------------------- Garland, TX 61,043 Leased (Expires 11/01) Offices, Manufacturing, Warehousing 80,000 Leased (Expires 1/01) Manufacturing, Storage 83,160 Leased (Expires 1/01) Finished Goods 15,295 Leased (Expires 1/01) Spa Manufacturing 125,000 Leased (Expires 2/04) Office, Manufacturing, Warehousing Ogden, UT 391,338 Leased (Month to Month) Warehouse South Brunswick, NJ 255,600 Leased (Expires 5/00) Warehouse West Valley City, UT 6,635 Leased (Month to Month) Offices San Luis Obispo, CA 4,950 Leased (Month to Month) Warehouse Anzin, France 8,097 Leased (Month to Month) Warehouse, Offices, Apartment Carrieres Sur Seine, France 2,966 Leased (Month to Month) Warehouse, Offices Neuilly Sur Seine, France 262 Leased (Month to Month) Apartment Leeds, UK 6,000 Leased (Month to Month) Offices Perguia, Italy 3,360 Leased (Expires 6/01) Offices 6,600 Leased (Month to Month) Warehouse Mirabel, Quebec 213,300 Leased (Expires 6/00) Warehouse 43,515 Leased (Month to Month) Warehouse St. Jerome, Quebec 65,835 Owned Manufacturing, Offices 105,984 Leased (Expires 7/02) Warehouse 61,852 Owned Manufacturing, Offices Clearfield, UT 329,075 Leased (Month to Month) Warehouse 161,564 Leased (Expires 12/03) Warehouse 76,000 Leased (Expires 6/00) Warehouse 120,000 Leased (Expires 6/00) Warehouse, Manufacturing 76,800 Leased (Expires 3/02) Office, Manufacturing Logan, UT 300,000 Owned Manufacturing, Offices, R&D 68,750 Leased (Expires 6/01) Warehouse 17,913 Leased (Month to Month) Warehouse 18,003 Leased (Month to Month) Warehouse 50,000 Leased (Month to Month) Warehouse Smithfield, UT 88,555 Leased (Expires 10/04) Manufacturing 64,275 Leased (Expires 9/01) Manufacturing
We believe that our existing facilities are well maintained, in good operating condition and adequate for our expected level of operations. Although a number of our facilities are rented on a month to month basis, we do not anticipate difficulty in maintaining access to facilities required for the conduct of our business. LEGAL PROCEEDINGS Due to the nature of our products, we are subject to legal proceedings, including product liability claims involving personal injuries allegedly related to our products. We are also party to a variety of non-product liability commercial suites involving contract claims and intellectual property claims and may be subject to claims resulting from our September recapitalization. See "Risk Factors--We may be subject to claims from holders of our 13% notes and the 14% notes of ICON Fitness who did not participate in our September recapitalization" for a discussion of potential claims arising out of the September recapitalization. 35 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of our company, and their ages, are as follows:
NAME AGE POSITION - ---- -------- ----------------------------------------------------- Scott R. Watterson..................... 44 Chairman of the Board and Chief Executive Officer Gary E. Stevenson...................... 44 President, Chief Operating Officer and Director Robert C. Gay.......................... 47 Vice Chairman of the Board Ronald P. Mika......................... 38 Director S. Fred Beck........................... 41 Chief Financial and Accounting Officer, Vice President and Treasurer David J. Watterson..................... 40 Vice President, Marketing and Research and Development Jon M. White........................... 51 Vice President, Manufacturing William T. Dalebout.................... 51 Vice President, Design Greg Benson............................ 45 Director David J. Matlin........................ 38 Director Chris R. Pechock....................... 35 Director Stanley C. Tuttleman................... 80 Director W. McComb Dunwoody..................... 55 Director
SCOTT R. WATTERSON. Mr. Watterson has served as President and Chief Executive Officer of Weslo since he co-founded Weslo in 1977 and has served as President and Chief Executive Officer of ProForm since 1988. In November 1994, Mr. Watterson became Chairman of the Board and Chief Executive Officer of our company. In addition, Mr. Watterson is a director of American Pad and Paper Company and the Utah State University Foundation. He is also on the Board of Trustees for the Utah Foundation and the Make-A-Wish Foundation of Utah. GARY E. STEVENSON. Mr. Stevenson has served as Chief Operating Officer of Weslo since he co-founded Weslo in 1977 and has served as Chief Operating Officer of ProForm since 1988. In November 1994, Mr. Stevenson became President, Chief Operating Officer and a Director of our company. ROBERT C. GAY. Mr. Gay became Vice Chairman of the Board of Directors of our company in November 1994. Mr. Gay has been a Managing Director of Bain Capital since April 1993 and has been a General Partner of Bain Venture Capital since February 1989. In addition, Mr. Gay serves as a director of American Pad and Paper Company, Nutraceutical, Cambridge Industries, Inc., GS Technologies Corporation, Anthony Crane, and Alliance Laundry. RONALD P. MIKA. Mr. Mika became a Director of our company in November 1994. Mr. Mika joined Bain Capital in 1989, where he has been managing Director since 1996. In addition, Mr. Mika serves as a director of Cambridge Industries, Kranson Industries, and PSI. S. FRED BECK. Mr. Beck has served as the Chief Financial Officer of Weslo since 1989. Mr. Beck became Chief Financial and Accounting Officer, Vice President and Treasurer of our company in November 1994. DAVID J. WATTERSON. Mr. Watterson has served as Vice President of Marketing and Research and Development of Weslo since 1992 and has continued in that position with our company since November 1994. Prior to 1992, Mr. Watterson served as Vice President of Sales of Weslo. He joined our company in 1980. Mr. Watterson is Scott R. Watterson's brother. 36 JON M. WHITE. Mr. White has served as Vice President of Manufacturing of Weslo since 1988 and has continued in that position with our company since November 1994. WILLIAM T. DALEBOUT. Mr. Dalebout has served as Vice President of Design of Weslo since 1987 and has continued in that position with our company since November 1994. GREG BENSON. Mr. Benson became a Director of our company in September 1999. Mr. Benson has been an executive vice president of Bain Capital since 1996. Prior to joining Bain Capital, Mr. Benson was the Chief Financial Officer of American Pad and Paper Company. In addition, Mr. Benson serves as a director of American Pad and Paper Company. DAVID J. MATLIN. Mr. Matlin became a Director of our company in September 1999. Mr. Matlin is a managing director of Credit Suisse First Boston. Mr. Matlin joined Credit Suisse First Boston in May 1994. Prior to that, Mr. Matlin was most recently a partner at Merrion Group LP, a boutique securities firm that he co-founded in 1991. In addition, Mr. Matlin is a director of Imagyn Medical Technologies, California Coastal Communities, Vacocor Inc., and Forstmann Textiles. CHRIS R. PECHOCK. Mr. Pechock became a director of our company in September 1999. Mr. Pechock has been a Vice President of Credit Suisse First Boston since 1999. Prior to joining Credit Suisse First Boston Corporation, Mr. Pechock was a portfolio manager at Turnberry Capital Management from 1997 until 1999 and at Eos Partners from 1996 until 1997. From 1993 until 1996, Mr. Pechock was a Vice President of PaineWebber, Incorporated. STANLEY C. TUTTLEMAN. Mr. Tuttleman became a director of our company in September 1999. Mr. Tuttleman is the CEO and President of Tuttson Capital Corp. and the Chairman of the Board and CEO of Telepartners, Inc. In addition, Mr. Tuttleman is a director of Mothers Work, Inc., and a trustee of the Franklin Institute, the Philadelphia Orchestra, the Philadelphia Museum of Art, Graduate Hospital, Gratz College and the Harrison Foundation. W. MCCOMB DUNWOODY. Mr. Dunwoody became a director of our company in September 1999. Mr. Dunwoody founded the Inverness Group Incorporated in 1981. He has served as Managing Director of Inverness Management LLC since 1996 and is General Partner of its Fund. Mr Dunwoody was a member of the Corporate Finance Departments of the First Boston Corporation and Donaldson, Lufkin & Jenrette. He is Chairman of the Executive Committee of the Board of Directors of National- Oilwell, Inc. 37 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation for fiscal 1999, 1998 and 1997 for Mr. Scott Watterson and our other four most highly compensated executive officers (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------ ALL OTHER FISCAL SALARY BONUS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) - --------------------------- -------- --------- --------- ------------ Scott R. Watterson............................... 1999 472,500 219,000 1,800 Chairman of the Board and Chief 1998 472,500 220,300 1,800 Executive Officer 1997 450,000 1,047,384 2,250 Gary E. Stevenson................................ 1999 420,000 219,000 1,800 President and Chief Operating Officer 1998 420,000 220,300 1,800 1997 400,000 1,047,384 2,250 S. Fred Beck..................................... 1999 210,000 40,000 1,853 Chief Financial and Accounting Officer 1998 188,000 39,300 2,234 Vice President and Treasurer 1997 178,920 144,533 79,506(3) David J. Watterson............................... 1999 252,000 40,000 925 Vice President, Marketing and 1998 229,000 39,300 1,920 Research and Development 1997 218,325 144,533 78,696(3) Richard Hebert................................... 1999 297,799 161,473 8,736 General Manager, ICON 1998 318,916 187,097 5,939 Du Canada, Inc. 1997 388,043(2) -- 9,440
- ------------------------ (1) Includes amounts contributed by our company for the benefit of the Named Executive Officers under our 401 (k) Plan. (2) Represents Mr. Hebert's salary from September 6, 1996, the date of the ICON of Canada acquisition, to May 31, 1997. (3) Includes forgiveness by our company of a $60,000 loan to Mr. Beck and Mr. David Watterson. 38 The following table sets forth information as of May 31, 1999, concerning options of IHF Capital, Inc., our former indirect parent company exercised by each of the Named Executive Officers in 1999 and year end option values: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY SHARES OPTIONS OPTIONS AT ACQUIRED VALUE AT MAY 31, 1999(#) MAY 31, 1999($)(1) ON REALIZED -------------------------- ------------------------- NAME EXERCISE(#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ----------- -------- -------------------------- ------------------------- CLASS A CLASS A CLASS A CLASS L CLASS L CLASS A COMMON COMMON COMMON COMMON COMMON COMMON STOCK STOCK STOCK STOCK STOCK STOCK Scott Watterson................ -- -- 469,988/0 48,620/0 -/- -/- Gary Stevenson................. -- -- 375,251/0 37,816/0 -/- -/- S. Fred Beck................... -- -- 77,383/0 -- -/- -/- David J. Watterson............. -- -- 62,285/0 -- -/- -/- Richard Hebert................. -- -- -- -- -/- -/-
- ------------------------ (1) As of May 31, 1999 there was no market for the common stock of IHF Capital, Inc. Due to the financial condition of our company at May 31, 1999, no value was attributed to the equity underlying these options. 1999 JUNIOR MANAGEMENT STOCK OPTION PLAN In September 1999 HF Holdings, adopted its 1999 Junior Management Stock Option Plan (the "1999 Stock Option Plan") which provides for the grant to eligible employees of our company of nonstatutory options. A total of 330,000 shares of common stock were reserved for issuance under the 1999 Stock Option Plan, which is administered by the Board of Directors or a committee thereof. COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We did not maintain a compensation committee during 1999. Messrs. Scott Watterson's and Stevenson's 1999 compensation was determined prior to the September recapitalization pursuant to employment contracts that had been in place since 1989 and, after the September recapitalization, pursuant to the newly entered into employment agreements described below under the caption "-- Employment Agreements". Messrs. Watterson and Stevenson participated in the deliberations concerning the compensation of other officers, and Mr. Beck participated in the deliberations concerning the compensation of officers other than himself and Messrs. Watterson and Stevenson. See "Transactions Between Our Company and Officers, Directors and Principal Stockholders." COMPENSATION OF DIRECTORS Our directors do not receive any compensation for serving on our Board of Directors in 1999, and are not entitled to receive compensation in connection with their current service. Directors are reimbursed for their out-of-pocket expenses incurred in connection with their service as directors. The Company also maintains liability insurance policies for our directors. See "Transactions Between Our Company and Officers, Directors and Principal Stockholders--Management Fees" for a more detailed description of these arrangements. 39 EMPLOYMENT AGREEMENTS On September 27, 1999 we entered into new three year employment agreements with each of Scott Watterson and Gary Stevenson. The employment agreements provide for the continued employment of Mr. Watterson as Chairman and Chief Executive Officer with an increase in base salary from $450,000 to $525,000 and Mr. Stevenson as President and Chief Operating Officer with an increase in base salary from $400,000 to $475,000. Except as set forth below, in all other material respects the agreements are substantially identical. On September 27, 1999, each of Mr. Watterson and Mr. Stevenson received a bonus of $500,000. Each executive is also entitled to participate in a bonus program providing for a bonus equal to a percentage of the consolidated EBITDA (as defined in our credit facility) of our company and our subsidiaries (our "EBITDA") which percentage shall equal 1.25% for Mr. Watterson and 1.10% for Mr. Stevenson. The executives will not be entitled to a bonus, however, unless our Profits exceed 5.5% of net sales. We may terminate each executive's employment (1) for cause as provided in each agreement, (2) upon six months' disability, or (3) without cause. Each executive may similarly terminate his employment immediately for cause as provided in his employment agreement, upon three months notice to perform full-time church service or for any reason upon six months' notice. In the event we terminate either executive's employment for cause, or such employment terminates as a result of the death of the executive, as the case may be, the executive will not be entitled to further salary, benefits or bonus. If we terminate the executive's employment without cause, or the executive terminates his employment with or without cause, we will be obligated to pay the executive his salary and bonus for a period of two years from the date of termination, provided, that if the executive should terminate his employment prior to September 27, 2000 (other than with cause or to perform full time church service), such executive shall forego $500,000 of severance compensation otherwise payable to such executive. If we terminate the executive's employment upon the executive's disability, we are obligated to pay as severance an amount equal to one month's base salary then in effect for each calendar year or part thereof elapsed since January 1, 1988 provided that such severance pay is reduced by payments under applicable disability insurance. The employment agreements prohibit the executives from engaging in outside business activity during the term, subject to exceptions. The employment agreements provide for customary confidentiality obligations and, in addition, a non-competition obligation for a period of four years following termination (two years if the executive quits with cause or without cause or is terminated without cause, except that we may, at our option, extend such period for up to two additionally years by paying the executive his salary and bonus during the extended period). Under the employment agreements, the executives (and their affiliates) shall be entitled to indemnification to the fullest extent allowed by Delaware law with respect to all losses, costs, expenses and other damages in connection with any lawsuits or other claims brought against them in their capacity as officers or directors or shareholders (or affiliates thereof) of HF Holdings or any of its past or present parent or subsidiary or other affiliated companies, including ICON Fitness and IHF Holdings, the parent companies. 40 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT HF Holdings owns all of the outstanding common stock of our company. The following table and related notes set forth information with respect to the beneficial ownership of HF Holdings' 7,771,613 outstanding shares of common stock as of March 28, 2000 by (i) each person known to HF Holdings to beneficially own more than 5.0% of the outstanding shares of common stock of HF Holdings, and (ii) each director and executive officer of HF Holdings individually and (iii) all directors and executive officers of HF Holdings as a group.
COMMON STOCK BENEFICIALLY OWNED (1)(2) ------------------------- PERCENT OF NUMBER OF OUTSTANDING NAMES SHARES SHARES - ----- ----------- ----------- Scott R. Watterson+ (3)..................................... 376,000 4.86% c/o ICON Health& Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Gary E. Stevenson+ (4)...................................... 292,700 3.78% c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 The Bain Funds (5).......................................... 5,161,035 66.69% c/o Bain Capital, Inc. Two Copley Place, 7th Floor Boston, Massachusetts 02116 Robert C. Gay+ (6).......................................... 5,161,035 66.69% c/o Bain Capital, Inc. Two Copley Place, 7th Floor Boston, Massachusetts 02116 Ronald P. Mika+ (6)......................................... 5,161,035 66.69% c/o Bain Capital, Inc. Two Copley Place, 7th Floor Boston, Massachusetts 02116 Greg Benson+ (6)............................................ 5,161,035 66.69% c/o Bain Capital, Inc. Two Copley Place, 7th Floor Boston, Massachusetts 02116 Credit Suisse First Boston Corp (7)(8)...................... 1,312,933 16.96% c/o Credit Suisse First Boston Corp. Eleven Madison Avenue New York, New York 10010-3629 Christopher Pechock+ (9).................................... 1,312,933 16.96% c/o Credit Suisse First Boston Corp. Eleven Madison Avenue New York, New York 10010-3629
41
COMMON STOCK BENEFICIALLY OWNED (1)(2) ------------------------- PERCENT OF NUMBER OF OUTSTANDING NAMES SHARES SHARES - ----- ----------- ----------- David Matlin+ (9)........................................... 1,312,933 16.96% c/o Credit Suisse First Boston Corp. Eleven Madison Avenue New York, New York 10010-3629 HF Investment Holdings, LLC................................. 5,160,035 66.68% c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 W. McComb Dunwoody+ (10).................................... 344,002 3.44% c/o Inverness/Phoenix Capital LLC 660 Steamboat Road, 2nd Floor Greenwich, Connecticut 06830 Stanley Tuttleman+ (11)..................................... 172,002 1.72% Tuttson's Inc. 349 Montgomery Avenue P.O. Box 22405 Bala Cynwyd, Pennsylvania 19004 David Watterson (12)........................................ 18,173 -- c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 S. Fred Beck (12)........................................... 15,149 -- c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 All directors and executive officers as a group (9 7,173,990 92.31% persons)..................................................
- ------------------------ + Director of HF Holdings (1) The common stock of HF Holdings consists of two classes of shares, par value $0.001 per share common stock and par value $0.001 preferred stock. There are twelve million authorized shares of common stock and ten thousand authorized shares of preferred stock. Subject to the Stockholders Agreement described below, each holder of common stock is entitled to one vote per share for the election of directors and for all other matters to be voted on by HF Holdings' stockholders. Subject to preferences that may be applicable to any outstanding series of preferred stock, the holders of common stock are entitled to share ratably in such dividends, if any, as may be declared form time to time by the Board of Directors from funds legally available. Upon liquidation or dissolution of HF Holdings, subject to preferences that may be applicable to any outstanding series of preferred stock, the holders of common stock are entitled to share ratably in all assets available for distribution to stockholders. (2) Except as otherwise indicated, (a) each owner has sole voting and investment power with respect to the shares set forth and (b) the figures in this table are calculated in accordance with Rule 13d-3, as amended, under the Exchange Act of 1934. The table includes the HF Holdings 42 Warrants (which have an exercise price, subject to adjustment, of $.01 per share) which are presently exercisable. HF Holdings' Certificate of Incorporation provides that HF Holdings may, by vote of its Board of Directors, designate the numbers, relative rights, preferences and limitations of one or more series of preferred stock and issue the securities so designated. All current stockholders of HF Holdings (other than IHF Holdings) are parties to a Stockholders Agreement pursuant to which (a) some holders affiliated with management are entitled to elect two directors, (b) some holders affiliated with Credit Suisse First Boston are entitled to elect two directors and (c) Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust Associates, L.P. (collectively, the "Bain Funds") are entitled to elect all remaining directors. In addition, the Bain Funds are entitled to direct how these other stockholders will cast their votes with respect to some matters, including a public offering of HF Holdings or the disposition of its assets. The Stockholders Agreement also contains other agreements among the stockholders of HF Holdings and HF Holdings which are described under "Transactions Between Our Company and Officers, Directors and Principal Stockholders--The Equity Investment--Stockholders Agreement." The shares reported in this table as owned by a stockholder do not include the shares over which such stockholder has the right to direct the vote pursuant to the Stockholders Agreement. (3) Includes 1,000 shares owned by IHF Holdings, of which Mr. Watterson is deemed the beneficial owner by virtue of being a director. Mr. Watterson disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. Excludes shares which may be distributable by HF Investments Holdings in some events. (4) Includes 1,000 shares owned by IHF Holdings, of which Mr. Stevenson is deemed the beneficial owner by virtue of being a director. Mr. Stevenson disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. Excludes shares which may be distributable by HF Investments Holdings, in some events. (5) Includes 5,160,035 shares beneficially owned by HF Investment Holdings, of which the Bain Funds may be deemed the beneficial owners by virtue of their control of HF Investment Holdings pursuant to its operating agreement. Also includes 1,000 shares owned by IHF Holdings, of which the Bain Funds may be deemed the beneficial owners by virtue of the fact that one or more of their general partners or principals, or one or more general partners or principals of one of their general partners, is a director of IHF Holdings. The Bain Funds disclaim beneficial ownership of any shares in which they do not have a pecuniary interest. (6) Includes the shares beneficially owned by each of the Bain Funds, of which each of Mr. Gay, Mr. Mika or Mr. Benson may be deemed the beneficial owner by virtue of being a general partner or principal, or a general partner or a principal of the general partner, of such Bain Fund. Also includes 1,000 shares owned by IHF Holdings, of which each of Mr. Gay, Mr. Mika or Mr. Benson may be deemed the beneficial owner by virtue of each being a director. Each of Mr. Gay, Mr. Mika or Mr. Benson disclaims beneficial ownership of any such shares in which it does not have a pecuniary interest. (7) Excludes (a) 1,931,263 shares receivable upon conversion of convertible subordinated notes, (b) shares which may be distributable in some events upon exercise in full of a warrant to purchase Class C Units of HF Investments Holdings and (c) up to 1,030,000 shares owned by HF Investments Holdings which are subject to an option exercisable only upon the occurrence of some events. (8) Includes 669,179 shares of common stock subject to purchase upon exercise of warrants that are presently exercisable. (9) Includes 1,312,933 shares beneficially owned by Credit Suisse First Boston, of which each of Mr. Pechock or Mr. Matlin may be deemed the beneficial owner by virtue of each being officers of Credit Suisse First Boston. Each of Mr. Pechock or Mr. Matlin disclaims beneficial ownership of any such shares in which it does not have a pecuniary interest. 43 (10) Excludes shares which may be distributable by HF Investments Holdings in some events to Inverness/Phoenix Capital LLC ("Inverness") of which Mr. Dunwoody may be deemed the beneficial owner by virtue of being a general partner or principal of Inverness. Mr. Dunwoody disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. (11) Excludes shares which may be distributable by HF Investment Holdings in some events. (12) Represents shares of HF Holdings issuable upon exercise of the vested portion of options awarded pursuant to the 1999 HF Holdings Junior Management Stock Option Plan. Excludes up to 47,264 shares for David Watterson and up to 39,396 shares for S. Fred Beck owned by HF Investment Holdings, LLC which are subject to an option exercisable only upon the occurrence of certain events. All of the outstanding common stock of our company, owned by HF Holdings, has been pledged to the lenders under the new credit facilities. If we were to default under these new credit facilities, the lenders could foreclose on the pledge and take control of our company. 44 TRANSACTIONS BETWEEN OUR COMPANY AND OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS THE EQUITY INVESTMENT GENERAL. As part of our September recapitalization, affiliates of Bain Capital and its designees, Scott Watterson and Gary Stevenson, and Credit Suisse First Boston and its affiliates made an equity investment of $40 million in HF Holdings which then contributed that money to the equity of our company. INVESTMENT BY BAIN AFFILIATES AND SENIOR MANAGEMENT. The Bain Affiliates (and their designees), CSFB and Senior Management purchased membership interests in HF Investment Holdings, LLC ("HF Investment Holdings") for an aggregate of $30 million of cash. The Bain Affiliates purchased $14,950,000 worth of membership interests in the form of Class B Units, each member of Senior Management purchased $2,500,000 worth of membership interests in the form of Class A Units, CSFB purchased for $5,000,000 a warrant (the "CSFB Warrant") to purchase Class C Units and designees of the Bain Affiliates purchased an aggregate of $5,050,000 worth of Class C Units. See "--The LLC Agreement" for a description of the limited liability company agreement of HF Investment Holdings and the Class A Units, Class B Units, Class C Units and the CSFB Warrant issued thereunder. HF Investment Holdings in turn purchased for $30.0 million in cash 5,160,035 shares of the common stock of HF Holdings (or approximately 51.6% of the common stock of HF Holdings outstanding on a fully diluted basis upon consummation of the September recapitalization). INVESTMENT BY CSFB. In addition to its investment in HF Investment Holdings, CSFB purchased for an aggregate purchase price of $10.0 million in cash convertible notes (which are reflected as common stock on HF Holdings' balance sheet) and stock aggregating (on an as-converted basis) 2,575,017 shares of the common stock of HF Holdings (or approximately 25.7% of the common stock of HF Holdings outstanding on a fully diluted basis upon the consummation of the September recapitalization). The convertible notes purchased by CSFB will mature on September 27, 2011, with no interest accruing thereon and no payments of principal until maturity. The notes (x) are convertible (by the holders thereof or by HF Holdings), subject to limited exceptions, into shares of common stock of HF Holdings upon a liquidation, insolvency or Liquidity Event (as defined below) and (y) automatically convert into shares of common stock of HF Holdings upon a bankruptcy, in each case at a conversion price of $3.88347 per share (subject to readjustment upon stock splits, stock dividends and combinations of shares). Prior to the September recapitalization, CSFB held 10% of our then outstanding 13% Senior Subordinated Notes, 76% of the then outstanding 15% Senior Secured Discount Notes of IHF Holdings and 83% of the then outstanding 14% Senior Discount Notes of ICON Fitness. CSFB received, as a participant in the private exchange offers, an aggregate of approximately $4.0 million in cash, $4.5 million principal amount of 12% notes and warrants to purchase 669,179 shares of common stock of HF Holdings. MANAGEMENT EQUITY GRANT. On September 27, 1999, HF Holdings issued to Scott Watterson and Gary Stevenson, without cost, an aggregate of 666,700 shares of the common stock of HF Holdings (or approximately 6.7% of its common stock outstanding on a fully diluted basis upon the consummation of the September recapitalization). Mr. Watterson received 375,000 of these shares, while Mr. Stevenson received 291,700 shares. STOCKHOLDERS AGREEMENT. On September 27, 1999, we entered into a stockholders agreement (the "Stockholders Agreement") with HF Holdings, HF Investment Holdings, the Bain Affiliates and their designees, Senior Management and CSFB. Holders of our 13% Senior Subordinated Notes, the 15% Senior Secured Discount Notes of IHF Holdings and the 14% Senior Discount Notes of ICON Fitness 45 who tendered their notes in the September recapitalization (other than CSFB) and received warrants to acquire HF Holdings common stock (the "Non-CSFB Warrantholders") are entitled to registration rights under the Stockholders Agreement with respect to the shares of common stock issuable upon exercise of such warrants. For purposes of the Stockholders Agreement, prior to the liquidation of the LLC, any reference to the "Bain Holders" shall be to the LLC and subsequent to such liquidation, any reference to "Bain Holders" shall be to the Bain Affiliates and any Bain designees who held Class B Units in the LLC. All other shareholders (other than the Non-CSFB Warrantholders) party to the Stockholders Agreement shall be referred to as the "Other Holders." Junior Management Option. Under the Stockholders Agreement, the LLC granted to some junior managers of our company ("Junior Management") an option to purchase 216,700 shares of the common stock of HF Holdings (or approximately 2.17% of the common stock of HF Holdings outstanding on a fully diluted basis after the consummation of the September recapitalization) (the "Junior Management Option"). The Junior Management Option is exercisable for an exercise price of $5.83 per share and will expire on September 27, 2011 or, if not exercised in full, upon consummation of a Liquidity Event. Subject to acceleration upon the occurrence of a Liquidity Event, 25% of the Junior Management Option vested on September 27, 1999 and the remaining 75% will vest in three equal installments over the next three anniversaries of September 27, 1999. The Junior Management Option is exercisable solely upon the occurrence of a Liquidity Event. As used herein, a "Liquidity Event" means (i) the consummation of an initial public offering of the common stock of HF Holdings with gross proceeds greater than $50.0 million, (ii) a merger or consolidation of HF Holdings or our company, or sale of stock of HF Holdings or our company, in which the holders of outstanding voting securities of HF Holdings immediately after giving effect to the September recapitalization (treating as "holders" for such purpose any holder of membership interests in the LLC) cease to own, directly or indirectly, greater than 51% of the outstanding voting securities of the entity surviving such merger or consolidation or sale or (iii) a sale of all or substantially all of the assets of HF Holdings or our company. CSFB Option. Under the Stockholders Agreement, the LLC granted to CSFB an option (the "CSFB Option") to purchase a percentage of the common stock of HF Holdings held by the LLC immediately after the consummation of the September recapitalization. The percentage shall be (i) 12.5% from September 27, 1999 through March 26, 2001, (ii) 15% from March 27, 2001 through October 26, 2001, (iii) 17.5% from October 27, 2001 through March 26, 2002 and (iv) 20% thereafter. The CSFB Option is exercisable solely upon the occurrence of a Liquidity Event at an exercise price of $14.56 per share and will expire on September 27, 2011 or, if not exercised in full, upon consummation of the Liquidity Event. Restrictions on Transfer, Tag Along and Drag Along Provisions. Under the Stockholders Agreement, the Other Holders are subject to customary restrictions on transfer, obtained rights to participate in sales of stock by the other parties to third parties, or "tag along" rights, and may be required to sell their shares to third parties, or subject to "drag along" provisions. The transfer restrictions (other than customary lockups in connection with registered public offerings) expire upon a change of control or at such time following the initial public offering that the outstanding shares of HF Holdings have an aggregate market value of $200.0 million or more (a "Significant Public Float"). The "tag along" and "drag along" rights expire upon the earlier of (x) a change of control, (y) the date on which there shall exist a Significant Public Float and (z) the initial public offering, if the managing underwriter shall so determine. Non-CSFB Warrantholders' shares are freely transferable, subject to securities law restrictions. When any Bain Holder sells shares of common stock to third parties (other than sales pursuant to the Junior Management and CSFB Options and customary exceptions), the Other Holders have the right to include their shares on a pro rata basis with the shares being sold by that Bain Holder, and 46 under some circumstances, that Bain Holder can require the Other Holders to sell their shares to the third party. The Other Holders also have pre-emptive rights in the event of issuances of equity by HF Holdings to the Bain Holders. Subject to customary limitations, the Other Holders have two (2) demand registration rights (one of which is exercisable by CSFB and the other of which is exercisable by Senior Management, in each case not earlier than 180 days following the first registered secondary offering following an initial public offering) and unlimited piggyback registration rights with respect to their shares of common stock. Subject to customary limitations, the Bain Holders have three demand registration rights and unlimited piggy back registration rights. Subject to customary limitations, the Non-CSFB Warrantholders have two demand registration rights, not earlier than 180 days following the first registered secondary offering following an initial public offering, and unlimited piggyback registration rights with respect to their shares of common stock. The registration rights described herein will terminate as to any shares of HF Holdings common stock when (a) they have been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) they have been distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the Securities Act or (c) the holder of such shares may sell all of its shares under Rule 144 within a three month period, provided such holder owns less than 1% of the outstanding shares of common stock. Management's tag along rights, drag along obligations and registration rights (and interests in the LLC) are subject to a special rule such that, at the option of Bain, up to 25% of Senior Management's and up to 15% of Junior Management's entire position must be retained as equity rather than sold, provided that, in the case of shares held by any particular manager (or some of his or her transferees): (i) such manager is at such time employed by us or was so employed at any time during the preceding 12 months, without any material diminution of his or her responsibilities; and (ii) the buyer in connection with such a sale is a financial buyer (as defined in the Stockholders Agreement). Director Designations. Under the terms of the Stockholders Agreement, HF Investment Holdings is entitled to appoint seven directors and CSFB is entitled to appoint two directors. Upon liquidation of HF Investment Holdings, the Bain Holders will be entitled to appoint five directors, CSFB will be entitled to appoint two directors and Senior Management shall have the right to be directors so long as they are employed by the company. So long as the Bain Holders hold a significant percentage of the common stock of HF Holdings, the Other Holders shall be required to vote in accordance with the Bain Holders on significant corporate transactions. THE LLC AGREEMENT. HF Investment Holdings is governed by a limited liability company agreement among the Bain Affiliates, Senior Management, CSFB and Bain designees (the "LLC Agreement"). The membership interests in HF Investment Holdings consists of three classes: Class A Units, Class B Units and Class C Units. Senior Management holds Class A Units, the Bain Affiliates hold Class B Units and the Bain designees hold Class C Units. The Class C units have no voting rights on any matters and Class A Units and Class B Units have voting rights on all matters (including actions under the Stockholders Agreement) subject to the following: (a) amendment of the LLC Agreement requires approval of holders of a majority of units of each class; and (b) holders of a majority of Class A Units are entitled to select two directors and holders of a majority of Class B Units are entitled to select five directors; in all other events, the Bain Affiliates shall have voting control (subject to (a) and (b) above). The holders of any class of units may not transfer their membership interests, except, in the case of management stockholders, to a member of the holder's immediate family (or a trust for the benefit of a family member) or charities or, in the case of institutional holders, to specified affiliates. The CSFB Warrant, which was issued under the LLC Agreement, is exercisable for an aggregate of 50,000 Class C Units of the LLC at an exercise price of $0.01 per Unit. The CSFB Warrant is exercisable solely upon the occurrence of a Liquidity Event, and shall be deemed, subject to exceptions, 47 to have been exercised upon the occurrence of an event of insolvency of HF Holdings or one of its subsidiaries. EMPLOYMENT AGREEMENTS. On September 27, 1999, we entered into new three year employment agreements with each of Scott Watterson and Gary Stevenson. These agreements are described under "Management--Employment Agreements." MANAGEMENT LOANS. On September 27, 1999, HF Holdings loaned $1,209,340 to Scott Watterson and $990,660 to Gary Stevenson against non-recourse notes with a maturity of 10 years. The notes bear interest at a rate equal to that of the revolver portion of the credit facilities, payable in cash until the earlier of (i) the first date as of which the cumulative consolidated net taxable income of HF Holdings and its subsidiaries (computed by disregarding deductions of HF Holdings and its subsidiaries arising from events and transactions occurring after the consummation of the September recapitalization) arising on or after September 27, 1999 exceeds $0 or (ii) May 31, 2000, provided that the consolidated EBITDA (as defined in the credit facilities) of our company and our subsidiaries, for our fiscal year then ended, exceeds $64 million. The notes may be accelerated upon specified defaults and liquidity events, and are secured by (i) 666,700 shares of HF Holdings common stock and (ii) 5,131.39 Class A Units of the LLC. HF Holdings has recourse only to such stock and Units. HF Holdings also loaned $92,000 to S. Fred Beck, our Chief Financial Officer, and $100,000 to David J. Watterson, our Vice President, Marketing and Research and Development. MANAGEMENT AGREEMENTS. On September 27, 1999, our company and HF Holdings also entered into a new management agreement with a Bain Affiliate which provides, subject to restrictions contained in the credit facilities, for a fee payable upon closing of the September recapitalization of $2,202,000 and an annual management fee of $366,500 in exchange for management consulting services including providing advice on strategic planning, development and acquisitions. In addition, if we enter into any acquisition transactions involving at least $10.0 million, the Bain Affiliate will receive (subject in some circumstances to CSFB's fee described below) a fee in an amount which will approximate 1% of the gross purchase price of the transaction (including assumed debt). We also paid all arrearages under the existing Bain management agreement. Additionally, HF Holdings entered into a management arrangement with CSFB which provides, subject to restrictions contained in the credit facilities, for a fee payable upon closing of the September recapitalization of $881,000 and an annual management fee of $366,500 in exchange for consulting services. In addition, if we enter into transactions which constitute a Liquidity Event, CSFB will receive a fee in an amount which will approximate 50% of the fee payable under the Bain management agreement in connection with such transaction. On September 27, 1999, our company and HF Holdings also entered into management agreements with each of Mr. Watterson and Mr. Stevenson which provide, subject to restrictions contained in the credit facilities, for a closing fee of $417,000 in the aggregate and, so long as the Bain Affiliate is receiving a management fee under the Bain management agreement, an annual management fee of $67,000 in the aggregate. The respective management agreements include full indemnification and expense reimbursement provisions in favor of Bain Capital, CFSB and their affiliates and Senior Management, respectively. AIRCRAFT LEASE In June 1996, we entered into an agreement with FG Aviation, Inc. ("FG"), a company which is jointly owned by our officers, whereby we have committed to lease a Westwind II jet from FG. Minimum rentals under the lease, which expires in May 2005, are $56,610 per month. In connection with its lease commitments, we recorded $864,000, $679,000 and $679,000 of rental expense and $206,000, $34,000 and $0 of maintenance expense in the years ended May 31, 1999, 1998 and 1997. In addition, we advanced $280,000 to FG as a security deposit on the aircraft lease. 48 THE EXCHANGE OFFER As of the date of this prospectus, $44,282,000 aggregate principal amount of unregistered notes are outstanding. Simultaneously with the September recapitalization, we entered into an exchange and registration rights agreement with the initial holders of the notes in which we agreed to deliver this prospectus to you. RESALE OF THE EXCHANGE NOTES Based on no-action letters issued by the staff of the Securities and Exchange Commission to third parties, we believe that a holder of old notes, but not a holder who is an affiliate of our company within the meaning of Rule 405 of the Securities Act, who exchanges old notes for exchange notes in the exchange offer, generally may offer the exchange notes for resale, sell the exchange notes and otherwise transfer the exchange notes without further registration under the Securities Act and without delivery of a prospectus that satisfies the requirements of Section 10 of the Securities Act. This does not apply, however, to a holder who is an affiliate of our company within the meaning of Rule 405 of the Securities Act. We also believe that a holder may offer, sell or transfer the exchange notes only if the holder acquires the exchange notes in the ordinary course of its business and is not participating, does not intend to participate and has no arrangement or understanding with any person to participate in a distribution of the exchange notes. Any holder of old notes using the exchange offer to participate in a distribution of exchange notes cannot rely on the no-action letters referred to above. This includes a broker-dealer that acquired old notes directly from us, but not as a result of market-making activities or other trading activities. Consequently, the holder must comply with the registration and prospectus delivery requirements of the Securities Act in the absence of an exemption from such requirements. Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by the broker-dealer as a result of market-making activities or other trading activities may be a statutory underwriter and must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with the resale of exchange notes received in exchange for old notes. The letter of transmittal which accompanies this prospectus states that by so acknowledging and by delivering a prospectus, a participating broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. A participating broker-dealer may use this prospectus, as it may be amended from time to time, in connection with resales of exchange notes it receives in exchange for old notes in the exchange offer. We will make this prospectus available to any participating broker-dealer in connection with any resale of this kind for a period of 30 days after the expiration date of the exchange offer. See "Plan of Distribution". Each holder of the old notes who wishes to exchange old notes for exchange notes in the exchange offer will be required to represent and acknowledge, for the holder and for each beneficial owner of such old notes, whether or not the beneficial owner is the holder, in the letter of transmittal that: - the exchange notes to be acquired by the holder and each beneficial owner, if any, are being acquired in the ordinary course of business, - neither the holder nor any beneficial owner is an affiliate, as defined in Rule 405 of the Securities Act, of our company or any of our subsidiaries, - any person participating in the exchange offer with the intention or purpose of distributing exchange notes received in exchange for old notes, including a broker-dealer that acquired old notes directly from us, but not as a result of market-making activities or other trading activities cannot rely on the no-action letters referenced above and must comply with the registration and prospectus delivery requirements of the Securities Act, in connection with a secondary resale of the exchange notes acquired by such person, 49 - if the holder is not a broker-dealer, the holder and each beneficial owner, if any, are not participating, do not intend to participate and have no arrangement or understanding with any person to participate in any distribution of the exchange notes received in exchange for old notes, and - if the holder is a broker-dealer that will receive exchange notes for the holder's own account in exchange for old notes, the old notes to be so exchanged were acquired by the holder as a result of market-making or other trading activities and the holder will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such exchange notes received in the exchange offer. However, by so representing and acknowledging and by delivering a prospectus, the holder will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. SHELF REGISTRATION STATEMENT If applicable law or interpretations of the staff of the SEC are changed so that the exchange notes received by holders who make all of the above representations in the letter of transmittal are not or would not be, upon receipt, transferable by each such holder without restriction under the Securities Act, our company and the subsidiary guarantors will, at their cost: - file a shelf registration statement covering resales of the old notes, - use their respective best efforts to cause the shelf registration statement to be declared effective under the Securities Act at the earliest possible time, but no later than the later of 120 days after the filing of the shelf registration statement and March 27, 2000, and - use their respective best efforts to keep effective the shelf registration statement until the earlier of September 27, 2001 or the time when all of the applicable old notes are no longer outstanding. We will, if and when we file the shelf registration statement, provide to each holder of the old notes copies of the prospectus which is a part of the shelf registration statement, notify each holder when the shelf registration statement has become effective and take other actions as are required to permit unrestricted resales of the old notes. A holder that sells old notes pursuant to the shelf registration statement generally must be named as a selling security-holder in the related prospectus and must deliver a prospectus to purchasers, will be subject to civil liability provisions under the Securities Act in connection with these sales and will be bound by the provisions of the exchange and registration rights agreement which are applicable to the holder, including indemnification obligations. In addition, each holder of old notes must deliver information to be used in connection with the shelf registration statement and provide comments on the shelf registration statement in order to have its old notes included in the shelf registration statement and benefit from the provisions regarding any liquidated damages described below. TERMS OF THE EXCHANGE OFFER Upon the exchange offer registration statement being declared effective, we will offer the exchange notes in exchange for surrender of the old notes. We will keep the exchange offer open for at least 30 days, or longer if required by applicable law, after the date notice of the exchange offer is mailed to the holders of the old notes. Upon the terms and subject to the conditions contained in this prospectus and in the letter of transmittal which accompanies this prospectus, we will accept any and all old notes validly tendered and not withdrawn before midnight, New York City time, on the expiration date of the exchange offer. We will issue an equal principal amount of exchange notes in exchange for the principal amount of old 50 notes accepted in the exchange offer. Holders may tender some or all of their old notes under the exchange offer. Old notes may be tendered only in integral multiples of $1,000. The form and terms of the exchange notes will be the same as the form and terms of the old notes except that: (1) the exchange notes will have been registered under the Securities Act and therefore will not bear legends restricting their transfer, and (2) the exchange notes will not contain terms providing for an increase in the interest rate on the old notes under specific circumstances which are described in the exchange and registration rights agreement. The exchange notes will evidence the same debt as the old notes and will be entitled to the benefits of the indenture governing the old notes. In connection with the exchange offer, holders of old notes do not have any appraisal or dissenters' rights under law or the indenture governing the old notes. We intend to conduct the exchange offer in accordance with the applicable requirements of the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission related to such offers. We will be deemed to have accepted validly tendered old notes when, as and if we have given oral or written notice of acceptance to The Bank of New York, exchange agent for the exchange offer. The exchange agent will act as agent for the tendering holders for the purpose of receiving the exchange notes from us. If any tendered old notes are not accepted for exchange because of an invalid tender, the occurrence of other events specified in this prospectus or if old notes are submitted for a greater principal amount than the holder desires to exchange, the certificates for the unaccepted old notes will be returned without expense to the tendering holder. If old notes were tendered by book-entry transfer in the exchange agent account at The Depository Trust Company in accordance with the book-entry transfer procedures described below, these non-exchanged old notes will be credited to an account maintained with The Depository Trust Company as promptly as practicable after the expiration date of the exchange offer. We will pay all charges and expenses, other than transfer taxes in some circumstances, in connection with the exchange offer. See "--Fees and Expenses." Holders who tender old notes in the exchange offer will therefore not need to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes in the exchange offer. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The expiration date of the exchange offer is midnight, New York City time, on , 2000, unless we, in our sole discretion, extend the exchange offer, in which case the expiration date shall be the latest date and time to which the exchange offer is extended. We reserve the right, in our sole discretion to amend the terms of the exchange offer in any manner. We will give oral or written notice of any extension, delay, non-acceptance, termination or amendment as promptly as practicable by a public announcement, and in the case of an extension, no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration date. During an extension, all notes previously tendered will remain subject to the exchange offer and may be accepted for exchange by us. Any old notes not accepted for exchange for any reason will be 51 returned without cost to the holder that tendered them as promptly as practicable after the expiration or termination of the exchange offer. PROCEDURES FOR TENDERING To tender in the exchange offer, you must do the following: - complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, - have the signatures thereon guaranteed if required by the letter of transmittal, and - except as discussed in "--Guaranteed Delivery Procedures," mail or otherwise deliver the letter of transmittal, or facsimile, together with the old notes and any other required documents, to the exchange agent prior to midnight, New York City time, on the expiration date of the exchange offer. The exchange agent must receive the old notes, a completed letter of transmittal and all other required documents at the address listed below under "--Exchange Agent" before midnight, New York City time, on the expiration date for the tender to be effective. You may deliver your old notes by using the book-entry transfer procedures described below, as long as the exchange agent receives confirmation of the book-entry transfer before the expiration date. The Depository Trust Company has authorized its participants that hold old notes on behalf of beneficial owners of old notes through The Depository Trust Company to tender their old notes as if they were holders. To effect a tender of old notes, The Depository Trust Company participants should either: (1) complete and sign the letter of transmittal (or a manually signed facsimile of the letter), have the signature thereon guaranteed if required by the instructions to the letter of transmittal, and mail or deliver the letter of transmittal (or the manually signed facsimile) to the exchange agent according to the procedure described in "Procedures for Tendering" or (2) transmit their acceptance to The Depository Trust Company through its automated tender offer program for which the transaction will be eligible and follow the procedure for book-entry transfer its described in "--Book-Entry Transfer." By tendering, each holder will make the representations contained in the fourth paragraph above under the heading "--Resale of the Exchange Notes." Each participating broker-dealer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See "Plan of Distribution." The tender by a holder and the acceptance of the tender by us will constitute the agreement between the holder and our company set forth in this prospectus and in the letter of transmittal. The method of delivery of old notes and the letter of transmittal and all other required documents to the exchange agent is at the election and sole risk of the holder. As an alternative to delivery by mail, holders may wish to consider overnight or hand delivery service. In all cases, holders should allow sufficient time to assure delivery to the exchange agent before the expiration date. No letter of transmittal or old notes or book-entry confirmation should be sent to us. Holders may request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions on their behalf. Any beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct it to tender on the beneficial owner's behalf. See "Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant from Beneficial Owner" included with the letter of transmittal. If the beneficial owner wishes to tender on his own behalf, such owner must, prior to 52 completing and executing the letter of transmittal and delivering such beneficial owner's old notes, either make appropriate arrangements to register ownership of the old notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a letter of transmittal or a notice of withdrawal must be guaranteed by an eligible guarantor institution (within the meaning of Rule 17Ad-5 under the Exchange Act of 1934) unless the old notes are tendered: - by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal, or - for the account of an eligible guarantor institution. If signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, the guarantee must be by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an eligible guarantor institution. If a letter of transmittal is signed by a person other than the registered holder of any old notes listed in the letter of transmittal, the old notes must be endorsed or accompanied by a properly completed bond power and signed by the registered holder as the registered holder's name appears on the old notes. If a letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by us, evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal. Promptly after the date of this prospectus, the exchange agent will establish a new account or utilize an existing account with respect to the old notes at the book-entry transfer facility, The Depository Trust Company, for the purpose of facilitating the exchange offer. Subject to the establishment of the accounts, any financial institution that is a participant in the book-entry transfer facility's system may make book-entry delivery of old notes by causing the book-entry transfer facility to transfer the old notes into the exchange agent's account with respect to the old notes in accordance with that facility's procedures. Although delivery of the old notes may be effected through book-entry transfer into the exchange agent's account at the book-entry transfer facility, an appropriate letter of transmittal properly completed and duly executed or an agent's message with any required signature guarantee and all other required documents the exchange agent at its address listed below on or before the expiration date of the exchange offer, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. Delivery of documents to the book-entry transfer facility does not constitute delivery to the exchange agent. The term "agent's message" means a message transmitted by The Depository Trust Company to, and received by, the exchange agent, which states that The Depository Trust Company has received an express acknowledgment from the participant in The Depository Trust Company tendering the old notes stating: - the aggregate principal amount of old notes which have been tendered by such participant, - that such participant has received and agrees to be bound by the term of the letter of transmittal and - that we may enforce such agreement against the participant. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered old notes and withdrawal of tendered old notes will be determined by us in our sole discretion, which 53 determination will be final and binding. We reserve the absolute right to reject any and all old notes not properly tendered or any old notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within a period of time that we shall determine. Neither our company, the exchange agent nor any other person shall incur any liability for failure to give notice of any defect or irregularity with respect to any tender of old notes. Tenders of old notes will not be deemed to have been made until such defects or irregularities mentioned above have been cured or waived. Any old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent to the tendering holders, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date of the exchange offer. GUARANTEED DELIVERY PROCEDURES A holder who wishes to tender its old notes and: - whose old notes are not immediately available, - who cannot deliver the holder's old notes, the letter of transmittal or any other required documents to the exchange agent prior to the expiration date, or - who cannot complete the procedures for book-entry transfer, before the expiration date, may effect a tender if: - the tender is made through an eligible guarantor institution, - before the expiration date, the exchange agent receives from the eligible guarantor institution a properly completed and duly executed notice of guaranteed delivery by facsimile transmission, mail or hand delivery, the name and address of the holder, the certificate number(s) of the old notes and the principal amount of old notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the expiration date, the letter of transmittal (or facsimiles thereof) together with the certificate(s) representing the old notes (or a confirmation of book-entry transfer of the old notes into the exchange agent's account at the book-entry transfer facility), and any other documents required by the letter of transmittal will be deposited by the eligible guarantor institution with the exchange agent, and - the exchange agent receives, within three New York Stock Exchange trading days after the expiration date, a properly completed and executed letter of transmittal or facsimile, as well as the certificate(s) representing all tendered old notes in proper form for transfer or a confirmation of book-entry transfer of such old notes into the exchange agent's account at the book-entry transfer facility, and all other documents required by the letter of transmittal. WITHDRAWAL OF TENDERS Except as otherwise provided in this prospectus, tenders of old notes may be withdrawn at any time prior to midnight, New York City time, on the expiration date of the exchange offer. To withdraw a tender of old notes in the exchange offer, a letter or facsimile transmission notice of withdrawal must be received by the trustee at its address set forth below prior to midnight, New York City time, on the expiration date. Any notice of withdrawal must: - specify the name of the person having deposited the old notes to be withdrawn, 54 - identify the old notes to be withdrawn including the certificate number(s) and principal amount of such old notes or, in the case of old notes transferred by book-entry transfer, the name and number of the account at the book-entry transfer facility to be credited and otherwise comply with the procedures of the transfer agent, - be signed by the holder in the same manner as the original signature on the letter of transmittal by which the old notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer sufficient to have the trustee under the indenture governing the old notes register the transfer of the old notes into the name of the person withdrawing the tender, and - specify the name in which any such old notes are to be registered, if different from that of the person who deposited the notes. If certificates for old notes have been delivered or otherwise identified to the exchange agent, then, before the release of the certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an eligible guarantor institution unless the holder is an eligible guarantor institution. All questions as to the validity, form and eligibility, including time of receipt, of such notices will be determined by us, and our determination shall be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer, and no exchange notes will be issued, unless the old notes so withdrawn are validly retendered. Any old notes which have been tendered but which are not accepted for exchange will be returned to the holder of the notes without cost to the holder as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn old notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time before the expiration date. EXCHANGE AGENT The Bank of New York has been appointed as exchange agent for the exchange offer. Questions and requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal should be directed to The Bank of New York addressed as follows: For Information by Telephone: (212) 815-3687 By Overnight Delivery Service or Registered/Certified Mail: The Bank of New York 101 Barclay Street New York, New York 10286 Attn.: Reorganization Unit-7E By Hand The Bank of New York 101 Barclay Street Ground Level Corporate Trust Services Window New York, New York 10286 Attn.: Reorganization Unit-7E By Facsimile Transmission: (212) 815-6339 Telephone Confirmation to Ayikwei Aryeetey: (212) 815-3687 55 The Bank of New York also acts as trustee under the indenture governing the notes as successor to IBJ Whitehall Bank & Trust Company. FEES AND EXPENSES We will bear the expenses of soliciting tenders. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. However, we will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection with providing the services. The cash expenses to be incurred in connection with the exchange offer will be paid by us. Such expenses include fees and expenses of The Bank of New York as exchange agent and as trustee under the indenture governing the notes, accounting and legal fees and printing costs, among others. ACCOUNTING TREATMENT The exchange notes will be recorded at the same carrying value as the old notes as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes. The expenses of the exchange offer and the unamortized expenses related to the issuance of the old notes will be amortized over the term of the notes. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of old notes who are eligible to participate in the exchange offer but who do not tender their old notes will not have any further registration rights, and their old notes will continue to be subject to restrictions on transfer. Accordingly, such old notes may be resold only: - to us, upon redemption of these notes or otherwise, - so long as the old notes are eligible for resale pursuant to Rule 144A under the Securities Act, to a person inside the United States whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A, - in accordance with Rule 144 under the Securities Act, or under another exemption from the registration requirements of the Securities Act, and based upon an opinion of counsel reasonably acceptable to us, - outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act, or - under an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. REGULATORY APPROVALS We do not believe that the receipt of any material federal or state regulatory approval will be necessary in connection with the exchange offer, other than the effectiveness of the exchange offer registration statement under the Securities Act. OTHER Participation in the exchange offer is voluntary and holders of old notes should carefully consider whether to accept the terms and condition of this offer. Holders of the old notes are urged to consult their financial and tax advisors in making their own decisions on what action to take with respect to the exchange offer. 56 DESCRIPTION OF THE NOTES The exchange notes, like the old notes, will be issued under the indenture, dated September 27, 1999 among ICON, the Subsidiary Guarantors named therein and The Bank of New York, as successor to IBJ Whitehall Bank & Trust Company, as trustee. The exchange notes are the same as the old notes except that the exchange notes - will not bear legends restricting their transfer and - will not contain certain terms providing for an increase in the interest rate under the circumstances described in the registration rights agreement. The indenture and its associated documents contain the full legal text of the matters described in this section. A copy of the indenture has been filed with the Securities and Exchange Commission as part of our Registration Statement. See "Where You Can Find More Information" on page 106 for information on how to obtain a copy. Because this section is a summary, it does not describe every aspect of the notes. This summary is subject to and qualified in its entirety by reference to all the provisions of the indenture, including definitions of some terms used in the indenture. For example, in this section we use capitalized words to signify defined terms that have been given special meaning in the indenture. We describe the meaning for only the more important terms, under "Definitions". We also include references in parentheses to sections of the indenture. Whenever we refer to particular sections or defined terms of the indenture in this prospectus, these sections or defined terms are incorporated by reference into this prospectus. For the purpose of this summary, the term "Notes" means the exchange notes offered by this prospectus and the old notes issued on September 27, 1999 in connection with the September recapitalization. The term "ICON" refers to ICON Health & Fitness, Inc. and does not include its subsidiaries except for purposes of financial data determined on a consolidated basis. BRIEF DESCRIPTION OF THE NOTES AND THE SUBSIDIARY GUARANTEES The Notes: - will be general unsecured obligations of ICON; - will be subordinated in right of payment to all existing and future Senior Indebtedness of ICON (i.e., Indebtedness outstanding under the credit facilities); - will be effectively subordinated to all secured obligations to the extent of the assets securing such obligations, including the credit facilities; - will be effectively subordinated in the right of payment to all existing and future liabilities of any ICON subsidiaries which do not guarantee the Notes, including its foreign subsidiaries; and - will be guaranteed by each domestic subsidiary of ICON. The Subsidiary Guarantees of the Notes: - will be general unsecured obligations of each Subsidiary Guarantor; - will be subordinated in right of payment to all existing and future Senior Indebtedness of each Subsidiary Guarantor (i.e., Indebtedness outstanding under its guarantee if the credit facilities); and - will be effectively subordinated to all secured obligations of the Subsidiary Guarantors to the extent of the assets securing such obligations, including the new credit facility. 57 At the date of this exchange offer, all of ICON's subsidiaries will be Restricted Subsidiaries. However, under circumstances described under the caption "--Certain Covenants--Limitation on Designation of Unrestricted Subsidiaries," ICON will be able to designate current or future subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to any of the restrictive covenants set forth in the indenture. ICON's Unrestricted Subsidiaries will not guarantee the Notes. PRINCIPAL, MATURITY AND INTEREST The indenture provides that ICON may issue Notes with a maximum aggregate principal amount of $45.0 million, of which $44.282 million is outstanding. ICON will issue Notes in denominations of $1,000 and integral multiples of $1,000. The Notes will mature on September 27, 2005. Interest on the Notes will accrue at the rate of 12% per annum and will be payable semi-annually in arrears on January 15 and July 15, to Holders of record on the immediately preceding January 1 and July 1. Interest on the Notes will accrue from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. METHODS OF RECEIVING PAYMENTS ON THE NOTES All payments on Notes will be made at the office or agency of ICON maintained for such purpose (which may be an office of the Trustee or an affiliate of the Trustee, registrar or co-registrars) within the Borough of Manhattan, City and State of New York, unless ICON elects to make interest payments by (1) check mailed to the Holders or (2) to an account maintained by the Holders in the United States. (SectionSection3.9, 10.2) TRANSFER AND EXCHANGE A Holder may transfer or exchange Notes in accordance with the indenture. The Registrar, Trustee and ICON may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and ICON may require a Holder to pay any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange. The registered Holder of a note will be treated as the owner of it for all purposes. (SectionSection3.5, 3.7) SUBORDINATION The payment of principal of, premium, if any, and interest on the Notes will be subordinated in right of payment, as set forth in the indenture, to the prior payment in full, in cash or, at the option of holders of Senior Indebtedness, cash equivalents, of all amounts payable under Senior Indebtedness of ICON, i.e., indebtedness under the credit facility. (Section13.1) The indenture provides that ICON may not make any payment upon or in respect of the Notes if: (1) a payment default by ICON of the principal of, premium, if any, or interest on Senior Indebtedness occurs; or (2) any other default occurs on any Specified Senior Indebtedness that permits holders of that Specified Senior Indebtedness to accelerate its maturity. (Section13.2) The indenture also provides that upon any payment or distribution of assets or securities of ICON upon any: (1) distribution to creditors of ICON in a liquidation or dissolution of ICON, or 58 (2) bankruptcy, reorganization, insolvency, receivership or similar proceeding of ICON (whether voluntary or involuntary), or (3) assignment for the benefit of creditors or any marshaling of the assets and liabilities of ICON, the holders of Senior Indebtedness will be entitled to receive payment in full of all amounts due in respect of all Senior Indebtedness before the Holders or the Trustee on their behalf will be entitled to receive any payment by ICON on or in respect of the Notes or any payment to acquire any of the Notes for cash, property or securities, or any distribution with respect to the Notes of any cash, property or securities. However, Holders may receive: (1) securities that are subordinated to at least the same extent as the Notes to (a) Senior Indebtedness and (b) any securities issued in exchange for Senior Indebtedness; and (2) payments and other distributions made from any defeasance trust created pursuant to the provisions described under the caption "--Defeasance and Covenant Defeasance--Conditions to Defeasance or Covenant Defeasance". (Section13.3) As a result of the subordination provisions described above, in the event of a liquidation or insolvency, Holders of Notes may recover less ratably than creditors of ICON who are holders of Senior Indebtedness. The indenture limits, subject to financial tests, the amount of additional indebtedness, including Senior Indebtedness, that ICON and its Restricted Subsidiaries can incur. See "--Certain Covenants--Limitation on Indebtedness and Issuance of Preferred Stock." SUBSIDIARY GUARANTEES The Subsidiary Guarantors will jointly and severally guarantee the payment obligations of ICON under the Notes. The Subsidiary Guarantee of each Subsidiary Guarantor is unsecured and is subordinated to the prior payment in full in cash, or cash equivalent, of all Senior Indebtedness of such Subsidiary Guarantor, i.e., its guarantee of the new credit facility. The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee will be limited as necessary to prevent that Subsidiary Guarantee from constituting a fraudulent conveyance under applicable law. (SectionSection14.1, 14.2) MERGER OF SUBSIDIARY GUARANTORS A Subsidiary Guarantor may not in a single transaction or a series of related transactions consolidate with or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person) or, sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties, to any other Person or group of affiliated Persons, other than in the case of a Merger with or into ICON or another Subsidiary Guarantor but subject to the releases described below, unless: (1) the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) expressly assumes all the obligations of such Subsidiary Guarantor under the Notes, the indenture and the Subsidiary Guarantee pursuant to a supplemental indenture in form reasonably satisfactory to the Trustee; and (2) immediately after giving effect to such transaction or series of transactions, no Default or Event of Default has occurred or is continuing. (Section14.4) The indenture provides that the Subsidiary Guarantee of a Subsidiary Guarantor will be released: (1) in connection with any sale or disposition of all or substantially all of the assets of that Subsidiary Guarantor, (including by way of merger or consolidation), if the disposition is to ICON or another Subsidiary Guarantor or, if ICON applies the Net Proceeds of that sale or other disposition in accordance with the applicable provisions of the indenture, including the 59 covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales"; or (2) in connection with any sale of all of the capital stock of a Subsidiary Guarantor, if ICON applies the Net Proceeds of that sale in accordance with the applicable provisions of the indenture, including the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales"; or (3) if ICON designates any Restricted Subsidiary that is a Subsidiary Guarantor as an Unrestricted Subsidiary; or (4) upon the release or discharge of all guarantees of such Subsidiary Guarantor, and all pledges of property or assets of such Subsidiary Guarantor securing all other Indebtedness of ICON and the other Subsidiary Guarantors. (Section14.5) REDEMPTION OPTIONAL REDEMPTION ICON may redeem all but not part of the Notes at any time after issuance upon not less than 30 nor more than 60 days notice at the following redemption prices (expressed in percentages of principal amount thereof), plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date if redeemed during the 12 month period ending February 15 of each of the years set forth below:
REDEMPTION YEAR PRICE - ---- ---------- Issue Date through 2001..................................... 101% 2002........................................................ 102% 2003........................................................ 104% 2004........................................................ 102% 2005........................................................ 101% Thereafter.................................................. 100%
Notice of redemption will be given by ICON or, at its request, by the Trustee in the name of ICON and at its expense, not less than 30 nor more than 60 days prior to the redemption date, to each Holder of Notes to be redeemed. (SectionSection11.1, 11.5) MANDATORY REDEMPTION ICON is not required to make mandatory redemption or sinking fund payments with respect to the Notes. REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL (Section10.15) If a Change of Control occurs, ICON will be required to make an offer to each Holder of Notes to purchase all of the then outstanding Notes and purchase all of the Outstanding Notes validly tendered pursuant to the offer. The purchase price will be in cash equal to 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest and Liquidated Damages, if any, to the purchase date. ICON will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth under the provisions of this covenant and all other provisions of the indenture applicable to a Change of Control Offer made by ICON and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. 60 ICON's outstanding Senior Indebtedness prohibits it from purchasing any Notes, and also provides that change of control events with respect to ICON constitute a default under the agreements governing the Senior Indebtedness. Any future credit agreements or other agreements relating to Senior Indebtedness to which ICON becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when ICON is prohibited from purchasing Notes, ICON could seek the consent of its senior lenders to the purchase of Notes or could attempt to refinance the borrowings that contain such prohibition. If ICON does not obtain such a consent or repay such borrowings, ICON will remain prohibited from purchasing Notes. In such case, ICON's failure to purchase tendered Notes will constitute an Event of Default under the indenture which will, in turn, constitute a default under such Senior Indebtedness. In such circumstances, the subordination provisions in the indenture will likely restrict payments to the Holders of Notes. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of ICON and its Restricted Subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Notes to require ICON to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of ICON and its Restricted Subsidiaries taken as a whole to another Person or groups may be uncertain. ASSET SALES (Section10.17) ICON will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, consummate an Asset Sale unless: (1) at least 75% of the proceeds from such Asset Sale is received in the form of cash or assumed liabilities; and (2) ICON, or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Capital Stock or assets issued or sold or otherwise disposed of. Within one year after the receipt of the proceeds from an Asset Sale, ICON or any of its Restricted Subsidiaries, may use such Net Cash Proceeds, at its option: (1) to repay or prepay permanently any then outstanding Senior Indebtedness of ICON or any of its Restricted Subsidiaries; or (2) to invest in properties and assets to replace the properties and assets subject to the Asset Sale, or in properties and assets to be used in a Permitted Business. Pending the making of any such investment, ICON may use such Net Cash Proceeds to temporarily reduce the amount of outstanding Indebtedness under the Credit Agreement and such reduction will constitute such a segregation as referred to in the immediately preceding sentence. When the aggregate amount of Excess Proceeds exceeds $5.0 million, ICON will be required to make an offer to purchase ("Excess Proceeds Offer") from all Holders, on a PRO RATA basis, the maximum principal amount of Notes that may be purchased with the Excess Proceeds. The offer price as to each Note will be payable in cash in an amount equal to 100% of the principal amount of such Notes plus accrued and unpaid interest and Liquidated Damages, if any, to the date such Excess Proceeds Offer is consummated. To the extent that the aggregate principal amount of Notes tendered pursuant to an Excess Proceeds Offer is less than the Excess Proceeds, ICON, or the applicable Restricted Subsidiary, may use such deficiency for general corporate purposes. If the aggregate principal amount of Notes validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes to be purchased will be selected on a PRO RATA basis. Upon completion of any such offer to purchase, the amount of Excess Proceeds will be reset to zero. 61 Notwithstanding the foregoing, if ICON or any Restricted Subsidiaries incurs Indebtedness (in compliance with the covenant described under the caption "--Certain Covenants--Limitation on Indebtedness and Issuance of Preferred Stock") for the purpose of purchasing assets, and such assets are then sold in a Sale and Leaseback Transaction, the proceeds of such Sale and Leaseback Transaction may be used to repay such Indebtedness and, if so applied, will not constitute "Excess Proceeds." If ICON becomes obligated to make an Excess Proceeds Offer, ICON will purchase the Notes on a date that is not earlier than 45 days and not later than 60 days from the date the notice is given to Holders, or such later date as may be necessary to comply with the requirements under the Exchange Act. CERTAIN COVENANTS PROVISION OF FINANCIAL STATEMENTS (Section10.9) Whether or not ICON is subject to Section 13(a) or 15(d) of the Exchange Act, ICON will prepare and, unless the SEC does not accept such filing, file with the SEC the annual reports, quarterly reports and other documents which ICON would have been required to file with the SEC pursuant to such Section 13(a) or 15(d) if ICON were so subject. The documents to be filed with the SEC include a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report by certified independent accountants of ICON, on or prior to the respective dates (the "Required Filing Dates") by which ICON would have been required to file such documents if ICON were so subject. ICON will also in any event: (1) within 15 days of each Required Filing Date (a) transmit by mail to all Holders; and (b) file with the Trustee copies of the annual reports, quarterly reports and other documents which ICON has filed with the SEC or would have been required to file with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act if ICON were subject to such Section, and (2) if filing such documents by ICON with the SEC is not permitted under the Exchange Act, promptly upon written request of any Holder or prospective Holder, supply copies of such documents to any Holder or prospective Holder or other Person at the cost of ICON. If any Guarantor's financial statements would be required to be included in the financial statements filed or delivered pursuant hereto if ICON were subject to Section 13(a) or 15(d) of the Exchange Act, ICON will include such financial statements in any filing or delivery pursuant to this covenant. For so long as any Notes remain outstanding, ICON and the Subsidiary Guarantors will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144(d)(4) under the Securities Act. LIMITATION ON INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK (Section10.10) ICON will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur"), any Indebtedness (including Acquired Indebtedness), other than Permitted Indebtedness, and ICON will not issue any Redeemable Stock and will not permit any of its Restricted Subsidiaries to issue any shares of Preferred Stock. However, ICON and any 62 Subsidiary Guarantor may incur Indebtedness (including Acquired Indebtedness) or issue Redeemable Stock, and any Subsidiary Guarantor may issue Preferred Stock, if: (1) ICON's Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or Preferred Stock is issued taken as one period, and after giving PRO FORMA effect to: (a) the incurrence of such Indebtedness or issuance of such Redeemable Stock or Preferred Stock and (if applicable) the application of the net proceeds therefrom, including the refinancing of other Indebtedness or Redeemable Stock or Preferred Stock, as if such Indebtedness was incurred or Redeemable Stock or Preferred Stock was issued, and the application of such proceeds occurred, on the first day of such four-quarter period; (b) the incurrence, repayment or retirement of any other Indebtedness by ICON and its Subsidiary Guarantors, or issuance or redemption of Redeemable Stock or Preferred Stock, since the first day of such four-quarter period, as if such Indebtedness was incurred, repaid or retired, Redeemable Stock or Preferred Stock was issued or redeemed, on the first day of such four-quarter period; and (c) notwithstanding clause (3) of the definition of "Consolidated Adjusted Net Income", any acquisition or disposition by ICON or any of its Restricted Subsidiary of any company, entity or any business, in each case since the first day of such four-quarter period, as if such acquisition or disposition had occurred on the first day of such four-quarter period, would have been at least equal (A) 2.25:1.0 for the period from the date of the indenture through January 31, 2001 and (B) 2.50:1.0 for all periods thereafter; (2) such Indebtedness is unsecured and is expressly subordinate in right of payment to the Notes and (3) the Weighted Average Life to Maturity of such Indebtedness or Redeemable Stock is greater than the remaining Weighted Average Life to Maturity of the Notes. Notwithstanding the foregoing, ICON will not, and will not permit any Subsidiary to incur Indebtedness or issue any shares of Preferred Stock of such Subsidiary, directly or indirectly, in exchange for or upon the conversion of any Indebtedness of IHF Holdings or ICON Fitness unless such Indebtedness is unsecured and is expressly subordinate in right of payment to the Notes. LIMITATION ON RESTRICTED PAYMENTS (Section10.11) ICON will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (1) declare or pay any dividend or make any other payment or distribution on account of ICON's or any of its Restricted Subsidiaries' Capital Stock (including any payment in connection with any merger or consolidation involving ICON or any of its Restricted Subsidiaries) or to the direct or indirect holders of, any shares of Capital Stock of ICON or any Restricted Subsidiary (other than dividends or distributions payable solely in shares of Capital Stock of ICON or in options, warrants or other rights to purchase such Capital Stock but excluding dividends or distributions payable in Redeemable Capital Stock or in options, warrants or other rights to purchase Redeemable Capital Stock and other than to ICON or one of its Restricted Subsidiaries); (2) purchase, redeem or otherwise acquire or retire for value, directly or indirectly, any shares of the Capital Stock of ICON or any direct or indirect parent of ICON or any of its Restricted Subsidiary or any Affiliate thereof or any options, warrants or other rights to acquire such Capital Stock, held by a Person other than ICON or any of its Restricted Subsidiaries (other 63 than such a purchase, redemption or acquisition of Capital Stock of a Restricted Subsidiary as a result of which such Restricted Subsidiary becomes a Wholly Owned Restricted Subsidiary); (3) make any payment on or with respect to, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to a scheduled principal payment, interest payment, scheduled sinking fund payment or maturity, any Subordinated Indebtedness or Indebtedness that ranks pari passu with the Notes; (4) make any payment on or with respect to, or purchase or repurchase, redeem, defease or otherwise acquire or retire for value any Indebtedness of IHF Holdings or ICON Fitness; (5) incur any guarantee of Indebtedness of any Affiliates of ICON or any of its Restricted Subsidiaries (other than with respect to (1) guarantees of Indebtedness of any Restricted Subsidiary by ICON or (2) guarantees of Indebtedness of ICON or any Restricted Subsidiary by any Restricted Subsidiary); or (6) make any Investment (other than any Permitted Investment) in any Person (all such payments described in clauses (1) through (6) above and not excepted therefrom are collectively referred to herein as "Restricted Payments"), unless at the time of and immediately after giving effect to the proposed Restricted Payment: (1) no Default or Event of Default has occurred and is continuing or would occur as a consequence thereof; (2) ICON could, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the covenant described under the caption "--Limitation on Indebtedness and Issuance of Preferred Stock"; and (3) the aggregate amount of all such Restricted Payments declared or made after the date of the indenture does not exceed the sum of: (a) 50% of the aggregate cumulative Consolidated Adjusted Net Income of ICON accrued on a cumulative basis during the period beginning on the first day of the month commencing immediately after the date of the indenture and ending on the last day of its last fiscal quarter ending prior to the date of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Adjusted Net Income shall be a loss, minus 100% of such loss); (b) the aggregate net cash proceeds received after the date of the indenture by ICON from the issuance or sale (other than to any of its Restricted Subsidiaries) of shares of Capital Stock of ICON (other than Redeemable Capital Stock) or any options, warrants or rights to purchase shares of such Capital Stock; (c) the aggregate net cash proceeds received after the date of the indenture by ICON from the issuance or sale of debt securities (other than to any Restricted Subsidiary) that have been converted into or exchanged for Capital Stock of ICON (other than Redeemable Capital Stock) to the extent such debt securities were originally sold for cash, together with the aggregate of any additional net cash proceeds received by ICON at the time of such conversion or exchange; (d) the aggregate net cash proceeds received after the date of the indenture by ICON as capital contributions (other than from any of its Restricted Subsidiaries); 64 (e) to the extent that any Investment (other than a Permitted Investment) that was made after the date of the indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (x) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (y) the initial amount of such Restricted Investment; (f) to the extent that any Unrestricted Subsidiary is redesignated as a Restricted Subsidiary after the date of the indenture in accordance with the covenant described under the caption "--Limitation on Designations of Unrestricted Subsidiaries", the lesser of (x) the net book value of ICON's Investment in the Unrestricted Subsidiary at the time of redesignation and (y) the Fair Market Value of ICON's Investment in such Unrestricted Subsidiary as of the date of such redesignation; and (g) $2.0 million. So long as no Default or Event of Default has occurred and is continuing or would be caused thereby, the preceding provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration thereof, if at such date of declaration such declaration complied with the provisions of the preceding paragraph (and such payment shall be deemed to have been paid on such date of declaration for purposes of the calculation required by such paragraph); (2) the purchase, redemption or other acquisition or retirement of any shares of Capital Stock of ICON in exchange for or out of the net cash proceeds of, a substantially concurrent issuance and sale (other than to a Subsidiary of ICON) of shares of Capital Stock (other than Redeemable Capital Stock) of ICON provided that the amount of any such net proceeds that are utilized for any such purchase, redemption or other acquisition or retirement is excluded from clause (3)(b), (3)(c) and (3)(d) of the preceding paragraph; (3) any purchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness (other than Redeemable Capital Stock) in exchange for, or out of the net cash proceeds of, a substantially concurrent issuance and sale (other than to any Subsidiary of ICON) of any Capital Stock (other than Redeemable Capital Stock) of ICON PROVIDED that the amount of any such net proceeds that are utilized for any such purchase, redemption or other acquisition or retirement is excluded from clause (3)(b), (3)(c) and (3)(d) of the preceding paragraph; (4) payments to HF Holdings, to the extent actually used by HF Holdings within 180 days of such payment for the payment of taxes pursuant to the Tax Sharing Agreement as the same may be amended from time to time in a manner that is not materially adverse to ICON; (5) payments to Holdings to pay its reasonable operating and administrative expenses including, without limitation, directors' fees, legal and audit expenses, SEC compliance expenses and corporate franchise and other taxes, in an amount not to exceed in the aggregate $375,000 per year; (6) the repurchase of Capital Stock of HF Holdings or options, warrants or rights to acquire Capital Stock of HF Holdings from the full-time members or former members of management of ICON or any Restricted Subsidiary upon death, disability, retirement or termination of employment of such members, in amounts not to exceed $1.5 million in any fiscal year of ICON; provided that, if such repurchases are less than $1.5 million in any fiscal year of ICON, the amount by which $1.5 million exceeds such amount of repurchases actually made in such fiscal year of ICON will be carried forward for the next fiscal year; 65 (7) loans to members of management of ICON or any Restricted Subsidiary in the ordinary course of business not to exceed $1.2 million at any one time outstanding in addition to those otherwise specifically referred to in the Exchange Offer and Consent Solicitation Statement; (8) the purchase, redemption, defeasance or other acquisition or retirement for value or payment of principal of any Subordinated Indebtedness (other than Redeemable Capital Stock) through the issuance of new Subordinated Indebtedness permitted to be incurred under clause (10) of the definition of Permitted Indebtedness; (9) any Restricted Payment made pursuant to agreements (A) in effect on the Issue Date (B) referred to in the Exchange Offer and Consent Solicitation Statement and the Annexes thereto and (C) listed on Schedule I of the indenture, as from time to time amended thereafter; PROVIDED that, as so amended, such agreements shall provide for terms that are, in the aggregate, not more disadvantageous to the Holders of Securities in any material respect than as in effect on the Issue Date; and (10) any payments made in settlement of claims arising out of the transactions contemplated by, or made pursuant to agreements or undertakings referred to in the Exchange Offer and Consent Solicitation Statement. The actions described in clauses (1), (5), (6), (7), (9) and (10) and described in clause (4) (to the extent not deducted in determining Consolidated Adjusted Net Income of ICON in clause (3)(a) of the preceding paragraph) of this paragraph will be Restricted Payments that will be permitted to be taken in accordance with this paragraph but will reduce the amount that would otherwise be available for Restricted Payments under clause (3) of the preceding paragraph (provided that any dividend paid pursuant to clause (1) of this paragraph will reduce the amount that would otherwise be available under clause (3) of the preceding paragraph when declared, but not also when subsequently paid pursuant to such clause (1) and the actions described in clauses (2) and (3) and (8) of this paragraph will be Restricted Payments that will be permitted to be taken in accordance with this paragraph and will not reduce the amount that would otherwise be available for Restricted Payments under clause (3) of the preceding paragraph. In computing Consolidated Adjusted Net Income of ICON, (1) ICON will use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on its books and records for the remaining portion of such period and (2) ICON will be permitted to rely in good faith on the financial statements and other financial data derived from the books and records of ICON that are available on the date of determination. If ICON or any of its Restricted Subsidiaries makes a Restricted Payment which, at the time of making such Restricted Payment, would in the good faith determination be permitted under the requirements of the indenture, such Restricted Payment will be deemed to have been made in compliance with the indenture notwithstanding any subsequent adjustments made in good faith to ICON's financial statements affecting Consolidated Adjusted Net Income of ICON for any period. The amount of all Restricted Payments (other than cash) will be the Fair Market Value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by ICON or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The Board of Directors' determination must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if the Fair Market Value exceeds $2.5 million. Not later than the date of making any Restricted Payment pursuant to the first paragraph of this 66 covenant, ICON will deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this covenant were computed, together with a copy of any fairness opinion or appraisal required by the indenture. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE (Section8.1) ICON will not, in a single transaction or a series of related transactions, directly or indirectly, consolidate or merge with or into any other Person or, sell, assign, convey, transfer or otherwise dispose of all or substantially all of its properties and assets as an entirety to any other Person or group of affiliated Persons, or permit any of its Restricted Subsidiaries to enter into any such transaction or transactions, if such transaction or transactions, in the aggregate, would effectively result in a sale, assignment, conveyance, transfer or disposition of all or substantially all of the properties and assets of ICON and those of its Restricted Subsidiaries on a consolidated basis to any other Person or group of affiliated Persons, unless: (1) either ICON is the continuing corporation or the Person (if other than ICON) formed by such consolidation or into which ICON or such Restricted Subsidiary is merged or the Person which acquires by sale, assignment, conveyance, transfer or disposition of all or substantially all of the properties and assets of ICON and its Restricted Subsidiaries on a consolidated basis (the "Surviving Entity") will be a corporation duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and such Person assumes by a supplemental indenture in a form reasonably satisfactory to the Trustee all the obligations of ICON under the Notes and the indenture and by an agreement in form reasonably satisfactory to the Trustee all the obligations of ICON under the Exchange and Registration Rights Agreement, and in each case, the indenture will remain in full force and effect; (2) immediately after giving effect to such transaction or transactions, no Default or Event of Default has occurred and is continuing; (3) immediately before and immediately after giving effect to such transaction or transactions ICON (or the Surviving Entity if ICON is not the continuing obligor under the indenture) (i) will have a Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of ICON immediately preceding the transaction and (ii) would be permitted to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the covenant described under the caption "--Limitation on Indebtedness and Issuance of Preferred Stock" if the ratio referred to therein were "2.0:1.0"; and (4) in connection with any consolidation, merger, transfer, sale, assignment, conveyance or other disposition contemplated hereby, ICON or the Surviving Entity, as the case may be, will deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers Certificate stating that such consolidation, merger, transfer, sale, assignment, conveyance or other disposition and the supplemental indenture in respect thereof, if any, comply with the requirements under the indenture and that all conditions precedent herein provided for relating to such transaction or series of transactions have been complied with, and an Opinion of Counsel stating that the above requirements have been complied with. In addition, ICON will not and will not permit any of its Restricted Subsidiaries to, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. Notwithstanding the foregoing, ICON may not, in a single transaction or a series of related transactions, directly or indirectly, consolidate or merge with or into IHF Holdings or ICON Fitness, or 67 sell, assign, convey, transfer or otherwise dispose of all or substantially all of its properties and assets as an entirety to IHF Holdings or ICON Fitness, or permit any of its Restricted Subsidiaries to enter into any such transaction or transactions with IHF Holdings or ICON Fitness, unless all of the Indebtedness of IHF Holdings or ICON Fitness is unsecured and is expressly subordinate in right of payment to the Notes. Notwithstanding the foregoing, ICON or any Wholly Owned Restricted Subsidiary may consolidate, combine or amalgamate with or merge with or into any Wholly Owned Restricted Subsidiary or sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of its properties and assets to any Wholly Owned Restricted Subsidiary. Upon any consolidation of ICON with or merger of ICON with or into any other corporation or any sale, assignment, transfer, conveyance or other disposition of the properties and assets of ICON substantially as an entirety to any Person as described above, the Surviving Entity formed by such consolidation or into which ICON is merged or to which such sale, assignment, transfer, conveyance or other disposition is made will succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of the indenture referring to "ICON" shall refer instead to the Surviving Entity and not to ICON), and may exercise every right and power of ICON under the indenture with the same effect as if such Surviving Entity had been named as ICON herein, PROVIDED, HOWEVER, that the predecessor company will not be relieved from the obligation to pay the principal of and interest on the Notes except in the case of a sale, conveyance or transfer of ICON's assets that meets the requirements described above. For all purposes of the indenture and the Notes (including this covenant and the covenants described under the captions "--Limitation on Indebtedness and Issuance of Preferred Stock", "--Limitations on Restricted Payments" and "--Limitations on Liens"), Subsidiaries of any Surviving Entity will, upon such transaction or series of related transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries and all Indebtedness, and all Liens on property or assets, of ICON and the Restricted Subsidiaries in existence immediately prior to such transaction or series of related transactions will be deemed to have been incurred upon such transaction or series of related transactions. If, upon any such consolidation of ICON with or merger of ICON into any other corporation, or upon any sale, assignment, transfer, conveyance or other transfer of the property or assets of ICON substantially as an entirety to any other Person, any property or assets of ICON would thereupon become subject to any Lien, then unless such Lien could be created pursuant to the covenant described under the caption "--Limitation on Liens" without equally and ratably securing the Notes, ICON, prior to or simultaneously with such consolidation, merger, sale, assignment, transfer, conveyance or other transfer, will as to such property or assets, secure the Outstanding Notes equally and ratably with (or prior to) the Indebtedness which upon such consolidation, merger, sale, assignment, transfer, conveyance or other transfer is to become secured as to such property or assets by such Lien, or will cause such Notes to be so secured. LIMITATION ON TRANSACTIONS WITH AFFILIATES (Section10.13) ICON will not, and will not permit any of its Restricted Subsidiaries to, enter into or suffer to exist any transaction or series of related transactions (including the sale, purchase, exchange or lease of assets, property or services or enter into or make any payment, loan, advance or guarantee) with or for the benefit of any Affiliate of ICON or such Restricted Subsidiary unless such transaction or series of related transactions is in writing on terms that are no less favorable to ICON or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction in arm's-length dealings with an unrelated third party; PROVIDED, HOWEVER, that, ICON will not, and will not permit any 68 of its Restricted Subsidiaries to, enter into or suffer to exist any such transaction or series of related transactions which, individually or in the aggregate, involve payments in excess of: (1) $750,000, unless an Officers' Certificate stating that such transaction complies with this covenant is delivered to the Trustee, (2) $1.0 million, unless the prior good faith approval of a majority of ICON's Disinterested Directors has been obtained and Board Resolution relating thereto has been passed and set forth in an Officers' Certificate delivered to the Trustee, or (3) $5.0 million, unless the prior good faith approval of a majority of ICON's Disinterested Directors has been obtained and the Board of Directors has obtained from any nationally recognized investment banking firm a favorable opinion as to the fairness to it of the transaction (copies of which shall be filed with the Trustee). However, the preceding restrictions will not apply to: (a) reasonable fees and compensation, loans or options to purchase Common Stock, indemnification and other benefits paid or made available to directors and full time officers and employees of ICON or any of its Restricted Subsidiaries for services rendered in such person's capacity as an officer, director or employee of ICON or the applicable Restricted Subsidiary, in each case entered into in the ordinary course of business consistent with past practice, (b) transactions with or among, or solely for the benefit of ICON, or any of its Wholly-Owned Restricted Subsidiaries, (c) transactions with an Unrestricted Subsidiary effected as part of a Securitization Transaction, and (d) payments and other transactions pursuant to agreements in effect on the Issue Date and referred to in the Exchange Offer and Consent Solicitation Statement as from time to time amended thereafter; PROVIDED that, as so amended, such agreements shall provide for terms that are, in aggregate, not more disadvantageous to the Holders of Notes in any material respect than as in effect on the Issue Date. LIMITATION ON LIENS (Section10.14) ICON will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, affirm or suffer to exist any Lien of any kind on or with respect to any of its property or assets, whether owned at the date of the indenture or thereafter acquired, or any income, profits or proceeds therefrom, except if the Notes are directly secured equally and ratably with (or prior to in the case of Liens with respect to Subordinated Indebtedness) the obligation or liability secured by such Lien; PROVIDED that Permitted Liens shall not be subject to the operation of the foregoing. LIMITATION ON LINE OF BUSINESS (Section10.16) ICON will not, and will not permit any Restricted Subsidiary to engage in any business other than Permitted Businesses. 69 LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS (Section10.18) ICON will not permit any Restricted Subsidiary (including Foreign Subsidiaries) that is not a Subsidiary Guarantor, directly or indirectly, to Guarantee or pledge any assets to secure the payment of any other Indebtedness of ICON or any Subsidiary Guarantor unless: (1) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the indenture providing for the Guarantee of the payment of the Notes by such Subsidiary, which Guarantee will be senior to or PARI PASSU with such Restricted Subsidiary's Guarantee of or pledge to secure such other Indebtedness, unless such other Indebtedness is Senior Indebtedness, in which case the Guarantee of the Notes may be subordinated to the Guarantee of such Senior Indebtedness to the same extent as the Notes are subordinated to such Senior Indebtedness and (2) such Restricted Subsidiary will simultaneously waive, and agree that it will not in any manner whatsoever claim or take any benefit from, any rights of reimbursement, indemnity or subrogation or any other rights against ICON or any other Subsidiary as a result of any payment by such Subsidiary under its Guarantee of the Notes. Notwithstanding the preceding paragraph, if any Restricted Subsidiary (including Foreign Subsidiaries) that is organized under the laws of Quebec, Canada would otherwise be required pursuant to the preceding paragraph to provide a Guarantee of the payment of the Notes by such Subsidiary, such obligation to provide such a Guarantee will be satisfied so long as such Restricted Subsidiary delivers to the Trustee a Guarantee of another Subsidiary Guarantor's Guarantee of the payment of the Notes, which Guarantee will be substantially in the form of the Guarantee by ICON du Canada, Inc. of the obligations of 510152 N.B. LTD., as Subsidiary Guarantor under the indenture delivered to the Trustee on the date of the indenture. Any Subsidiary Guarantee of the Notes (including any Guarantee provided pursuant to the immediately preceding paragraph) will provide by its terms that it will be automatically and unconditionally released and discharged under the circumstances described under the caption "--Subsidiary Guarantees." LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES (Section10.19) ICON will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to: (1) pay dividends, in cash or otherwise, or make any other distribution on its Capital Stock, (2) pay any Indebtedness owed to ICON or any Restricted Subsidiary, (3) make any loans or advances to ICON or any Restricted Subsidiary or (4) transfer any of its properties or assets to ICON or any Restricted Subsidiary. However, the preceding restrictions will not apply to: (a) any encumbrance or restriction pursuant to an agreement relating to Indebtedness in effect on the date of the indenture, including pursuant to the Credit Agreement; (b) any encumbrance or restriction pursuant to an agreement relating to Indebtedness with respect to a Restricted Subsidiary that is not a Restricted Subsidiary on the date of the indenture, in existence at the time such Person becomes a Restricted Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary (so long as such encumbrance or restriction does not extend to any assets of ICON 70 or any other Restricted Subsidiary) and provided that, the Indebtedness was permitted by the terms of the indenture to be incurred; (c) any encumbrance or restriction pursuant to customary nonassignment provisions in leases governing leasehold interests only to the extent such provisions restrict the transfer of the lease or the leased property entered into in the ordinary course of business consistent with past practices; (d) any encumbrance or restriction due to applicable law; (e) any encumbrance or restriction pursuant to Purchase Money Obligations permitted under the indenture, but only to the extent such restrictions restrict the transfer of the property purchased with the proceeds of the applicable Purchase Money Obligation; (f) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business consistent with past practices; (g) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business consistent with past practices; (h) any agreement for the sale or other disposition of a Restricted Subsidiary that restricts distributions by such Restricted Subsidiary pending its sale or other disposition; (i) restrictions on the transfer of assets subject to any Permitted Lien by the holder of such Lien; (j) any agreement or instrument governing Indebtedness (whether or not outstanding) of Foreign Subsidiaries that constitutes Permitted Indebtedness; and (k) Indebtedness incurred pursuant to clause (10) of the definition of "Permitted Indebtedness"; PROVIDED, HOWEVER, that, the provisions contained in such new Indebtedness are no more restrictive in any material respect than those contained in the agreements governing Indebtedness being refinanced. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS (Section10.20) ICON will not, and will not permit its Restricted Subsidiaries to, enter into, renew or extend any transactions or series of related transactions pursuant to which ICON or any such Restricted Subsidiary sells or transfers any property or asset in connection with the leasing, or the resale against installment payments, or as part of an arrangement involving the leasing or the resale against installment payments, of such property or asset to the seller or transferor ("Sale and Leaseback Transaction") unless: (1) ICON or that Restricted Subsidiary could have: (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to that Sale and Leaseback transaction pursuant to the Consolidated Fixed Charge Coverage Ratio test in described in the "Limitation on Indebtedness and Issuance of Preferred Stock" covenant and (b) incurred Lien to secure that Indebtedness pursuant to the "Limitation on Liens" covenant; (2) the gross cash proceeds of that Sale and Leaseback Transaction are at least equal to the Fair Market Value of the property that is the subject of that Sale and Leaseback Transaction, as determined in good faith by the Board of Directors evidenced by a Board Resolution set forth in an Officers' Certificate delivered to the Trustee; and 71 (3) the Sale and Leaseback Transaction is treated as an Asset Sale and all of the conditions of the "Asset Sales" covenant (including the provisions concerning the application of Net Cash Proceeds) are satisfied with respect to such Sale and Leaseback Transaction, treating all of the consideration received in such Sale and Leaseback Transaction as Net Cash Proceeds for purposes of the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales." LIMITATION ON DESIGNATION OF UNRESTRICTED SUBSIDIARIES (Section10.22) The Board of Directors of ICON may designate any Restricted Subsidiary of ICON (other than any Restricted Subsidiary which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted Subsidiary" under the indenture (a "Designation") only if: (1) no Default or Event of Default has occurred and is continuing at the time of or after giving effect to such Designation; and (2) except in the case of a newly organized Subsidiary in which ICON and its Restricted Subsidiaries have made an aggregate Investment of $1,000 or less or a Subsidiary formed in connection with a Securitization Transaction with ICON or one or more Restricted Subsidiaries, ICON would be permitted under the indenture to make an Investment constituting a Restricted Payment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the Fair Market Value of the aggregate amount of its Investments in such Subsidiary on such date. ICON may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such Subsidiary will then constitute a Restricted Subsidiary, if: (1) no Default or Event of Default has occurred and is continuing at the time of and after giving effect to such Revocation; and (2) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of the indenture. All Designations and Revocations must be evidenced by Officers' Certificates of ICON delivered to the Trustee certifying compliance with the foregoing provisions. WAIVER OF CERTAIN COVENANTS (Section10.23) ICON may omit in any particular instance to comply with any term, provision or condition set forth in the indenture relating to the last paragraph of the covenant described under the caption "--Consolidation, Merger, Conveyance, Transfer or Lease" and the covenants relating to the following matters: - maintenance of insurance, - statement by officers as to default, - provision of financial statements, - indebtedness and issuance of preferred stock, - restricted payments, - transactions with affiliates, - liens, - change of control, 72 - line of business, - asset sales, - issuances of guarantees of indebtedness, - dividends and other payment restrictions affecting subsidiaries, - sale and leaseback transactions, - designation of unrestricted subsidiaries, - other senior indebtedness, - rating and additional subsidiary guarantees, if before or after the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities, by act of such Holders, waive such compliance in such instance with such term, provision or condition, but no such waiver will extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver becomes effective, the obligations of ICON and the duties of the Trustee in respect of any such term, provision or condition will remain in full force and effect. LIMITATION ON OTHER SENIOR INDEBTEDNESS (Section10.24) ICON will not incur, and will not permit any Restricted Subsidiary to, create, issue, assume, guarantee or otherwise become liable for any Senior Indebtedness other than Indebtedness under the Credit Agreement. In addition, ICON will not, and will not permit any Restricted Subsidiary to incur Indebtedness or issue any shares of Preferred Stock of such Subsidiary, directly or indirectly, in exchange for or upon the conversion of any Indebtedness of IHF Holdings or ICON Fitness, unless such Indebtedness is unsecured and is expressly subordinate in right of payment to the Notes. PAYMENTS FOR CONSENT (Section10.26) ICON will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder of Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the Exchange Offer and Consent Solicitation Statement relating to such consent, waiver or agreement. ADDITIONAL SUBSIDIARY GUARANTEES (Section10.27) If ICON or any of its Restricted Subsidiaries acquires or creates another Domestic Subsidiary after the date of the indenture or if ICON is otherwise required pursuant to the covenant described under the caption "--Limitation on Issuances of Guarantees of Indebtedness", then ICON will cause that Domestic Subsidiary or such other Subsidiary, as the case may be, to become a Subsidiary Guarantor and execute a supplemental indenture and deliver an Opinion of Counsel to the Trustee within 10 Business Days of the date on which it was acquired or created. 73 EVENTS OF DEFAULT AND REMEDIES EVENTS OF DEFAULT (Section5.1) Each of the following constitutes an Event of Default under the indenture: (1) default in the payment of the principal of or premium, if any, when due and payable, on any of the Notes, whether or not prohibited by the Subordination provisions contained in the indenture; or (2) default in the payment of an installment of interest or Liquidated Damages on any of the Notes, when due and payable, and continuance of such default for a period of 30 days, whether or not prohibited by the Subordination provisions contained in the indenture; or (3) default in the performance or breach of the provisions described under the caption "--Consolidation, Merger, Conveyance, Transfer or Lease" or "--Repurchase at the Option of Holders--Change of Control" or "--Asset Sales"; or (4) ICON or any Restricted Subsidiary fails to perform or observe any other term, covenant or agreement contained in the Notes or the indenture (other than a default specified in (1), (2) or (3) above) for a period of 45 days after written notice of such failure requiring ICON to remedy the same has been given (a) to ICON by the Trustee or (b) to ICON and the Trustee by the Holders of 25% in aggregate principal amount of the Notes then Outstanding; or (5) default or defaults under one or more mortgages, bonds, debentures or other evidences of Indebtedness under which ICON or any of its Restricted Subsidiaries then has outstanding Indebtedness in excess of $5,000,000, individually or in the aggregate, and either (a) such Indebtedness is already due and payable in full or (b) such default or defaults have resulted in the acceleration of the maturity of such Indebtedness; or (6) one or more final judgments, orders or decrees of any court or regulatory or administrative agency of competent jurisdiction for the payment of money in excess of $5,000,000, individually or in the aggregate, is entered against ICON or any of its Restricted Subsidiaries or any of their properties which is not discharged or fully bonded and there has been a period of 60 consecutive days after the date on which any period for appeal has expired and during which a stay of enforcement of such judgment, order or decree, is not in effect; or (7) (a) any holder of at least $5,000,000 in aggregate principal amount of secured Indebtedness of ICON or of any of its Restricted Subsidiaries as to which a default has occurred and is continuing commences judicial proceedings (which proceedings remain unstayed for 5 Business Days) to foreclose upon assets of ICON or such Restricted Subsidiary having an aggregate Fair Market Value, individually or in the aggregate, in excess of $5,000,000 or exercises any right under applicable law or applicable security documents to take ownership of any such assets in lieu of foreclosure or (b) any action described in the foregoing clause (a) results in any court of competent jurisdiction issuing any order for the seizure of such assets; or (8) certain bankruptcy events with respect to ICON and its significant subsidiary; or (9) except as otherwise permitted by the indenture, any Subsidiary Guarantee is held in any judicial proceeding to be unenforceable or invalid or ceases for any reason to be in full force and effect or any Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary Guarantee. 74 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT (Section5.2) If an Event of Default (other than an Event of Default specified in clause (8) under the caption "--Events of Default") occurs and is continuing, then the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes may declare the principal of, premium, if any, and accrued interest on all the Notes to be due and payable immediately, by a notice in writing to ICON (and to the Trustee if given by Holders), and upon any such declaration such principal amount shall become immediately due and payable. If an Event of Default specified in clause (8) under the caption "--Events of Default" occurs and is continuing, then the principal of, premium, if any, and accrued interest on all the Notes will become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided, the Holders of a majority in principal amount of the Outstanding Notes, by written notice to ICON and the Trustee, may rescind and annul such declaration and its consequences if (1) ICON has paid or deposited with the Trustee a sum sufficient to pay (a) all overdue interest on all Outstanding Notes, (b) all unpaid principal of (and premium, if any, on) any Outstanding Notes which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate borne by the Notes, (c) to the extent that payment of such interest is lawful, interest on overdue interest at the rate borne by the Notes, and (d) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; (2) such rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (3) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided under the caption "--Waiver of Past Defaults." No such rescission will affect any subsequent default or impair any right consequent thereon. Notwithstanding the preceding paragraph, in the event of a declaration of acceleration in respect of the Notes because of an Event of Default specified in clauses (5) or (7) under the caption "--Events of Default" has occurred and is continuing, such declaration of acceleration will be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or the holders thereof have rescinded their declaration of acceleration or notification or action, as applicable, in respect of such Indebtedness, and written notice of such discharge or rescission, as the case may be, has been given to the Trustee by ICON or such Subsidiary and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders or the Person or Persons entitled to take the actions described in clauses (5)(b) or (7) under the caption "--Events of Default," within 30 days after such declaration of acceleration in respect of the Notes, and no other Event of Default has occurred during such 30-day period which has not been cured or waived during such period. 75 LIMITATION ON SUITS (SECTION5.7) No Holder of any Notes will have any right to institute any proceeding, judicial or otherwise, with respect to the indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 30 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 30-day period by the Holders of a majority or more in aggregate principal amount of the Outstanding Notes; it being understood and intended that no one or more Holders have any right in any manner whatever by virtue of, or by availing of, any provision of the indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under the indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. WAIVER OF PAST DEFAULTS (SECTION5.13) The Holders of not less than a majority in aggregate principal amount of the Outstanding Notes may on behalf of the Holders of all the Notes waive any past default described under the indenture and its consequences, except a default (1) in respect of the payment of the principal of (or premium, if any, on) or interest on any Note, or (2) in respect of a covenant or provision of the indenture which under the caption "--Supplemental Indentures" cannot be modified or amended without the consent of the Holder of each outstanding Note affected. Upon any such waiver, such default will cease to exist, and any Event of Default arising therefrom will be deemed to have been cured, for every purpose of the indenture; but no such waiver will extend to any subsequent or other default or Event of Default or impair any right consequent thereon. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of ICON, as such, will have any liability for any of ICON's obligations under the Notes, the indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy. 76 DEFEASANCE AND COVENANT DEFEASANCE ICON'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE (SECTION12.1) ICON may, at its option, by Board Resolution, at any time, with respect to the Notes, elect to have either the provisions regarding defeasance or those regarding covenant defeasance apply to all outstanding Notes upon compliance with the conditions set forth below. DEFEASANCE AND DISCHARGE (SECTION12.2) ICON may, at its option, elect to have its obligations and those of its Subsidiary Guarantors discharged with respect to all Outstanding Notes on the date the conditions set forth under the caption "--Conditions to Defeasance or Covenant Defeasance" are satisfied (hereinafter, "Defeasance"), except for the following which will survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of Outstanding Notes to receive, solely from the trust fund described under the caption "--Conditions to Defeasance or Covenant Defeasance" below and as more fully set forth in such section, payments in respect of the principal of (and premium, if any, on) and interest on such Notes when such payments are due, (2) ICON's obligations with respect to such Notes under the provisions of the indenture governing temporary securities, registration, registration of transfer and exchange, mutilated, destroyed, lost and stolen securities, the maintenance of an office or agency for payment and money for security payments to be held in trust, (3) the rights, powers, trusts, duties and immunities of the Trustee under the indenture and (4) this provision governing Defeasance and Covenant Defeasance. Subject to compliance with this provision governing Defeasance and Covenant Defeasance, ICON may exercise its option under this paragraph, notwithstanding the prior exercise of its option under covenant defeasance below with respect to the Notes. COVENANT DEFEASANCE (SECTION12.3) ICON may, at its option, elect to have its obligations and those of its Subsidiary Guarantors released under certain of the covenants described in the indenture on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes will thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes under the indenture. For this purpose, such Covenant Defeasance means that, with respect to the Outstanding Notes, ICON and the Subsidiary Guarantors may omit to comply with and will have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere in the indenture to any such covenant or by reason of any reference in any such covenant to any other provision of the indenture or in any other document and such omission to comply shall not constitute a Default or an Event of Default under clauses (3) or (4) described under the caption "--Events of Default", but, except as specified above, the remainder of the indenture and such Notes will be unaffected thereby. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE (SECTION12.4) In order to exercise either defeasance or covenant defeasance: (1) ICON must have irrevocably deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of the indenture who will agree to comply with the 77 provisions of the Defeasance and Covenant Defeasance provision applicable to it) as trust funds in trust for the purpose of making the following payments of principal of (and premium, if any, on) and interest on the outstanding Notes on the Stated Maturity (or Redemption Date, if applicable) of such principal (and premium, if any) or installment of interest; PROVIDED that the Trustee has been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Notes. Before such a deposit, ICON may give to the Trustee a notice of its election to redeem all of the Outstanding Notes at a future date in accordance with the terms described in the indenture which notice will be irrevocable. Such irrevocable redemption notice, if given, will be given effect in applying the foregoing. (2) No Default or Event of Default with respect to the Notes has occurred and is continuing on the date of such deposit. (3) Such Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under, the indenture (including the subordination provisions) or any other material or instrument to which ICON or any Subsidiary Guarantor is a party or by which it is bound. (4) Certain other customary conditions precedent are satisfied. SUPPLEMENTAL INDENTURES Modifications and amendments of the indenture may be made by ICON, when authorized by a Board Resolution, and the Trustee with the consent of the Holders of not less than a majority in principal amount of the Outstanding Notes; PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the Holder of each Outstanding Note affected: (1) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which any Note or any premium or the interest thereon is payable (except with respect to liquidated damages as provided in the Exchange and Registration Rights Agreement), or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); or (2) reduce the percentage in principal amount of outstanding Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with some provisions of or defaults under the indenture and their consequences; or (3) modify any of the provisions in the indenture relating to supplemental indenture, waiver of past defaults and waiver of some covenants, except to increase any such percentage or to provide that some other provisions of the indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby; or (4) except as otherwise permitted under the caption "--Certain Covenants--Consolidation, Merger, Conveyance, Transfer or Lease," consent to the assignment or transfer by ICON of any of its rights and obligations under the indenture; or (5) make any change in the subordination provisions of the indenture that adversely affects the rights of any Holder of the Notes. (Section9.2) The Holders of at least a majority in principal amount of the Outstanding Notes may waive compliance with some restrictive covenants and provisions of the indenture as described under the caption "--Certain Covenants--Waiver of Covenants." 78 ADDITIONAL INFORMATION Anyone who receives this prospectus may obtain a copy of the indenture without charge by writing to ICON Health & Fitness, Inc. 1500 South, 1000 West Logan, Utah 84321, Attention: Corporate Secretary. DEFINITIONS Set forth below is a summary of defined terms used in the indenture. Reference is made to the indenture for the full definition of all such terms, as well as any other captioned terms used herein for which no definition is provided. "Acquired Indebtedness" means, with respect to any specified Person: (1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Subsidiary of, such specified Person and (2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate" of any specified Person means any other Person: (1) which directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, such Person, (2) which directly or indirectly through one or more intermediaries beneficially owns or holds 10% or more of the combined voting power of the total Voting Stock of such Person, or (3) of which 10% or more of the combined voting power of the total Voting Stock (or in the case of a Person that is not a corporation, 10% or more of the equity interest), directly or indirectly, through one or more intermediaries is beneficially owned or held by such Person; provided that the term "Affiliate" shall not be deemed to apply to any Bank solely by virtue of its ownership directly or indirectly of up to 20% of the Voting Stock of ICON. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling", "controlled by" and "under common control with" have meanings correlative to the foregoing. For the avoidance of doubt, HF Holdings, Bain Capital and Credit Suisse First Boston Corporation shall be deemed Affiliates of ICON as of the Issue Date. "Asset Sale" means: (1) the sale, lease, conveyance or other disposition of any assets or rights, other than sales of inventory in the ordinary course of business consistent with past practices; provided that the sale, conveyance or other disposition of all or substantially all of the assets of ICON and its Restricted Subsidiaries taken as a whole shall be governed by the covenants described under the captions "--Certain Covenants--Consolidation, Merger, Conveyance, Transfer or Lease" and "--Repurchase at the Option of Holders--Change of Control" and not "--Asset Sales" and (2) the issuance or sale of Capital Stock by any of ICON's Restricted Subsidiaries. 79 Notwithstanding the preceding, the following items shall not be deemed to be Asset Sales: (1) any single transaction or series of related transactions that (a) involves assets having a Fair Market Value of less than $500,000 or (b) results in net proceeds to ICON and its Restricted Subsidiaries of less than $500,000, (2) a transfer of assets between or among ICON and its Restricted Subsidiaries, (3) an issuance of Capital Stock by a Restricted Subsidiary to ICON or to another Restricted Subsidiary, (4) a Restricted Payment that is permitted by the covenant "Limitation on Restricted Payments" and (5) the sale of accounts receivable transferred to an Unrestricted Subsidiary or any other Person that is not a Subsidiary of ICON in connection with a Securitization Transaction for the Fair Market Value thereof, including cash in an amount at least equal to 75% of the Fair Market Value thereof. For purposes of clause (5) of the immediately preceding sentence, Securitization Notes shall be deemed to be cash. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP. "Average Life to Stated Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by (2) the then outstanding principal amount of such Indebtedness. "Bankruptcy Law" means Title 11, United States Code, as amended, or any similar United States Federal or State law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Banks" means General Electric Capital Corporation and Fleet National Bank, as agents for the lenders, and the banks and other financial institutions from time to time that are agents or lenders under the Credit Agreement. "Board of Directors" means either the board of directors of ICON or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of ICON to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York or in the city where the Corporate Trust Office 80 or the principal office of the Paying Agent is located are authorized or obligated by law or executive order to close. "Canadian Subsidiary Borrowing Base" means, as of any date, an amount equal to the sum of: (1) 85.0% of the book value of all accounts receivable owned by the ICON's Canadian Restricted Subsidiaries) (excluding any accounts receivable from an Affiliate of such Canadian Restricted Subsidiaries or that are more than 90 days past due, less (without duplication) the allowance for doubtful accounts attributable to current trade accounts receivable) and (2) 60.0% of the book value of all inventory owned by such Canadian Restricted Subsidiaries as of such date (with a seasonal increase of 70.0% of inventory in effect from July 1 through November 30 of each year), all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, Canadian Subsidiary Borrowing Base shall be calculated utilizing the most recent available information. "Capital Stock" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and (4) any other interest or participation that confers on a person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing person; and in each case, all warrants, options or other rights to acquire any of the foregoing (but excluding any debt security that is convertible into, or exchangeable for, any of the foregoing). "Capitalized Lease Obligation" means any obligation under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed) that is required to be classified and accounted for as a capital lease obligation under GAAP and, for the purpose of the indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Cash Equivalents" means: (1) United States dollars, (2) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than nine months from the date of acquisition, (3) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition and overnight bank deposits, in each case with any United States commercial bank having capital and surplus in excess of $500 million, (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) entered into with any financial institution meeting the qualifications specified in clause (3) above, and (5) commercial paper having the highest rating obtainable from Moody's Investors Service or Standard & Poor's Ratings Group and bankers' acceptances of a financial institution with such 81 a commercial paper rating and in each case maturing within 270 days after the date of acquisition. "Change of Control" means the occurrence of any of the following events: (1) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than Bain Capital or its Affiliates or Credit Suisse First Boston or its Affiliates, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that (x) a Person shall be deemed to have beneficial ownership of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time and (y) "beneficial owner" shall not include any "person" or "group" solely by reason of such Person being party to the Stockholders Agreement or a member of the limited liability company referred to in the Exchange Offer and Consent Solicitation Statement), directly or indirectly, of more than 50% of the total outstanding Voting Stock of ICON or HF Holdings, as the case may be, measured by voting power rather than number of shares; (2) the sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of ICON and its Subsidiaries taken as a whole to any "person" or "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than Bain Capital or its Affiliates or Credit Suisse First Boston or its Affiliates; (3) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of ICON or HF Holdings, as the case may be (together with any new directors whose election to such Board or whose nomination for election by the stockholders of ICON or HF Holdings, as the case may be, was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of such Board of Directors then in office; (4) ICON or HF Holdings, as the case may be, consolidates with or merges with or into another Person, or any Person consolidates with or merges into or with ICON or New Icon, as the case may be, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of ICON or New Icon, as the case may be, is converted into or exchanged for cash, securities or other property, other than any such transaction where the outstanding Voting Stock of ICON or New Icon, as the case may be, is not changed or exchanged at all (except only to the extent necessary to reflect a change in the jurisdiction of incorporation of ICON or New Icon, as the case may be) or where (A) the outstanding Voting Stock of ICON or New Icon, as the case may be, outstanding immediately prior to such transaction is changed into or exchanged for Voting Stock of the surviving transferee Person (other than Redeemable Capital Stock) constituting a majority of the outstanding shares of such Voting Stock of such surviving transferee Person immediately after giving effect to such issuance and (B) no "person" or "group" other than Bain Capital or its Affiliates or Credit Suisse First Boston or its Affiliates, owns immediately after such transaction, directly or indirectly, more than 50% of the total outstanding Voting Stock of the surviving corporation; (5) ICON is liquidated or dissolved or adopts a plan of liquidation or dissolution; or (6) HF Holdings shall hold less than 100% of the common stock of ICON. "Code" means the Internal Revenue Code of 1986, as amended. 82 "Company Borrowing Base" means, as of any date, an amount equal to the sum of: (1) 85.0% of the book value of all accounts receivable owned by ICON and its Domestic Subsidiaries and Canadian Restricted Subsidiaries (excluding any accounts receivable from an Affiliate of such Person or that are more than 90 days past due, less (without duplication) the allowance for doubtful accounts attributable to current trade accounts receivable) and (2) 60.0% of the book value of all inventory owned by ICON and its Domestic Subsidiaries and Canadian Restricted Subsidiaries as of such date (with a seasonal increase of 70.0% of inventory in effect from July 1 through November 30 of each year), all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, Company Borrowing Base shall be calculated utilizing the most recent available information. "Company Request" or "Company Order" means a written request or order signed in the name of ICON by its Chairman, Chief Executive Officer, its President, any Vice President, its Treasurer, its Chief Financial Officer, Director of Finance or an Assistant Treasurer, and delivered to the Trustee. "Consolidated Adjusted Net Income (Loss" means, for any period, the consolidated net income (or loss) of ICON and its Restricted Subsidiaries for such period as determined in accordance with GAAP, adjusted, to the extent included therein, by excluding, without duplication: (1) any net after-tax extraordinary gains or losses (less all fees and expenses relating thereto), (2) the portion of net income (or loss) of ICON and its consolidated Restricted Subsidiaries allocable to minority interests in unconsolidated Persons or Persons that are accounted for by equity method of accounting to the extent that cash dividends or distributions have not actually been received by ICON or any Restricted Subsidiary, (3) net income (or loss) of any Person combined with ICON or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination, (4) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan, (5) net after-tax gains or losses (less all fees and expenses relating thereto) in respect of dispositions of assets other than in the ordinary course of business, (6) the net income of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its shareholders, or (7) the cumulative effect of a change in accounting principles. "Consolidated Fixed Charge Coverage Ratio" of ICON means, for any period, the ratio of: (1) the sum of: (a) Consolidated Adjusted Net Income (Loss), (b) Consolidated Interest Expense, (c) Consolidated Income Tax Expense and 83 (d) Consolidated Non-Cash Charges, in the case of (b), (c) and (d) only to the extent such expense or charge was deducted in computing Consolidated Adjusted Net Income (Loss), in each case, for such period, of ICON and its Restricted Subsidiaries on a consolidated basis, all determined in accordance with GAAP to: (2) the sum of Consolidated Interest Expense for such period and cash and non-cash dividends paid on any Preferred Stock of ICON or any Restricted Subsidiary during such period. In making such computation, the Consolidated Interest Expense attributable to: (1) interest on any Indebtedness computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period, (2) interest on any Indebtedness under a revolving credit facility computed on a pro forma basis shall be computed based upon the average daily balance of such Indebtedness during the applicable period and (3) notwithstanding clauses (1) and (2), interest on any Indebtedness determined on a fluctuating basis, to the extent such interest is covered by Interest Rate Protection Agreements, shall be deemed to have accrued at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Income Tax Expense" means for any period the provision for federal, state, local and foreign income taxes of ICON and its consolidated Subsidiaries for such period as determined in accordance with GAAP. "Consolidated Interest Expense" means, without duplication, for any period: (x) the sum of: (1) the interest expense of ICON and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized, as determined on a consolidated basis in accordance with GAAP including, without limitation: (a) amortization of original issue discount and non-cash interest payments, (b) the net payment under Interest Rate Protection Agreements (including amortization of discounts), (c) the interest portion of any deferred payment obligation, (d) imputed interest with respect to Attributable Debt, (e) commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings and (f) accrued interest, and (2) (a) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by ICON or any Restricted Subsidiary during such period and (b) all capitalized interest of ICON and its consolidated Restricted Subsidiaries, in each case as determined in accordance with GAAP, minus (y) any amortization of financing fees and expenses of ICON and its consolidated Restricted Subsidiaries for such period. 84 "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of: (1) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date; plus (2) the respective amounts reported on such Person's balance sheet as of such date with respect to any series of Preferred Stock (other than Redeemable Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such Preferred Stock. "Consolidated Non-Cash Charges" means, for any period, the aggregate depreciation, amortization and other non-cash charges of ICON and its consolidated Restricted Subsidiaries for such period, as determined in accordance with GAAP (excluding any non-cash charge which requires an accrual or reserve for cash charges for any future period or amortization of a prepaid cash expense that was paid in a prior period). "Consolidation" means, with respect to the ICON, the consolidation of the accounts of the Restricted Subsidiaries with those of ICON, all in accordance with GAAP consistently applied; PROVIDED that, "consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of ICON. The term "Consolidated" shall have a similar meaning. "Corporate Trust Office" means the principal corporate trust office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which office at the date of the indenture is located at The Bank of New York, 101 Barclay Street, New York, New York 10286, except that with respect to presentation of Notes for payment or for registration of transfer or exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate agency business shall be conducted. "Corporation" includes corporations, associations, companies and business trusts. "Credit Agreements" means one or more Credit Agreements among ICON and the Banks, as in effect as of the date of the indenture, providing for a revolving credit facility and term loans to ICON, as such agreements may be amended, renewed, extended, substituted, refinanced, restructured, replaced, supplemented or otherwise modified from time to time, including, without limitation, amendments and modifications that provide for loans to Canadian Restricted Subsidiaries and for sub-facilities (including, without limitation, any successive renewals, extensions, substitutions, refinancings, restructurings, replacements, supplementations or other modifications of any of the foregoing), together with the security agreements and other agreements in favor of the Banks entered into from time to time in connection with such credit agreements as such security agreements and other agreements may be amended, supplemented or otherwise modified from time to time. "Currency Agreements" means any spot or forward foreign exchange agreements and currency swap, currency option or other similar financial agreements or arrangements entered into by ICON or any of its Restricted Subsidiaries in the ordinary course of business and designed to protect against or manage exposure to fluctuations in foreign currency exchange rates. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Depository" means, with respect to the Notes issuable or issued in whole or in part in global form, The Depository Trust Company, and any and all successors thereto appointed as depository hereunder and having become such pursuant to the applicable provision of the indenture. 85 "Disinterested Directors" means, with respect to any transaction or series of related transactions, a member of the Board of Directors who does not have any material direct or indirect financial interest in or with respect to such transaction or series of related transactions. "Domestic Subsidiary" means any Restricted Subsidiary that is incorporated under the laws of the United States or any state thereof or the District of Columbia. "Event of Default" has the meaning set forth under "--Events of Default and Remedies--Events of Default" above. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Offer and Consent Solicitation Statement" means the Exchange Offer and Consent Solicitation Statement dated July 30, 1999 relating to the offer of the Notes. "Exchange and Registration Rights Agreement" means the Exchange and Registration Rights Agreement between ICON and the holders of the Notes, relating to the Notes, as such agreement may be amended, modified or supplemented from time to time. "Registered Exchange Offer" means the registered exchange offer for the Notes which may be effected pursuant to the Exchange and Registration Rights Agreement. "Exchange Registration Statement" means the Exchange Registration Statement as defined in the Exchange and Registration Rights Agreement. "Exchange Notes" has the meaning stated in the first recital of the indenture and refers to any Exchange Notes containing terms substantially identical to Initial Notes (except that such Exchange Notes shall not contain terms with respect to transfer restrictions) that are issued and exchanged for the Initial Notes pursuant to the Exchange and Registration Rights Agreement and the indenture. "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer. "Foreign Subsidiary" means any Subsidiary that is incorporated in a jurisdiction outside of the U.S. and territories thereof. "Foreign Subsidiary Borrowing Base" means, as of any date, an amount equal to the sum of: (1) 85.0% of the book value of all accounts receivable owned by the ICON's Foreign Subsidiaries (other than Canadian Restricted Subsidiaries) (excluding any accounts receivable from an Affiliate of such Foreign Subsidiaries or that are more than 90 days past due, less (without duplication) the allowance for doubtful accounts attributable to current trade accounts receivable) and (2) 60.0% of the book value of all inventory owned by such Foreign Subsidiaries (other than Canadian Restricted Subsidiaries) as of such date (with a seasonal increase of 70.0% of inventory in effect from July 1 through November 30 of each year), all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, Foreign Subsidiary Borrowing Base shall be calculated utilizing the most recent available information. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in 86 other statements by any other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. "Guarantee" or "guarantee" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness. "Holder" means a Person in whose name a Note is registered in the Security Register. "Indebtedness" means, with respect to any Person, without duplication: (1) all liabilities of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other current liabilities incurred in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letter of credit, bankers' acceptance or other similar credit transaction and in connection with any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock, now or hereafter outstanding, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, (2) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, (3) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding accounts payable arising in the ordinary course of business, (4) all Capitalized Lease Obligations of such Person, (5) all indebtedness referred to in the preceding clauses of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness or of such dividend (the amount of such obligation being deemed to be the lesser of the value of such property or asset or the amount of the obligation so secured), (6) all guarantees by such Person of indebtedness referred to in this definition, (7) all Redeemable Capital Stock of such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued dividends and (8) all obligations of such Person under or in respect of Interest Rate Protection Agreements and Currency Agreements. The amount of any Indebtedness outstanding as of any date shall be: (a) the accreted value thereof, in the case of any Indebtedness issued with original issue discount and (b) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. 87 "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes. "Interest Rate Protection Agreements" means any interest rate protection agreements and other types of interest rate hedging agreements (including, without limitation, interest rate swaps, caps, collars and similar agreements) designed to minimize exposure to fluctuations in interest rates in respect of Indebtedness. "Investment" means, with respect to any Person, directly or indirectly, any advance, loan, or other extension of credit (including by means of a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by any other Person, except for purchases of assets in the ordinary course of business of ICON or any of its Restricted Subsidiaries, and all other items that would be classified as investments on a balance sheet prepared in accordance with GAAP. "Issue Date" means the closing date for the original issuance of the Notes under the indenture. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), security interest, hypothecation or other encumbrance of any kind upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the return thereof, any option or other agreement to sell or give a security interest in and any filing or agreement to give any financing statement under the Uniform Commercial Code or equivalent statutes of any jurisdiction. "Liquidated Damages" means all liquidated damages then owing pursuant to the Registration Rights Agreement. "Maturity" when used with respect to any Note means the date on which the principal of such Note or an installment of principal becomes due and payable as therein provided or as provided in the indenture, whether at Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means with respect to any Asset Sale the proceeds thereof received by ICON or any of its Restricted Subsidiaries in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or Cash Equivalents (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of: (1) reasonable out-of-pocket fees and expenses (including legal, accounting and investment banking and sales commissions) related to such Asset Sale, (2) provisions for all taxes payable as a result of such Asset Sale, (3) payments made to retire Indebtedness where payment of such Indebtedness is secured by the assets or properties which are the subject of such Asset Sale, (4) amounts required to be paid to any Person (other than ICON or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale and (5) appropriate amounts to be provided by ICON or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by ICON or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, 88 liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale (provided that the amount of any such reserves shall be deemed to constitute Net Cash Proceeds at the time such reserves shall have been released or are not otherwise required to be retained as a reserve), all as reflected in an Officers' Certificate delivered to the Trustee. "Non-Recourse Debt" means Indebtedness: (1) as to which neither ICON nor any of its Restricted Subsidiaries: (a) provides credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Indebtedness) or (b) is directly or indirectly liable (as a guarantor, general partner or otherwise), or (c) constitutes a lender; and (2) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Notes) of ICON or any of its Restricted Subsidiaries to declare a default under such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (3) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of ICON or any of its Restricted Subsidiaries. "Officers' Certificate" means a certificate signed by the Chairman, the Chief Executive Officer, the President or a Vice President, and by the Treasurer, the Chief Financial Officer, the Director of Finance, an Assistant Treasurer, the Secretary or an Assistant Secretary of ICON, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for ICON, including an employee of ICON, and who shall be acceptable to the Trustee. "Outstanding", when used with respect to Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under the indenture, except: (1) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (2) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than ICON) in trust or set aside and segregated in trust by ICON (if ICON shall act as its own Paying Agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to the indenture or provision therefor satisfactory to the Trustee has been made; (3) Notes, except to the extent provided under the caption "--Defeasance and Covenant Defeasance--Defeasance and Discharge--Covenant Defeasance", with respect to which ICON has effected defeasance and/or covenant defeasance as provided under the caption "--Defeasance and Covenant Defeasance"; and (4) Notes which have been paid pursuant to the provision of the indenture governing mutilated, destroyed, lost and stolen notes or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to the indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands the Notes are valid obligations of ICON; 89 PROVIDED, HOWEVER, that, in determining whether the Holders of the requisite principal amount of Outstanding Notes have given any request, demand, authorization, direction, consent, notice or waiver hereunder, and for the purpose of making the calculations required by TIA Section 313, Notes owned by ICON or any other obligor upon the Notes or any Affiliate of ICON or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not ICON or any other obligor upon the Notes or any Affiliate of ICON or such other obligor. "Permitted Business" means the lines of business that ICON and its Restricted Subsidiaries currently conduct on the date of the indenture and any businesses that derive (or are expected to derive) a majority of their revenues from products and activities reasonably related thereto. "Permitted Indebtedness" means any of the following: (1) Indebtedness of ICON and any Subsidiary Guarantor (including Canadian Restricted Subsidiaries that are also Subsidiary Guarantors) under the Credit Agreements; provided that the aggregate principal amount of such Indebtedness at any one time outstanding shall not exceed the greater of (a) the Company Borrowing Base plus $120 million and (b) $350 million, in each case less (A) the aggregate amount of all Net Cash Proceeds of Asset Sales applied by ICON and any of its Subsidiaries since the date of the indenture to permanently repay Indebtedness under the Credit Agreement pursuant to the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales" and (B) the amount of outstanding Indebtedness incurred by Canadian Restricted Subsidiaries pursuant to clause (13) below; PROVIDED FURTHER that the amount of Indebtedness permitted to be incurred pursuant to this clause (1) shall be in addition to any Indebtedness permitted to be incurred under the Credit Agreements in reliance on, and in accordance with, clauses (8) and (12) of this definition of "Permitted Indebtedness"; (2) Indebtedness of ICON and any Restricted Subsidiary under the Notes; (3) Indebtedness of ICON and any Restricted Subsidiary (other than under the Credit Agreements) outstanding on the date of the indenture until such amounts are repaid; (4) obligations of ICON and any Restricted Subsidiary incurred in connection with Interest Rate Protection Agreements relating to Indebtedness (including Permitted Indebtedness) permitted pursuant to the covenant described under the caption "--Certain Covenants--Limitation on Indebtedness and Issuance of Preferred Stock" that are entered into in the ordinary course of business; (5) obligations of ICON and any Restricted Subsidiary incurred in connection with Currency Agreements that are entered into in the ordinary course of business of ICON and its Restricted Subsidiaries; (6) the incurrence by ICON or any of its Restricted Subsidiaries of intercompany Indebtedness between or among ICON and any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that: (a) if ICON or any Subsidiary Guarantor is the obligor on such Indebtedness and the obligee is not ICON or any Subsidiary Guarantor, such Indebtedness must be expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes, in the case of ICON, or the Subsidiary Guarantee of such Subsidiary Guarantor, in the case of a Subsidiary Guarantor; and 90 (b) (A) any subsequent issuance or transfer of Capital Stock that results in any such Indebtedness being held by a Person other than ICON or a Restricted Subsidiary thereof and (B) any sale or other transfer of any such Indebtedness to a Person that is not either ICON or a Restricted Subsidiary thereof; shall be deemed, in each case, to constitute an incurrence of such Indebtedness by ICON or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (6); (7) Indebtedness arising from customary agreements providing for indemnification or similar obligations, or from guarantees, letters of credit, surety bonds or performance bonds securing any obligations of ICON pursuant to such agreements, in any case entered into in a commercially reasonable manner in the ordinary course of business consistent with past practices incurred in connection with the disposition of any business, assets or Restricted Subsidiary of ICON, in a principal amount not to exceed the proceeds received by ICON and its Restricted Subsidiaries in connection with such disposition; (8) Purchase Money Obligations and Capitalized Lease Obligations of ICON and one or more Restricted Subsidiaries not to exceed, in the aggregate at any time outstanding (including the amount of any additional Indebtedness incurred under clause (1) of this definition of "Permitted Indebtedness" in reliance on this clause (8)), $10 million; (9) Indebtedness of Foreign Subsidiaries (other than Canadian Restricted Subsidiaries) in an aggregate principal amount not to exceed, at any time outstanding, the lesser of $50 million or the Foreign Subsidiary Borrowing Base; PROVIDED, HOWEVER, that such amount shall be reduced by the amount of Indebtedness incurred by such Foreign Subsidiaries pursuant to clause (1) above; (10) any renewals, extensions, substitutions, refundings, refinancings or replacements (each, a "refinancing") of any Indebtedness (other than intercompany Indebtedness) described in clauses (2) and (3) and clause (12) of this definition of "Permitted Indebtedness," including any successive refinancings so long as (a) the aggregate principal amount or accreted value, if applicable,(or, if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, then such lesser amount as of the date of determination) of Indebtedness represented thereby is not increased by such refinancing other than by an amount equal to the stated amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus the amount of reasonable expenses of ICON incurred in connection with such refinancing, (b) such refinancing does not reduce the Average Life to Stated Maturity or shorten the Stated Maturity of such Indebtedness, (c) such new Indebtedness is subordinated to the Notes at least to the same extent as the Indebtedness being refinanced if the Indebtedness being refinanced is Subordinated Indebtedness and (d) such Indebtedness is incurred either by ICON or by the Restricted Subsidiary which is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (11) the accrual of interest, accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Redeemable Capital Stock in the form of additional shares of the same class of Redeemable Capital Stock; PROVIDED, in each such case, that the amount thereof is included in Consolidated Interest Expense of ICON as accrued; (12) Indebtedness of ICON and one or more Restricted Subsidiaries in addition to that described in clauses (1) through (11) of this definition of "Permitted Indebtedness," including Indebtedness incurred pursuant to clause (10) above to refinance any Indebtedness incurred pursuant to this clause (12), not to exceed $15 million in the aggregate at any one time 91 outstanding (including the amount of any additional Indebtedness incurred under clause (1) of this definition of "Permitted Indebtedness" in reliance on this clause (12)); and (13) Indebtedness of Canadian Restricted Subsidiaries (to the extent they are not also Subsidiary Guarantors) under the Credit Agreements in an aggregate principle amount not to exceed, at any time outstanding, the lesser of $50 million or the Canadian Subsidiary Borrowing Base. "Permitted Investment" means: (1) Investments in any Restricted Subsidiary or any Investment in any Person by ICON or any Restricted Subsidiary as a result of which such Person becomes a Restricted Subsidiary (PROVIDED, HOWEVER, that in each case such Restricted Subsidiary is engaged in a Permitted Business) or any Investment in ICON by a Restricted Subsidiary; (2) intercompany Indebtedness to the extent permitted under clause (6) of the definition of "Permitted Indebtedness"; (3) Investments in Cash Equivalents; (4) Investments in an amount not to exceed $2 million in the aggregate at any given time outstanding; (5) Investments in existence on the date of the indenture; (6) Investments by ICON or any Restricted Subsidiary in any Person (including any Unrestricted Subsidiary) whose operations consist of, or has been formed to operate, a Permitted Business in an amount not to exceed $8 million in the aggregate at any given time outstanding; and (7) any Investment made by ICON or a Restricted Subsidiary in an Unrestricted Subsidiary or any other Person that is not a Subsidiary of ICON in connection with a Securitization Transaction; provided that any such Investment is in the form of a Securitization Note or an equity interest. "Permitted Liens" means any of the following: (1) any Lien existing as of the date of the indenture (other than Liens securing Indebtedness under the Credit Agreements); (2) any Lien arising by reason of (a) any judgment, decree or order of any court, so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment, decree or order shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired, the claims secured thereby are being contested in good faith by appropriate proceedings, adequate reserves have been established with respect to such claims in accordance with GAAP and no Default or Event of Default would result thereby; (b) taxes, assessments, governmental charges or levies not yet delinquent or which are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that, any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (c) security for payment of workers' compensation or other insurance incurred in the ordinary course of business; (d) security for the performance of tenders, contracts (other than contracts for the payment of money) or leases incurred in the ordinary course of business; (e) deposits to secure public or statutory obligations incurred in the ordinary course of business; (f) operation of law in favor of carriers, warehousemen, mechanics, materialmen, laborers, employees or suppliers and similar Liens incurred in the ordinary course of business for sums which are not yet delinquent or are being contested in good faith by negotiations or by appropriate proceedings which suspend the collection thereof 92 incurred in the ordinary course of business; or (g) security for surety or appeal bonds incurred in the ordinary course of business; (3) any Lien existing on the assets of ICON or any Subsidiary Guarantor or any (including Canadian Restricted Subsidiary that are also Subsidiary Guarantors) securing the Indebtedness of ICON or any such Subsidiary Guarantor under the Credit Agreement, provided that the principal amount of Indebtedness secured by such Lien does not exceed the amount of Indebtedness permitted to be incurred under clause (1) of the definition of "Permitted Indebtedness"; (4) any Lien in favor of ICON or a Subsidiary Guarantor; (5) any Lien securing any Interest Rate Protection Agreements to the extent such Agreements relate to Indebtedness that is otherwise permitted to be incurred pursuant to the indenture; (6) any Lien securing the Notes; (7) any Liens on assets acquired by ICON or any Restricted Subsidiary after the ate of the indenture, whether by acquisition of shares, assets or otherwise, provided that such Lien (a) existed on the date such asset was acquired, (b) only extends to assets that were subject to such Lien prior to such acquisition, and (c) was not incurred in anticipation of such acquisition; (8) Liens relating to Purchase Money Obligations, provided, however, that (a) the principal amount of any Indebtedness secured by such Liens shall not exceed 100% of the applicable purchase price or cost and (b) the Lien securing such Indebtedness shall be created (A) in the case of any asset acquisition within 180 days of the closing of such asset acquisition and (B) in all other cases, in the ordinary course of business, within 90 days of such acquisition and (c) such Lien does not apply to any assets other than those acquired with such Purchase Money Obligations and (d) the Indebtedness secured by the Lien was permitted to be incurred pursuant to clause (8) of the definition of Permitted Indebtedness; (9) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods not yet delinquent, incurred in the ordinary course of business; provided that, any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (10) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods incurred in the ordinary course of business; (11) [Intentionally Omitted]; (12) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of ICON or any Restricted Subsidiary relating to such property or assets incurred in the ordinary course of business; (13) Liens securing an aggregate of $2.5 million of Indebtedness permitted to be incurred under the indenture by ICON and any Restricted Subsidiary; (14) easements, rights-of-way and other similar charges or encumbrances which were not incurred in connection with the incurrence of Indebtedness and do not interfere in any material respect with the ordinary conduct of the business of ICON or any of its Restricted Subsidiaries; (15) Liens on the assets of Foreign Subsidiaries securing (other than Canadian Restricted Subsidiaries) Indebtedness of Foreign Subsidiaries (other than Canadian Restricted 93 Subsidiaries) permitted to be incurred under clause (9) under the definition of "Permitted Indebtedness"; (16) any extension, renewal, substitution or replacement (or successive extensions, renewals, substitutions or replacements), as a whole or in part, of any of the Liens referred to in clauses (1), (3), (6), (7), (15) and (17) of this definition or the Indebtedness secured thereby; provided that (a) such extension, renewal, substitution or replacement Lien shall be limited to all or any part of the same property or assets, now owned or hereafter acquired, that secured the Lien extended, renewed, substituted or replaced (plus improvements on such property or assets) and (b) the Indebtedness secured by such Lien (assuming all available amounts were borrowed) at such time is not increased, except to the extent permitted under clause (10) of the definition of "Permitted Indebtedness"; and (17) Liens on the assets of Canadian Restricted Subsidiaries securing Indebtedness of Canadian Restricted Subsidiaries permitted to be incurred under clause (13) under the definition of "Permitted Indebtedness". Notwithstanding the foregoing, under no circumstances shall any Lien securing Indebtedness of ICON or any of its Subsidiaries, issued, directly or indirectly, in exchange for or upon the conversion of any Indebtedness of IHF Holdings or ICON Fitness be deemed to be a "Permitted Lien". "Person" means any individual, corporation, limited liability company, partnership, joint venture, joint-stock company, trust, unincorporated organization, association, government or any agency or political subdivision thereof or any other entity. "Predecessor Security" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under the provision of the indenture governing mutilated, destroyed, lost and stolen Notes in exchange for a mutilated security or in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred stock whether now outstanding, or issued after the date of the indenture, and including, without limitation, all classes and series of preferred or preference stock. "Purchase Money Obligations" of any Person means any Indebtedness (including Capitalized Lease Obligations) of such Person incurred in the ordinary course of business for the purpose of financing all or any part of the acquisition price or the cost of construction or improvement of equipment or property, but only if such equipment or property is included in "addition to property, plant or equipment" in accordance with GAAP and only if such equipment or property is not being purchased as part of an acquisition of any business. "Redeemable Capital Stock" means any Capital Stock that, either by its terms or by the terms of any security into which it is convertible or exchangeable or otherwise, is or upon the happening of any event or passage of time, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the Stated Maturity of the principal of the Notes, or is convertible into or exchangeable for debt securities at any time prior to the date that is 91 days after such Stated Maturity at the option of the holder thereof; PROVIDED, HOWEVER, that any Capital Stock that would constitute Redeemable Capital Stock solely because the holders thereof have the right to require the issuer thereof to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Redeemable Capital Stock if the terms of such Capital Stock provide that such 94 issuer may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant "Limitation on Restricted Payments". "Redemption Date", when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption pursuant to the indenture. "Redemption Price", when used with respect to any Note to be redeemed, means the price at which it is to be redeemed pursuant to the indenture. "Registration Statement" means the Registration Statement as defined in the Exchange and Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the January 1 or July 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Restricted Subsidiary" means any Subsidiary of ICON that has not been designated as an Unrestricted Subsidiary; provided that on the date the Notes are originally issued, all Subsidiaries of ICON shall be Restricted Subsidiaries of ICON. "S&P" means Standard and Poor's Rating Group and its successors. "Securities" has the meaning stated in the first recital of the indenture and more particularly means any Notes authenticated and delivered under the indenture. For all purposes of the indenture, the term "Notes" shall include any Exchange Notes issued and exchanged for any Notes pursuant to the Exchange and Registration Rights Agreement and the indenture and, for purposes of the indenture, all Notes and Exchange Notes shall vote together as one series of Notes under the indenture. "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder. "Securitization Note" means a promissory note of an Unrestricted Subsidiary or any other Person that is not a Subsidiary of ICON evidencing a line of credit, which may be irrevocable, from ICON or any Restricted Subsidiary of ICON in connection with a Securitization Transaction, which note shall be repaid from cash available to the Unrestricted Subsidiary or such Person other than amounts required to be established as reserves pursuant to agreements, amounts paid to investors in respect of interest, principal and other amounts owing to such investors and amounts paid in connection with the purchase of newly generated receivables. "Securitization Transaction" means any transaction or series of transactions pursuant to which ICON or any of its Restricted Subsidiaries may sell, convey or otherwise transfer to an Unrestricted Subsidiary or any other Person that is not a Subsidiary of ICON any accounts receivable (whether now existing or arising or acquired in the future) of ICON or any of its Restricted Subsidiaries, and any assets related thereto including, without limitation, all collateral securing such accounts receivable, all contracts and contract rights and all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets (including contract rights) which are customarily transferred in connection with asset securitization transactions involving accounts receivable. "Security Register" has the meaning specified in the indenture under "Registration, Registration of Transfer and Exchange". "Senior Indebtedness" means the principal of, premium, if any, and interest, fees and expenses (including, without limitation, post-petition interest at the rate provided for in the documentation with respect thereto, whether or not allowed as a claim in bankruptcy, reorganization, insolvency, receivership or similar proceeding) with respect to any Permitted Indebtedness of ICON and its Restricted Subsidiaries under the Credit Agreement, including without limitation any guarantee thereof. 95 "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Exchange and Registration Rights Agreement. "Significant Subsidiary" means, as of any date, any corporation or partnership that is a Subsidiary of ICON and that, as of the end of the most recently completed fiscal year of ICON for which financial statements are available, was a "significant subsidiary" as defined in Regulation S-X under the Securities Act and the Exchange Act or that, if acquired after such date, would have been a "significant subsidiary" as defined therein if it had been acquired as of such date. "Specified Senior Indebtedness" means Indebtedness under the Credit Agreements. "Standard Securitization Undertakings" means representations, warranties, covenants and indemnities entered into by ICON or any Subsidiary of ICON that are customary in accounts receivable securitization transactions. "Stated Maturity" when used with respect to any Indebtedness or any installment of principal thereof or interest thereon, means the dates specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of principal or interest is due and payable. "Stockholders Agreement" means the stockholders agreement substantially in the form attached as an annex to the Exchange Offer and Consent Solicitation Statement. "Subordinated Indebtedness" means Indebtedness of ICON or any Restricted Subsidiary contractually subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person: (1) any corporation, association or other business entity of which more than 50% of the equity ownership or the Voting Stock of which is at the time owned, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Subsidiary Guarantee" means the Guarantee by each Subsidiary Guarantor of ICON's payment obligations under the indenture and the Notes, executed pursuant to the provisions of the indenture. "Subsidiary Guarantors" means each of (1) ICON's Domestic Subsidiaries and (2) any future Subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture and their respective successors and assigns. "Tax Sharing Agreement" means the tax sharing agreement among HF Holdings and its Subsidiaries, as amended from time to time; PROVIDED that, such amendments shall not, in aggregate, provide for terms that are materially less favorable to ICON than those in effect on the Issue Date. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939. "Trustee" means the Person named as the "Trustee" in the first paragraph of the indenture until a successor Trustee shall have become such pursuant to the applicable provisions of the indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (1) has no Indebtedness other than Non-Recourse Debt, (2) is not a party to any agreement, contract, arrangement or understanding with ICON or any Restricted Subsidiary of ICON unless the terms of any such agreement, contract arrangement 96 or understanding are no less favorable to ICON or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of ICON, (3) is a Person with respect to which neither ICON nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Capital Stock or (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results, and (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of ICON or any of its Restricted Subsidiaries. Notwithstanding the above, ICON and its Restricted Subsidiaries may: (a) make payments to, provide credit or credit support for or make Investments in the Unrestricted Subsidiaries to the extent that such payments or investments in Unrestricted Subsidiaries are in compliance with the covenant "Limitation on Restricted Payments" and (b) may make Standard Securitization Undertakings to an Unrestricted Subsidiary and other Persons, and loans to an Unrestricted Subsidiary under a Securitization Note, in connection with a Securitization Transaction with such Unrestricted Subsidiary. "Vice President", when used with respect to ICON or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not, at the time, stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Wholly Owned Subsidiary" of any specified Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. 97 BOOK-ENTRY; DELIVERY AND FORM The exchange notes initially will be represented by one or more permanent global certificates in definitive, fully registered form. This global note will be deposited upon issuance with The Depository Trust Company, New York, New York and registered in the name of a nominee of the Depository Trust Company. THE GLOBAL NOTE. We expect that pursuant to procedures established by The Depository Trust Company (1) upon the issuance of the global note, The Depository Trust Company or its custodian will credit, on its internal system, the principal amount of the individual beneficial interests represented by the global note to the respective accounts of persons who have accounts with such depository and (2) ownership of beneficial interests in the global note will be shown on, and the transfer of ownership will be effected only through, records maintained by The Depository Trust Company or its nominee, with respect to interests of participants, and the records of participants, with respect to interests of persons other than participants. Ownership of beneficial interests in the global notes will be limited to persons who have accounts with The Depository Trust Company or persons who hold interests through participants. So long as The Depository Trust Company or its nominee is the registered owner or holder of the exchange notes, The Depository Trust Company (or the nominee) will be considered the sole owner or holder of the exchange notes represented by the global note for all purposes under the indenture. No beneficial owner of an interest in the global note will be able to transfer that interest except in accordance with The Depository Trust Company's procedures. Payments of interest, principal and other amounts due on the global note will be made to The Depository Trust Company or its nominee as the registered owner. None of our company, the trustee or any paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the global note or for maintaining, supervising or reviewing any records relating to this beneficial ownership interest. We expect that The Depository Trust Company or its nominee, upon receipt of any payment of interest, principal or other amounts due on the global note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the global note as shown on the records of The Depository Trust Company. We also expect that payments by participants to owners of beneficial interests in the global note held through such participants will be governed by standing instructions and customary practice, as is the case with securities held for the accounts of customers registered in the names of nominees for those customers. These payments will be the responsibility of the participants. Transfers between participants in The Depository Trust Company will be effected in the ordinary way through The Depository Trust Company's settlement system in accordance with The Depository Trust Company rules and will be settled in same day funds. The Depository Trust Company has advised us that it will take any action permitted to be taken by a holder of exchange notes, including the presentation of exchange notes for exchange as described below, only at the direction of a participant to whose account the Depository Trust Company interests in the global note are credited. Further, The Depository Trust Company will take action only as to such portion of the notes as to which the participant has given such direction. However, if there is an Event of Default under the indenture, the Depository Trust Company will exchange the global note for certificated notes, which it will distribute to its participants. 98 The Depository Trust Company has advised us as follows: The Depository Trust Company is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered under to the provisions of Section 17A of the Exchange Act. The Depository Trust Company was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and other organizations. Indirect access to the Depository Trust Company system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Although the Depository Trust Company has agreed to the foregoing procedures in order to facilitate transfers of interests in the global note among participants of the Depository Trust Company, it is under no obligation to perform those procedures, and those procedures may be discontinued at any time. Neither our Company's nor the trustee will have any responsibility of the performance by the Depository Trust Company or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. CERTIFICATED SECURITIES. If the Depository Trust Company is at any time unwilling or unable to continue as a depository for the global note and a successor depository is not appointed by us within 90 days, certificated notes will be issued in exchange for the global note. DESCRIPTION OF MATERIAL INDEBTEDNESS In connection with our September recapitalization, we entered into new credit facilities of $300 million with a syndicate of banks and financial services companies. In addition to this summary, you can refer to the copy of the credit agreement, which is filed as an exhibit to this registration statement, of which this prospectus is a part. The new credit facilities consist of a $120 million revolving credit line ("revolver"), a $30 million term loan ("term loan A"), a $80 million term loan ("term loan B"), a $53 million term loan ("term loan C") and a $15 million term loan ("IP loan"). All loans are secured by a first priority security interest in all of the existing and subsequently acquired assets of our company and our domestic and Canadian subsidiaries, subject to specified exceptions, and a pledge of 65% of the stock of our first-tier foreign subsidiaries. The IP loan contains special provisions granting it priority over the other loans on the proceeds of a liquidation of our patents, trademarks and other intellectual property. All loans are cross-collateralized and cross-defaulted. REVOLVER The revolver consists of a $120 million revolving credit line, which includes a letter of credit sub-facility of up to $10 million and includes a swing line sub-facility of up to $10 million. The term of the revolver expires on August 31, 2004. The terms and conditions include a clean down period to reduce the outstanding borrowings on the revolver to $25 million or less for a period of 60 consecutive days or more, during the period from May 1st through August 31st. In addition, borrowing availability is limited to defined percentages of qualified assets as specified in the credit agreement. A letter of credit fee of 2.00% per annum of the maximum amount available to be drawn under outstanding letters of credit and an unused facility fee of .50% per annum of the average unused daily balance of the revolver is due monthly. In addition, a fee of .25% per annum of the average unused 99 daily balance for the preceding calendar quarter is due quarterly if such average unused daily balance exceeded $60 million. TERM LOAN A The $30 million term loan A has a 60 month term and amortizes quarterly at an annual rate of approximately $2.7 million in year one, approximately $5.5 million in each of years two and three, and approximately $8.2 million in each of years four and five. The term loan A expires on August 31, 2004. TERM LOAN B The $80 million term loan B has a 63 month term and amortizes quarterly at an annual rate of $1.1 million in each of years one through five and $74.5 million at maturity. The term loan B expires on November 29, 2004. TERM LOAN C The $55 million term loan C has a 66 month term and amortizes quarterly at an annual rate of $0.4 million in each of years one through five and $52.9 million at maturity. The term loan C expires on March 1, 2005. IP LOAN The $15 million IP loan has a 60 month term and amortizes quarterly at an annual rate of $3.0 million in each of years one through five. The IP loan expires on August 31, 2004. At our option, all loans will bear interest at either (a) a floating rate equal to the "index rate" plus an applicable margin of between 1.5 and 5.5% or (b) a fixed rate for periods of one, two, three or six months equal to an interest rate based on the LIBOR rate plus an applicable margin of between 3 and 7%. The index rate is a floating rate equal to the higher of (i) the rate quoted by The Wall Street Journal as the "base rate on corporate loans at large U.S. money center commercial banks" and (ii) the federal funds rate plus 0.5%. In addition, the term loan C accrues pay-in-kind interest at a rate of 5% per annum capitalized quarterly. If the revolver is terminated, term loans A, B, C and the IP loan will immediately be due and payable in full. In addition, if the revolver is terminated or if any or all of the term loans are prepaid (with the exception of term loan C which cannot be prepaid), prepayment premiums of up to 2% will apply. Proceeds of the credit facility were used to refinance our existing senior credit facilities and 13% notes and to fund transaction fees and expenses, and will be used to provide for general working capital and to fund necessary future capital expenditures. The credit agreement contains a number of restrictive covenants that, among other things, limit or restrict our ability and our subsidiaries' ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of the Indenture, engage in mergers or consolidations, enter into operating leases or engage in transactions with affiliates. In addition, we are expected to comply with various financial ratios and tests, including a maximum capital expenditures test, minimum debt service coverage ratio, minimum EBITDA, maximum senior leverage ratio and minimum revenue. The credit agreement also contains customary events of default including nonpayment of principal, interest or fees, failure to meet covenants, inaccuracy of representations and warranties in any material respect, bankruptcy, cross default to other significant indebtedness, loss of lien perfection, material judgments and change of ownership or control. 100 MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES The following is a summary of United States federal income tax consequences associated with (1) the receipt of exchange notes pursuant to the exchange offer and (2) the ownership and disposition of the exchange notes. Except where noted, this summary assumes that you will hold your exchange notes as capital assets. This summary does not deal with special situations, such as those of dealers in securities or currencies, traders in securities that elect mark to market treatment, financial institutions, life insurance companies or tax-exempt organizations. It also does not deal with U.S. holders whose "functional currency" is not the U.S. dollar or who hold the notes as a hedge or part of a straddle or conversion transaction. Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), administrative rulings and regulations, and judicial decisions as of the date of this filing. At any time and without prior notice, these authorities may be repealed, revoked or modified so as to result in federal income tax consequences different from those discussed below. IF YOU ARE CONSIDERING THE TENDER OF AN OLD NOTE FOR AN EXCHANGE NOTE, OR THE PURCHASE, OWNERSHIP OR DISPOSITION OF EXCHANGE NOTES, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES AND CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. THE EXCHANGE OFFER If you exchange an old note for an exchange note under the exchange offer, this exchange should not constitute a taxable event to you. Therefore: - you should realize no gain or loss upon the receipt of an exchange note in exchange for an old note, although you will have ordinary income to the extent you receive a payment from us as a penalty for the late filing of this document; - your holding period in the exchange note should include your holding period in the old note; and - your adjusted tax basis of the exchange note should be the same as your adjusted tax basis of your old note immediately before the exchange. UNITED STATES HOLDERS This section will apply to you if you are a U.S. holder. A U.S. holder is, generally, a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or an estate the income of which is subject to United States federal income taxation regardless of its source. A trust is a U.S. holder if a United States court can exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. A U.S. holder is also any other person whose worldwide income or gain is otherwise subject to United States federal income taxation on a net income basis. INTEREST QUALIFIED STATED INTEREST. The tax treatment of the semiannual interest payments made on the exchange notes depends on whether such payments are "qualified stated interest." The payments of interest on each January 15 and July 15 will constitute qualified stated interest. If you are a cash method taxpayer (which includes most individual holders), you must report qualified stated interest in your income when you receive it. If you are an accrual method taxpayer, you must report qualified stated interest in your income as it accrues. 101 ORIGINAL ISSUE DISCOUNT. Generally, the exchange notes will be considered to have been issued with OID if the old notes for which the exchange notes are exchanged were issued with OID. The old notes will be considered to have been issued with OID if either the 13% notes or a substantial amount of the old notes were "traded on an established market", within the meaning of the Code and applicable Treasury regulations, at any time during the sixty day period that ended thirty days after the 13% notes were exchanged for the old notes, and the fair market value of the old notes or of the 13% notes, as the case may be, were determined to be below the face amount of such notes. The applicable Treasury regulations are complex and highly detailed in defining "traded on an established market." For example, the fact that old notes or 13% notes were purchased and sold during the relevant period would not, by itself, constitute trading on an established market. Rather, the notes must be listed on an exchange, appear on a "quotation medium," or satisfy other requirements. It is our belief, and we intend to take the position that, neither the 13% notes nor a substantial amount of the old notes were "traded on an established market" within the meaning of the relevant Code provisions and Treasury regulations during the relevant time period. We, and our agents, have undertaken a limited amount of investigation regarding whether the notes were so traded and it is possible that the IRS may disagree with our conclusion. If the IRS were to take a contrary position and prevail, special OID rules would apply to holders of exchange notes or old notes. DETERMINING AMOUNT OF OID. The amount of OID, if any, on an exchange note is its "stated redemption price at maturity" minus its "issue price." The stated redemption price at maturity of an exchange note is equal to its face amount. The "issue price" of the exchange notes will be the same as the issue price of the old notes. The issue price of the old notes depends on whether the 13% notes or a substantial amount of the old notes were "traded on an established market" at any time during the sixty day period ending thirty days after the issue date. If a substantial amount of the old notes were so traded on an established market, the issue price of an old note will be the fair market value of such note as of the issue date. If a substantial amount of the old notes were not so traded, but the 13% notes were "traded on a established market" the issue price of an old note would be the fair market value as of the issue date of the 13% note for which it was exchanged. If neither the 13% notes nor a substantial amount of the old notes were so traded, which we believe is the case, the issue price for each old note is its face amount. If the issue price of an old note is its face amount, it was not issued with OID. ACCRUAL OF OID. OID on an exchange note must be included by its holder as ordinary income over the life of the note. Thus, you must include OID (if there is any) in income as the OID accrues, even if you are a cash method taxpayer. Thus, you are required to report OID income, and in some cases pay tax on that income, before you receive the cash that corresponds to that income. OID accrues on a note on a "constant yield" method. This method takes into account the compounding of interest. The accruals of OID on a note will generally be less in the early years and more in the later years. The amount of OID that you must accrue will be reduced if you paid an "acquisition premium" for an exchange note or for an old note that you exchanged for an exchange note. You will have paid an acquisition premium if you purchased an old note or an exchange note in a transaction other than our exchange of old notes for 13% notes or this exchange offer, and the amount you paid for such note exceeded the adjusted issue price of such note at the time you bought it. If you have acquisition premium on your exchange note, you should consult your tax advisor. Your tax basis in an exchange note received pursuant to this exchange offer is your adjusted issue price in the old note that you exchanged. It increases by any OID (but not qualified stated interest) that you report as income. It decreases by any principal payments or payments of OID you receive on the note. 102 AHYDO RULES. If the old notes were issued with significant OID, they and the exchange notes for which they are exchanged would be "applicable high yield discount obligations" ("AHYDOs"), and thus would be subject to special rules. Under these AHYDO rules, a portion of the amount of OID that you would have to accrue may, if you are a corporation, be characterized as a dividend for purposes of securing a dividend received deduction. If you are a corporation, you should consult your tax advisor on this point. The AHYDO rules would also defer our ability to take a deduction for a portion of the OID that accrues on the exchange notes, and likely deny our ability to take a deduction for another portion of the OID. OID AND CANCELLATION OF INDEBTEDNESS INCOME. In the event the old notes were determined to have been issued with OID, we could be treated as having recognized additional cancellation of indebtedness income as of the date that the 13% notes were exchanged for the old notes. As noted above under the discussion of original issue discount, we do not believe that the old notes were issued with OID. Additionally, we believe that if additional cancellation of indebtedness income were realized, substantially all of any such additional income would be offset by available net operating loss carryforwards unless, as discussed in "Risk Factors", such net operating loss carryforwards were reduced as a result of the IRS, in connection with its audit of us, successfully disallowing deductions previously claimed by us. If the old notes were determined to have been issued with OID, all or a portion of the cancellation of indebtedness income that we recognized would be (prior to being offset by any available net operating loss carryforwards) excluded from our income to the extent that we were, as of immediately prior to the issuance of the old notes for the 13% notes, insolvent. If this so-called "insolvency exception" were to apply to reduce the amount of cancellation of indebtedness income required to be reported by us, we would be required, under applicable tax rules, to reduce, as of the beginning of our next taxable year and to the extent of such excluded cancellation of indebtedness, our remaining net operating loss carryforwards. If the amount of excluded cancellation of indebtedness income were greater than the amount of our remaining net operating loss carryforwards, as of the beginning of our next taxable year, we would have to reduce our tax basis in our assets by the remaining amount of such excluded income, but not below the aggregate amount of our liabilities, as determined immediately after the restructuring. This could materially adversely affect our financial condition because, if we subsequently sold assets, we would recognize more taxable gain than we would have absent this required reduction in tax basis. MARKET DISCOUNT Generally, you may be subject to the "market discount" rules if either (1) you exchanged a 13% note for an old note and the 13% note that you exchanged had market discount, or (2) you acquired an old note other than in exchange for a 13% note and the amount you paid for the old note was less than its "revised issue price." The revised issue price is the sum of the note's issue price and all OID includible in the income of holders prior to your acquisition of the note. Under a special rule, if the amount of "market discount" is less than a DE MINIMIS amount, the market discount rules will not apply. If you are subject to the market discount rules with respect to an exchange note, gain that you realize upon the disposition of the note will be characterized as ordinary income to the extent of the market discount that has not previously been included in income and that has accrued at the time of disposition. Also, if you incur or continue indebtedness in order to purchase or carry the note, you may be required to defer the deduction of the interest expense payable on such indebtedness. If you are subject to the market discount rules, you should consult your tax advisor. 103 SALE AND RETIREMENT OF NOTES Upon the sale or retirement of an exchange note, you will recognize gain or loss equal to the difference between the amount realized upon the sale or retirement and your adjusted tax basis in the note. Except with respect to market discount accrued and unpaid interest, such gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if you held such note for more than one year. The deductibility of capital losses is subject to limitations. NON-UNITED STATES HOLDERS This section applies to you if you are a non-U.S. holder. A non-U.S. holder is any holder of an exchange note who is a nonresident alien individual or a foreign corporation, foreign partnership or an estate, trust or any other person that is not a U.S. Holder as defined in the preceding section. Subject to the discussion of backup withholding below: (1) payments of principal, premium, if any, and interest by us or any of our paying agents to you on an exchange note will not be subject to United States federal withholding tax if you are the beneficial owner of the note and, in the case of interest, (a) you do not actually or constructively own 10% or more of the total combined voting power of all of our classes of stock entitled to vote, (b) you are not a controlled foreign corporation that is related to us through stock ownership, (c) you are not a bank that holds the note pursuant to a loan agreement entered into in the ordinary course of your trade or business, and (d) either: (A) you certify to us or our agent, under penalties of perjury, that you are not a U.S. holder and provide your name and address; or (B) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business and holds the exchange note certifies to us or our agent under penalties of perjury that this statement has been received from you by it or by a financial institution between it and you and furnishes us or our agent with a copy thereof; (2) you will not be subject to United States federal withholding tax on any gain realized on the sale or exchange of an exchange note; and (3) an exchange note held by an individual who at death is not a citizen or resident of the United States will not be includible in the individual's gross estate for purposes of the United States federal estate tax as a result of the individual's death if (a) the individual did not actually or constructively own 10% or more of the total combined voting power of all classes of our stock entitled to vote, and (b) the income on the note would not have been effectively connected with a United States trade or business of the individual at the individual's death. New regulations that are generally effective with respect to payments made after December 31, 2000, will provide alternative methods for satisfying the certification requirement described in clause (1)(d) above. We urge you to consult their tax advisor regarding these regulations. 104 BACKUP WITHHOLDING AND INFORMATION REPORTING UNITED STATES HOLDERS You must comply with information reporting rules unless an exemption applies. The information reporting rules require you to provide us (or, if you hold your notes through a securities intermediary such as a broker, such intermediary) with your taxpayer identification number. We (or the intermediary) will use your taxpayer identification number in reporting information to the IRS. You must also comply with other IRS information reporting requirements. If you fail to comply with the IRS's information reporting requirements, the "backup withholding" rules require us (or the intermediary) to withhold 31% of all amounts payable to you on the notes (including principal payments). Any amounts so withheld may be used by you as a credit against your U.S. federal income tax liability. All individual U.S. holders are subject to the information reporting requirements and backup withholding rules. Some U.S. holders, including all corporations, tax-exempt organizations, and individual retirement accounts, are exempt. NON-UNITED STATES HOLDERS Principal and interest payments received by non-U.S. holders will be automatically exempt from the usual information reporting and backup withholding rules if you provide the tax certifications needed to avoid withholding tax on interest, as described above. This exemption, however, does not apply if the recipient of the applicable certification knows the certification is false. Also, interest payments made to you will be reported to the IRS. Sale proceeds that you receive on the sale of a note through a broker may be subject to information reporting or backup withholding or both if you are not eligible for an exemption. In particular, information reporting and backup withholding may apply if you use the U.S. office of a broker, and information reporting (but not backup withholding) may apply if you use the foreign office of a broker that has connections to the U.S. You should consult your tax advisor concerning information reporting and backup withholding on a sale. PLAN OF DISTRIBUTION Each holder desiring to participate in the exchange offer will be required to represent, among other things, that (1) it is not an "affiliate" (as defined in Rule 405 of the Securities Act) of us, (2) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the exchange notes, and (3) it is acquiring the exchange notes in the ordinary course of its business. A holder unable to make the above representations is referred to as a restricted holder. A restricted holder will not be able to participate in the exchange offer, and may only sell its old notes pursuant to a registration statement containing the selling securityholder information required by Item 507 of Regulation S-K of the Securities Act, or pursuant to an exemption from the registration requirement of the Securities Act. Each participating broker-dealer is required to acknowledge in the letter of transmittal that it acquired the old notes as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with the resale of such exchange notes. Based upon interpretations by the staff of the Securities and Exchange Commission, we believe that exchange notes issued pursuant to the exchange offer to participating broker-dealers may be offered for resale, resold, and 105 otherwise transferred by a participating broker-dealer upon compliance with the prospectus delivery requirements, but without compliance with the registration requirements, of the Securities Act. We have agreed that for a period of 30 days following consummation of the exchange offer, we will make this prospectus available to participating broker-dealers for use in connection with any such resale. During such period of time, delivery of this prospectus, as it may be amended or supplemented, will satisfy the prospectus delivery requirements of a participating broker-dealer engaged in market making or other trading activities. Based upon interpretations by the staff of the Securities and Exchange Commission, we believe that exchange notes issued pursuant to the exchange offer may be offered for resale, resold and otherwise transferred by their holder, other than a participating broker-dealer, without compliance with the registration and prospectus delivery requirements of the Securities Act. We will not receive any proceeds from any sale of exchange notes by broker-dealers. Exchange notes received by participating broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such participating broker-dealer and /or the purchasers of any such exchange notes. Any participating broker-dealer that resells exchange notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such exchange notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of exchange notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a participating broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. We have agreed to pay all expenses incidental to the exchange offer other than commissions and concessions of any brokers or dealers and will indemnify holders of the notes, including any broker-dealers, against liabilities, including liabilities under the Securities Act, as set forth in the registration rights agreement. LEGAL MATTERS The validity of the exchange notes will be passed upon for ICON by Willkie Farr & Gallagher, New York, New York. EXPERTS The consolidated financial statements of ICON as of May 31, 1999 and 1998 and for each of the three years in the period ended May 31, 1999, included in this prospectus, have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-4 to register this exchange offer. This prospectus, which forms part of the registration statement, does not contain all of the information included in that registration statement. For further information about ICON and the notes offered in this prospectus, you should refer to the registration statement and its exhibits. 106 We are not currently subject to the periodic reporting and other informational requirements of the Securities and Exchange Act of 1934. Upon the effectiveness of the registration statement, we will become subject to the periodic reporting and other information requirements of the Exchange Act, and in accordance therewith, will be required to file periodic reports and other information with the SEC. You may read and copy any document we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. We file our SEC materials electronically with the SEC, so you can also review our filings by accessing the web site maintained by the SEC at http://www.sec.gov. This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our principal executive offices are located at 1500 South, 1000 West, Logan, Utah 84321. Our telephone number is (435) 750-5000. 107 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations and Comprehensive Loss...................................................... F-4 Consolidated Statements of Stockholder's Equity (Deficit)... F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7 Financial Statement Schedule II............................. F-38
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of ICON Health & Fitness, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of stockholder's equity (deficit) and of cash flows present fairly, in all material respects, the financial position of ICON Health & Fitness, Inc. and its subsidiaries at May 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consoldiated financial statements. 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 of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described in Notes 2, 16, 17 and 18 to the consolidated financial statements, on September 27, 1999, the Company restructured its capital structure and entered into a new $300 million credit facility. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Salt Lake City, Utah September 27, 1999 F-2 ICON HEALTH & FITNESS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
NOVEMBER 27, MAY 31, ------------ --------------------- 1999 1999 1998 ------------ --------- --------- (UNAUDITED) ASSETS Current assets: Cash.................................................... $ 5,749 $ 4,275 $ 3,892 Accounts receivable, net................................ 212,680 116,468 124,301 Inventories, net........................................ 139,748 106,426 121,466 Deferred income taxes................................... 1,299 821 11,177 Other assets............................................ 9,653 6,311 6,202 Income taxes receivable................................. -- 118 781 --------- --------- --------- Total current assets.................................. 369,129 234,419 267,819 Property and equipment, net............................... 44,687 45,277 48,819 Receivable from parent.................................... -- -- 2,362 Trademarks, net........................................... 24,773 22,859 17,244 Deferred income taxes..................................... 4,512 5,763 4,927 Other assets.............................................. 20,847 23,592 21,958 --------- --------- --------- $ 463,948 $ 331,910 $ 363,129 ========= ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt....................... $ 7,804 $ 7,227 $ 6,051 Accounts payable........................................ 130,270 95,665 83,965 Interest payable........................................ 4,221 5,673 6,596 Accrued expenses........................................ 15,035 16,893 18,090 Income taxes payable.................................... 1,443 939 249 --------- --------- --------- Total current liabilities............................. 158,773 126,397 114,951 --------- --------- --------- Long-term debt............................................ 324,388 253,352 268,495 --------- --------- --------- Commitments and contingencies (Notes 13 and 18)........... -- -- -- Stockholder's equity (deficit): Common stock and additional paid-in capital............. 204,267 163,819 166,186 Receivables from officers and Parent.................... (2,200) (656) (656) Accumulated other comprehensive loss.................... (1,178) (1,017) (547) Accumulated deficit..................................... (220,102) (209,985) (185,300) --------- --------- --------- Total stockholder's deficit........................... (19,213) (47,839) (20,317) --------- --------- --------- $ 463,948 $ 331,910 $ 363,129 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-3 ICON HEALTH & FITNESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS)
SIX MONTHS ENDED --------------------------- YEAR ENDED MAY 31, NOVEMBER 27, NOVEMBER 28, ------------------------------ 1999 1998 1999 1998 1997 ------------ ------------ -------- -------- -------- (UNAUDITED) (UNAUDITED) Net sales............................. $334,308 $331,495 $710,249 $749,313 $836,162 Cost of sales......................... 243,735 238,969 514,018 535,646 583,747 Cost of sales--amortization of step-up in HealtherRider and ICON of Canada inventory........................... -- -- -- 330 14,009 -------- -------- -------- -------- -------- Gross profit.......................... 90,573 92,526 196,231 213,337 238,406 -------- -------- -------- -------- -------- Operating expenses: Selling............................. 43,068 46,204 107,621 120,752 132,392 Research and development............ 3,812 3,569 7,715 7,777 7,620 General and administrative.......... 30,797 26,366 53,414 60,912 56,689 Weider settlement................... -- -- -- -- 16,583 HealthRider integration costs....... -- -- -- -- 4,880 -------- -------- -------- -------- -------- Total operating expenses.............. 77,677 76,139 168,750 189,441 218,164 -------- -------- -------- -------- -------- Income from operations................ 12,896 16,387 27,481 23,896 20,242 Interest expense...................... (16,970) (15,981) (33,056) (35,058) (33,627) Amortization of deferred financing fees................................ (2,065) (2,972) (6,992) (4,806) (3,058) Other income.......................... -- -- -- 1,223 700 Other expense......................... -- -- (34) (686) (193) -------- -------- -------- -------- -------- Loss before income taxes and extraordinary item.................. (6,139) (2,566) (12,601) (15,431) (15,936) Provision for (benefit from) income taxes............................... 2,804 (753) 12,084 (5,897) (3,988) -------- -------- -------- -------- -------- Loss before extraordinary item........ (8,943) (1,813) (24,685) (9,534) (11,948) Extraordinary loss on extinguishment of debt net of income tax benefit of $750................................ (1,174) -- -- -- -- -------- -------- -------- -------- -------- Net loss............................ (10,117) (1,813) (24,685) (9,534) (11,948) Other comprehensive loss comprised of foreign currency translation adjustment.......................... (161) (544) (470) (41) (892) -------- -------- -------- -------- -------- Comprehensive loss.................. $(10,278) $ (2,357) $(25,155) $ (9,575) $(12,840) ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 ICON HEALTH & FITNESS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED COMMON STOCK ADDITIONAL RECEIVABLE FROM OTHER TOTAL ------------------- PAID-IN OFFICERS AND COMPREHENSIVE ACCUMULATED STOCKHOLDER'S SHARES VALUE CAPITAL PARENT INCOME (LOSS) DEFICIT DEFICIT -------- -------- ---------- --------------- ------------- ----------- ------------- Balance at May 31, 1996........ 1,000 $ -- $166,176 $ (758) $ 386 $(163,818) $ 1,986 Proceeds from exercise of common stock options and contribution of capital by IHF Holdings, Inc............ -- -- 8 -- -- -- 8 Loan balances forgiven......... -- -- -- 102 -- -- 102 Other comprehensive loss....... -- -- -- -- (892) -- (892) Net loss....................... -- -- -- -- -- (11,948) (11,948) ------ ------ -------- ------- ------- --------- -------- Balance at May 31, 1997........ 1,000 -- 166,184 (656) (506) (175,766) (10,744) Proceeds from exercise of common stock options and contribution of capital by IHF Holdings, Inc............ -- -- 2 -- -- -- 2 Other comprehensive loss....... -- -- -- -- (41) -- (41) Net loss....................... -- -- -- -- -- (9,534) (9,534) ------ ------ -------- ------- ------- --------- -------- Balance at May 31, 1998........ 1,000 -- 166,186 (656) (547) (185,300) (20,317) Other comprehensive loss....... -- -- -- -- (470) -- (470) Cancellation of receivable from parent....................... -- -- (2,367) -- -- -- (2,367) Net loss....................... -- -- -- -- -- (24,685) (24,685) ------ ------ -------- ------- ------- --------- -------- Balance at May 31, 1999........ 1,000 -- 163,819 (656) (1,017) (209,985) (47,839) Cash contribution of capital from Parent (net of financing fees of $4,263) (unaudited).................. 35,737 35,737 Warrants of HF Holdings granted to management (unaudited).... 3,175 3,175 Loan balances forgiven (unaudited).................. (656) 656 -- Warrants of HF Holdings granted to holders of 13% Notes (unaudited).................. 2,192 2,192 Receivable from Parent (unaudited).................. (2,200) (2,200) Other comprehensive loss (unaudited).................. (161) (161) Net loss (unaudited)........... (10,117) (10,117) ------ ------ -------- ------- ------- --------- -------- Balance November 27, 1999 (unaudited).................. 1,000 $ -- $204,267 $(2,200) $(1,178) $(220,102) $(19,213) ====== ====== ======== ======= ======= ========= ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 ICON HEALTH & FITNESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED --------------------------- MAY 31, NOVEMBER 27, NOVEMBER 28, ------------------------------- 1999 1998 1999 1998 1997 ------------ ------------ --------- -------- -------- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES: Net loss........................................... $(10,117) $ (1,813) $ (24,685) $ (9,534) $(11,948) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision (benefit) for deferred taxes........... 1,523 (1,986) 9,521 (8,599) 1,635 Depreciation and amortization.................... 8,166 8,791 17,422 16,658 13,351 Amortization of deferred financing fees and debt discount....................................... 2,173 3,112 7,272 5,045 3,264 Non-cash employee compensation expense........... -- -- -- -- 296 Non-cash equity grant to management.............. 3,175 -- -- -- -- Extraordinary loss in extinguishment of debt..... 1,174 -- -- -- -- Amortization of inventory step-up................ -- -- -- 330 14,009 Loss on disposal of property and equipment....... -- -- -- 333 67 Gain on barter transaction....................... -- -- -- -- (2,095) Changes in operating assets and liabilities: Accounts receivable............................ (96,212) (79,972) 7,833 68,524 (46,862) Inventories.................................... (33,322) (28,996) 15,040 42 (1,465) Income taxes receivable/payable................ 622 -- 1,353 5,732 510 Other assets................................... 779 (4,798) (5,317) (606) (6,466) Accounts payable and accrued expenses.......... 31,295 43,206 10,503 (29,932) (2,401) Interest payable............................... -- -- (923) (376) 405 -------- -------- --------- -------- -------- Net cash provided by (used in) operating activities....................................... (90,744) (62,456) 38,019 47,617 (37,700) -------- -------- --------- -------- -------- INVESTING ACTIVITIES: Proceeds from sale of building..................... -- -- -- 18,250 -- Purchase of property and equipment................. (6,805) (6,812) (11,593) (11,825) (16,039) Purchase of intangibles and trademarks............. (372) -- (8,474) -- -- Purchase of HealthRider............................ -- -- -- -- (25,800) Purchase of Weider Sports and CanCo................ -- -- -- -- (11,058) Receivable from Parent............................. (2,200) -- -- -- -- -------- -------- --------- -------- -------- Net cash provided by (used in) investing activities....................................... (9,377) (6,812) (20,067) 6,425 (52,897) -------- -------- --------- -------- -------- FINANCING ACTIVITIES: Borrowings (payments) on revolving credit facility, net.............................................. (40,623) -- 223,121 (36,302) 89,484 Payments on other long-term debt................... (384) -- (237,369) (16,418) (6,341) Proceeds from issuance of common stock............. -- -- -- 2 8 Receivable from parent............................. -- -- (5) (55) (2,307) Proceeds from new term notes....................... 180,000 141,336 -- -- -- Payments on old term notes......................... (19,464) (70,668) -- -- -- Contriubted capital from parent.................... 40,000 -- -- -- -- Payments for financing fees--equity................ (4,263) -- -- -- -- Payments to 13% noteholders........................ (39,408) -- -- -- -- Payments for financing fees--debt.................. (14,102) -- (2,846) (2,896) (3,023) -------- -------- --------- -------- -------- Net cash provided by (used in) financing activities....................................... 101,756 70,668 (17,099) (55,669) 77,821 -------- -------- --------- -------- -------- Effect of exchange rate changes on cash.............. (161) (544) (470) (41) (977) -------- -------- --------- -------- -------- Net increase (decrease) in cash...................... 1,474 856 383 (1,668) (13,753) Cash, beginning of period............................ 4,275 3,892 3,892 5,560 19,313 -------- -------- --------- -------- -------- Cash, end of period.................................. $ 5,749 $ 4,748 $ 4,275 $ 3,892 $ 5,560 ======== ======== ========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-6 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS BASIS OF PRESENTATION--The consolidated financial statements include the accounts of ICON Health & Fitness Inc. and its wholly-owned subsidiaries ("Icon Health" or "the Company"). Icon Health was formerly known as Weslo, Inc. and its wholly-owned subsidiary, ProForm Fitness Products, Inc. and its wholly-owned subsidiaries, and American Physical Therapy, Inc. At May 31, 1999, Icon Health was a wholly-owned subsidiary of IHF Holdings, Inc. ("IHF Holdings"), a wholly-owned subsidiary of ICON Fitness Corporation ("ICON Fitness"), a wholly-owned subsidiary of IHF Capital, Inc. ("IHF Capital"). DESCRIPTION OF BUSINESS--The Company is principally involved in the development, manufacturing and distribution of home fitness equipment. The Company's revenues are derived from the sale of various aerobic and anaerobic fitness product lines in domestic and foreign markets. Because product life cycles can be short in the fitness industry, the Company emphasizes new product innovation and product repositioning. The Company primarily sells its products to retailers and, to a limited extent, to end-users through direct response advertising efforts and retail outlets. UNAUDITED FINANCIAL INFORMATION--In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position of the Company as of November 27, 1999 and the results of its operations and cash flows for the six-month periods ended November 27, 1999 and November 28, 1998. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the SEC's rules and regulations. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. 2. RECENT DEVELOPMENTS The Company incurred a net loss of $24,685,000 for the year ended May 31, 1999, and as of May 31, 1999 had an accumulated deficit of $209,985,000. The Company was unable to make the interest payment on the 13% Senior Subordinated Notes due on July 15, 1999 and was in violation of certain financial covenants of its Credit Agreement. To provide ongoing funding for the Company's operations and debt repayment requirements, on September 27, 1999, the Company consummated a troubled debt restructuring of its capital structure (the "Restructuring") and to refinance its existing bank credit facility (Notes 17 and 18). The Company believes that the new capital structure, the new credit facility and cash provided from operations will be sufficient to fund its operations and debt repayment requirements during the next year. There can be no assurance that this plan will result in a successful reorganization of the Company. 3. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--All significant intercompany accounts and transactions have been eliminated in the consolidation of the Company. CASH--At May 31, 1999, substantially all of the Company's cash is held by two banks located in Utah. The Company does not believe that as a result of this concentration it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. F-7 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES--Inventories consist primarily of raw materials (principally parts and supplies) and finished goods, and are valued at the lower of cost or market. Cost is determined using standard costs which approximate the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT--Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Expenditures for renewals and improvements are capitalized, and maintenance and repairs are charged to expense as incurred. TRADEMARKS--During the fiscal year ended May 31, 1999, the Company acquired certain assets of NordicTrack, the majority of which was a trademark recorded at $6,664,000. During the fiscal year ended May 31, 1997 the Company acquired HealthRider (Note 4), Weider Sports and CanCo (Note 14). In connection with these acquisitions, the Company recorded trademarks of $12,024,000 and $6,915,000 respectively. These assets are being amortized on a straight-line basis over 20 years. At May 31, 1999 and 1998 trademarks are net of accumulated amortization of $2,641,950 and $1,695,000 respectively. LONG-LIVED ASSETS--Long-lived assets are periodically reviewed for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of". SFAS 121 requires the assessment of whether there has been an impairment whenever events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flow from that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset, which is generally based on discounted cash flows. As a result of its review, the Company does not believe that any impairment currently exists related to its long-lived assets. DEFERRED FINANCING COSTS--The Company deferred certain debt issuance costs relating to the establishment of the Credit Agreement (Note 8) and the issuance of the 13% Senior Subordinated Notes (the "Notes"). These costs are capitalized in other long-term assets and are being amortized using the straight-line method for costs associated with the Credit Agreement and the effective interest method for costs associated with the Notes. These deferred costs will be written off as part the Restructuring transaction (Note 17). In addition, the Company deferred certain costs relating to the Company's Restructuring transaction (Note 17). Amortization will commence in fiscal year 2000. ADVERTISING COSTS--The Company expenses the costs of advertising as incurred, except for direct response advertising, which is capitalized and amortized over its expected period of future benefit, generally twelve months. Direct response advertising costs consist primarily of costs to produce infomercials for the Company's products. At May 31, 1999 and 1998, $0 and $273,000, respectively, were included in other long-term assets. For the fiscal years ended May 31, 1999, 1998 and 1997, total advertising expense was approximately $11,249,000, $24,637,000, and $31,810,000, respectively. REVENUE RECOGNITION--The Company recognizes revenue upon the shipment of product to the customer. Allowances are recognized for estimated returns, discounts, advertising programs and warranty costs associated with these sales. Finance charges under the Company's payment plans are recognized as other income. F-8 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME--At the beginning of fiscal year 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components. SFAS 130 requires that all items that are required to be recognized under accounting standards as comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In accordance with the provisions of SFAS 130, the Company has presented the components of other comprehensive income (loss) in its consolidated statements of operations and comprehensive loss. The financial statements for all prior periods have been restated to conform to requirements of SFAS 130. CONCENTRATION OF CREDIT RISK--Financial instruments which potentially expose the Company to concentration of credit risk include trade accounts receivable. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed and reserves are maintained; however, collateral is not required. A significant portion of the Company's sales are made to Sears Roebuck ("Sears"). Sears accounted for approximately 37%, 33% and 29% of total sales for the fiscal years ended May 31, 1999, 1998 and 1997, respectively. Accounts receivable from Sears accounted for approximately 30% and 32% of gross accounts receivable at May 31, 1999 and 1998, respectively. RESEARCH AND DEVELOPMENT COSTS--Research and product development costs are expensed as incurred. Research and development activities include the design of new products and product enhancements, and are performed by both internal and external sources. INCOME TAXES--The Company accounts for income taxes utilizing the asset and liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes". SFAS 109 requires the Company to record in its consolidated balance sheet deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in different periods for financial statements versus tax returns. If appropriate, deferred tax assets are reduced by a valuation allowance which reflects expectations of the extent to which such assets will be realized. Currently, the Company is included as part of the consolidated tax return filed by IHF Capital. The income tax provision for the Company has been prepared on a separate company basis. FOREIGN OPERATIONS--Assets and liabilities of the Company's European and Canadian subsidiaries are translated into U.S. dollars at the applicable rates of exchange at each period end. The Company's foreign transactions are primarily denominated in Canadian dollars, British pounds, German marks, French francs and Italian lira, and transactions with foreign entities that result in income and expense for the Company are translated at the average rate of exchange during the period. Translation gains and losses are reflected as a separate component of other comprehensive income (loss). Transaction gains and losses are recorded in the consolidated statements of operations and comprehensive loss and were not material in the fiscal years ended May 31, 1999, 1998 and 1997. In the fiscal years ended May 31, 1999, 1998 and 1997, the Company's foreign operations represented less than 10% of the Company's net sales and effects of exchange rate changes have not had a material impact on the Company's earnings. FOREIGN CURRENCY HEDGES--The Company enters into foreign currency forward exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with its anticipated or committed foreign currency exposures on purchases in Canadian dollars. The effect of this practice is to minimize the impact of foreign exchange rate movements on the Company's operating results. The Company's hedging activities do not subject the Company to significant exchange rate risk because F-9 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) gains and losses on these contracts offset losses and gains on the assets and transactions being hedged. Unrealized gains and losses on these contracts are deferred and accounted for as part of the hedged transactions. Cash flows from these contracts are classified in the consolidated statement of cash flows in the same category as the hedged transactions. As of May 31, 1999 and 1998, the Company had approximately $0 and $32,000,000 Canadian, respectively, of open forward exchange contracts to sell Canadian dollars throughout fiscal years May 31, 2000 and 1999, respectively. The fair value of these forward exchange contracts are based on quoted market prices. At May 31, 1999, the estimated unrealized loss on outstanding forward exchange contracts was $0 and at May 31, 1998 the estimated unrealized loss was $459,000. During the fiscal years ended May 31, 1999 and 1998, the Company recognized losses of $0 and $449,000, respectively, and in the fiscal year ended May 31, 1997 the Company recognized gains of $149,000 upon settlement of foreign currency translations denominated in Canadian dollars. BARTER TRANSACTION--Included in other current and other long-term assets at May 31, 1999 and 1998 are barter credits of $4,484,000 which were recorded in connection with a barter agreement the Company entered into during the fiscal year ended May 31, 1997. The Company recorded the barter credit at the fair value of the inventory exchanged and recorded a gain of $2,095,000 in connection with the transaction. The Company intends to use this asset primarily to purchase advertising through August 31, 2003, the expiration date of the barter credits. FAIR VALUE OF FINANCIAL INSTRUMENTS--The following methods and assumptions were used to estimate the fair value disclosures for financial instruments: Senior Notes--based on quoted market prices and the remaining long-term debt. Other long-term debt--fair value approximates carrying value since such debt is primarily variable rate debt. The carrying amounts and fair values of long-term debt at May 31, 1999 and 1998 were as follows (in thousands):
1999 1998 --------------------- --------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- 13% Senior Subordinated Notes....................... $100,024 $ 70,875 $ 99,743 $108,084 Other long-term debt................................ 160,555 160,555 174,803 174,803
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses for the period presented. Actual results could differ from those estimates. RECLASSIFICATIONS--Certain balances of the prior year have been reclassified to conform to the current year's presentation. These reclassifications had no effect on net income or total assets. F-10 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. HEALTHRIDER ACQUISITION On August 16, 1996, the Company: (i) purchased substantially all the assets of HealthRider, Inc. ("HealthRider"), a distributor of aerobic home fitness equipment, for approximately $16,800,000 and assumed (or refinanced) substantially all of the liabilities of HealthRider (including $700,000 of fees and expenses related to the acquisition); (ii) purchased certain related manufacturing assets of Parkway Manufacturing, Inc., ("Parkway"), including Parkway's contract to manufacture and supply upright rowers to HealthRider, for approximately $10,100,000 (including the payment of $1,000,000 of trade payables owed to Parkway by HealthRider); and (iii) purchased the minority interest of HealthRider's European subsidiary for approximately $1,400,000; (of which $1,300,000 was paid in cash and $100,000 was paid in inventory) (together, the "HealthRider Acquisition"). The HealthRider Acquisition was accounted for under the purchase method of accounting. Accordingly, the purchase price plus direct costs of the acquisition were allocated to the assets acquired and liabilities assumed based on their relative fair values as of the closing date. The results of operations of HealthRider were consolidated with the Company's results from August 16, 1996 to September 3, 1997, when HealthRider was merged into the Company. The unaudited pro forma summary presents the consolidated results of operations assuming that the HealthRider Acquisition had occurred on June 1, 1996. The results of HealthRider for the month ended June 30, 1996 have been utilized in preparing the combined results of the Company and HealthRider for the fiscal year ended May 31, 1997. No adjustments were required to conform the accounting policies of HealthRider to those of the Company. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the transaction been effected on the date indicated above or of results which may occur in the future. In addition, the pro forma summary excludes certain non-recurring charges related to the HealthRider Acquisition, including a $13,200,000 non-recurring, non-cash charge resulting from the fact that the Company's purchase accounting included writing-up the book value of the HealthRider inventory to fair market value less estimated sales costs. For the fiscal year ended May 31, 1997, pro forma unaudited net sales were $852,352,000 and the pro forma unaudited net loss was $18,143,000. 5. ACCOUNTS RECEIVABLE Accounts receivable, net, consist of the following (table in thousands):
MAY 31, ------------------- 1999 1998 -------- -------- Accounts receivable..................................... $124,687 $131,188 Less allowance for doubtful accounts, advertising discounts and credit memos............................ (8,219) (6,887) -------- -------- $116,468 $124,301 ======== ========
F-11 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INVENTORIES Inventories, net, consist of the following (table in thousands):
MAY 31, ------------------- NOVEMBER 27, 1999 1998 1999 -------- -------- ------------ (UNAUDITED) Raw materials, principally parts and supplies................................. $ 42,126 $ 42,609 $ 73,788 Finished goods............................. 64,300 78,857 65,960 -------- -------- -------- $106,426 $121,466 $139,748 ======== ======== ========
Inventories are net of allowances of $4,815,000 and $3,335,000 at May 31, 1999 and 1998, respectively. These allowances are established based on management's estimates of inventory held at fiscal year end that is potentially obsolete or for which its market value is below cost. 7. PROPERTY AND EQUIPMENT Property and equipment, net, consist of the following (table in thousands):
MAY 31, ESTIMATED ------------------- USEFUL LIFE 1999 1998 ----------- -------- -------- (YEARS) Land........................................... -- $ 1,430 $ 1,430 Building and improvements...................... up to 31 16,823 16,675 Equipment...................................... 3-7 69,035 71,293 -------- ------- 87,288 89,398 Less accumulated depreciation.................. (42,011) (40,579) -------- ------- $ 45,277 $48,819 ======== =======
For the fiscal years ended May 31, 1999, 1998 and 1997, the Company recorded depreciation expense of $15,135,000, $13,698,000 and $11,630,000, respectively. 8. OTHER ASSETS Other assets consist of the following (table in thousands):
MAY 31, ------------------- 1999 1998 -------- -------- Deferred financing costs, net............................. $ 9,966 $14,112 Deferred advertising costs................................ -- 273 Barter credits............................................ 2,819 2,000 Long-term receivables, net................................ 8,348 3,198 Other..................................................... 2,459 2,375 ------- ------- $23,592 $21,958 ======= =======
At May 31, 1999 and 1998, capitalized deferred financing costs are net of accumulated amortization of $18,598,000 and $11,606,000, respectively. At May 31, 1999 and 1998, long-term receivables are net of an allowance for doubtful accounts of $7,981,000 and $3,198,000, respectively. F-12 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LONG-TERM DEBT Long-term debt consists of the following (table in thousands):
MAY 31, ------------------- 1999 1998 -------- -------- Revolving Credit Facility............................... $140,107 $148,488 Term Loan A Facility.................................... 3,912 9,225 Term Loan B Facility.................................... 15,552 15,802 13% Senior Subordinated Notes, face amount $101,250, net of unamortized discount of $1,226 at May 31, 1999 and $1,507 at May 31, 1998................................ 100,024 99,743 Other................................................... 984 1,288 -------- -------- 260,579 274,546 Less current portion.................................... (7,227) (6,051) -------- -------- Total long-term debt.................................... $253,352 $268,495 ======== ========
On September 27, 1999, the Company consummated a plan to restructure its outstanding debt and to refinance its existing bank credit facility. The Company entered into a new credit facility and consummated exchange offers for all outstanding 13% Senior Subordinated Notes (Notes 17 and 18). Below is described the Credit Agreement that was in effect at May 31, 1999 and through September 23, 1999. CREDIT AGREEMENT In 1994, the Company entered into a Credit Agreement with a syndicate of banks. Borrowings under the Amended and Restated Credit Agreement consist of the Revolving Credit Facility, the Term Loan A Facility, and the Term Loan B Facility, and are collateralized by a perfected first priority security interest in the assets of the Company. Under the terms of the Credit Agreement, the Company must comply with certain restrictive covenants, which include the requirement that the Company maintain minimum amounts of profitability, solvency and liquidity. In addition, the Credit Agreement restricts the Company from making certain payments, including dividend payments, to its shareholder. At May 31, 1999, the Company was not in compliance with certain loan covenants of its Credit Agreement. However, due to the subsequent refinancing of the entire Credit Agreement (Note 18), outstanding balances of $152,344,000 under the Credit Agreement as of May 31, 1999 have been classified as long-term. REVOLVING CREDIT FACILITY The Credit Agreement provided for borrowings of up to $160,000,000 based upon a percentage of eligible accounts receivable and inventories. As of August 23, 1996, the Credit Agreement was amended to permit total borrowings of up to $310,000,000, with certain changes to the percentage of eligible receivables and inventory, in order to fund the HealthRider Acquisition (Note 4), the settlement of the WHF Litigation (Note 14), the Weider Sports and CanCo Acquisitions (Note 14) and other working capital needs. This Revolving Credit Facility was due to expire on November 14, 1999 and was replaced on September 27, 1999 by New Credit Facilities (Note 18). Advances under the Revolving Credit Facility bear interest, at the Company's option, at either (1) a margin of 1.50% to 2.50% over the rate F-13 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LONG-TERM DEBT (CONTINUED) at which certain Eurodollar deposits are offered in the interbank Eurodollar market (the "LIBOR Rate") or (2) a margin of up to 1.00% over the higher of (a) the highest of the most recently published or announced prime corporate base, reference or similar benchmark rate announced by Bankers Trust Company or (b) the published rate for ninety-day dealer placed commercial paper (the "Index Rate") (8.15% rate as of May 31, 1999 under the LIBOR Rate option). The applicable margin is based on the Company's debt service ratio. The Company is required to pay a fee of between 0.375% to 0.5% per annum on the average unused commitment under the Revolving Credit Facility. For the fiscal years ended May 31, 1999, 1998 and 1997, the Company paid an unused commitment fee of $664,000, $564,000, and $421,000, respectively. TERM LOAN A FACILITY Under the Term Loan A Facility, $17,500,000 was advanced on November 14, 1994. Quarterly payments of $937,500, $1,250,000 and $1,562,500 became due beginning each March 31, 1997, 1998 and 1999, respectively. Quarterly payments continue at $1,562,500 until maturity on November 14, 1999. Advances under the Term Loan A Facility bear interest, at the Company's option, at a rate equal to either (1) a margin of 1.75% to 2.75% over the LIBOR Rate or (2) a margin of 0.25% to 1.25% over the Index Rate (8.42% as of May 31, 1999 under the LIBOR Rate option). TERM LOAN B FACILITY Under the Term Loan B Facility, $17,500,000 was advanced on November 14, 1994. Quarterly payments of $62,500 were due beginning March 31, 1996. Quarterly payments increase to $1,562,500 beginning March 31, 2000 through September 30, 2001, and the balance of $3,651,691 is due at maturity on November 14, 2001. Advances under the Term Loan B Facility bear interest, at the Company's option, at a rate equal to either (1) a margin of 2.25% to 3.25% over the LIBOR Rate or (2) a margin of 0.75% to 1.75% over the Index Rate (8.92% as of May 31, 1999 under the LIBOR Rate option). In addition, the Company is required to use the proceeds of permitted sales of assets to pay down the Term Loan A and Term Loan B Facilities. SENIOR SUBORDINATED NOTES In 1994, the Company issued $101,250,000 face amount (net proceeds of $100.0 million) of 13% Senior Subordinated Notes (the "Senior Subordinated Notes") and warrants to purchase 200,000 shares of Class A and 20,000 shares of Class L Common Stock of IHF Capital. The Senior Subordinated Notes are unsecured and bear interest at 13%, payable January 15 and July 15 through the maturity date of July 15, 2002. The warrants have an exercise price of $0.01 per share and expire on November 14, 1999. As of May 31, 1999, no warrants had been exercised. In conjunction with the sale, $968,000 of the issuance price was ascribed to the warrants and is included in the total discount on the notes. This discount is being amortized using the effective interest method. Upon certain asset sales, the Company may be obligated to purchase the Senior Subordinated Notes with the net cash proceeds of the asset sales at a redemption price of 100% of principal plus accrued and unpaid interest. On or after November 15, 1998, the Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, at redemption prices ranging from 110.00% of F-14 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LONG-TERM DEBT (CONTINUED) principal amount in the year ended November 14, 1999, plus accrued and unpaid interest, to 100% of principal amount subsequent to November 14, 2001, plus accrued and unpaid interest. The Company did not make the interest payment that was due on July 15, 1999. However, in connection with the Company's Restructuring (Note 17), the outstanding accrued interest was settled. FUTURE PAYMENTS As of May 31, 1999, due to the Company's noncompliance with certain debt covenants, all of the Company's debt became currently payable. However, as a result of the Company's Restructuring (Notes 17 and 18) on September 27, 1999, the current debt obligations were settled. The table below reflects the scheduled principal payment term of the new debt (in thousands):
YEAR ENDED MAY 31, - ------------------ 2000........................................................ $ 7,227 2001........................................................ 9,273 2002........................................................ 9,956 2003........................................................ 12,000 2004........................................................ 12,681 Thereafter.................................................. 173,950
10. STOCKHOLDERS' EQUITY The Company has 3,000 shares of $.01 par value common stock authorized, and 1,000 shares issued and outstanding. 11. INCOME TAXES The provision for (benefit from) income taxes consists of the following (in thousands):
MAY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Current: Federal........................................ $ -- $ -- $(6,252) State.......................................... 107 426 (536) Foreign........................................ 2,457 2,276 1,165 ------- ------- ------- Total current................................ 2,564 2,702 (5,623) ------- ------- ------- Deferred: Federal........................................ 8,224 (7,672) 1,512 State.......................................... 1,286 (1,195) 129 Foreign........................................ 10 268 (6) ------- ------- ------- Total deferred............................... 9,520 (8,599) 1,635 ------- ------- ------- $12,084 $(5,897) $(3,988) ======= ======= =======
F-15 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES (CONTINUED) The components of the Company's pre-tax income (loss) are as follows:
MAY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Domestic....................................... $(17,150) $(17,948) $(14,000) Foreign........................................ 4,549 2,517 (1,936) -------- -------- -------- $(12,601) $(15,431) $(15,936) ======== ======== ========
The provision for (benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to income (loss) before taxes as follows:
MAY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Statutory federal income tax rate.......................... (35)% (35)% (35)% State tax benefit.......................................... 8 (2) (3) Foreign losses for which no benefit has been recognized.... 6 6 11 Other...................................................... -- (7) 2 Change in valuation allowance.............................. 117 -- -- --- --- --- Provision for (benefit from) income taxes.................. 96 % (38)% (25)% === === ===
As of May 31, 1999 and 1998, the Company recorded gross deferred tax assets and gross deferred tax liabilities as follows (in thousands):
MAY 31, ------------------- 1999 1998 -------- -------- Gross deferred tax assets................................ $ 30,713 $26,686 Gross deferred tax liabilities........................... (6,499) (6,092) -------- ------- 24,214 20,594 Valuation allowance...................................... (17,630) (4,490) -------- ------- $ 6,584 $16,104 ======== =======
During the fiscal year ended May 31, 1999, the valuation allowance for net deferred tax assets increased by $13,140,000. The Company has provided a valuation allowance for deferred tax assets to the extent the Company believes the realization of the future benefits is not sufficiently assured, primarily related to the following: (1) net operating loss carryforwards ("NOLs"), (2) future deductible interest and (3) future deductible stock compensation expense. In addition, management believes that it is more likely than not that the Company will generate sufficient future taxable income, primarily due to the subsequent restructuring of its long-term debt (Note 17), to realize the balance of the net deferred tax asset at May 31, 1999 prior to expiration of any NOLs. However, there can be no assurance that the Company will generate any specific level of taxable income or that it will be able to realize any of the remaining deferred tax assets in future periods. If the Company were unable to generate sufficient taxable income in the future through operating or restructuring results, an additional valuation allowance against this deferred tax asset would result in a charge to earnings. F-16 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES (CONTINUED) At May 31, 1999 and 1998 net deferred tax assets consist of the following (in thousands):
MAY 31, ------------------- 1999 1998 -------- -------- Foreign net operating loss carryforward.................. $ 4,950 $ 4,490 Domestic net operating loss carryforward................. 16,007 9,154 Stock compensation expense............................... 4,146 4,145 Future deductible interest............................... (249) (137) Depreciation............................................. (2,448) (4,463) Reserves and allowances.................................. 1,088 5,622 Uniform capitalization of inventory...................... (95) 830 Other, net............................................... 815 953 -------- ------- 24,214 20,594 Less valuation allowance................................. (17,630) (4,490) -------- ------- Net deferred tax asset................................... $ 6,584 $16,104 ======== =======
In the fiscal years ended May 31, 1999, 1998 and 1997, the Company did not realize any income tax benefits from federal and state net operating loss carryforwards from the current and prior years. At May 31, 1999, the Company had approximately $11.0 million of foreign net operating loss carryforwards which may be carried forward indefinitely and $44.8 million of domestic net operating loss carryforwards which expire in 2020. The utilization of these carryforwards may be subject to limitations. 12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEAR ENDED MAY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Cash paid during the period for (in thousands): Interest paid............................................. $33,979 $32,891 $33,017 Income taxes paid (refunds received), net................. 27 1,505 (685)
Non-cash investing and financing activities: During the fiscal year ended May 31, 1999, the Company recorded a non-cash decrease to additional paid-in capital of $2,367,000 to reflect the settlement of a receivable from parent through a return of capital to the parent (Note 14). 13. COMMITMENTS AND CONTINGENCIES LEASES--The Company has noncancellable operating leases, primarily for computer and production equipment, that expire over the next five years. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as F-17 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) maintenance and insurance. Future minimum payments under noncancellable operating leases consist of the following at May 31, 1999 (table in thousands):
YEAR ENDED MAY 31, - ------------------ 2000........................................................ $8,298 2001........................................................ 6,115 2002........................................................ 3,472 2003........................................................ 2,544 2004........................................................ 1,733 Thereafter.................................................. 1,201
Rental expense under noncancellable operating leases was approximately $9,550,000, $10,222,000 and $9,373,000 for the fiscal years ended May 31, 1999, 1998, and 1997, respectively. ENVIRONMENTAL ISSUES--The Company's operations are subject to federal, state and local environmental and health and safety laws and regulations that impose workplace standards and limitations on the discharge of pollutants into the environment and establish standards for the handling, generation, emission, release discharge, treatment, storage and disposal of certain materials, substances and wastes. The Company is unaware of any environmental, health or safety violations. PRODUCT LIABILITY--Due to the nature of the Company's products, the Company is subject to product liability claims involving personal injuries allegedly related to the Company's products. The Company currently carries an occurrence-based product liability insurance policy. The policy provides coverage for the period from October 1, 1998 to September 30, 2001 of up to $25,000,000 per occurrence and $25,000,000 in the aggregate. The current policy has a deductible on each claim of $250,000 for claims related to trampolines and $100,000 for claims related to all other products. The Company believes that its insurance is generally adequate to cover product liability claims. Previously, the Company maintained similar occurrence based policies with somewhat lower coverage limits and higher deductibles. Nevertheless, currently pending claims and any future claims are subject to the uncertainties related to litigation and the ultimate outcome of any such proceedings or claims cannot be predicted. On July 14, 1997, in cooperation with the Consumer Products Safety Commission (the CPSC), the Company recalled approximately 78,000 exercise machines sold under the brand name, ProForm R-930 SpaceSaver". Riders, Model No. PFCR6406. The machine was designed to close horizontally for easy storage. In several reported incidents, when the handle bar was pulled against the seat during use, the machine unexpectedly closed into the storage position. As such, consumers were advised to stop using the machine until a free repair kit had been installed. Any claims filed by a consumer in conjunction with this product have been and continue to be handled in the normal course of business. While no assurance can be given, the Company does not believe that it will incur any material adverse effect relative to this product recall. On April 15, 1999, in cooperation with the CPSC, the Company recalled approximately 75,000 exercise machines sold under the brand names, Weider Shapeglider (Model No. WECR4306), Weider PowerGlide (Model No. WECR4406), and the Weslo Total Body Trainer (Model No. WLCR4356). In several reported incidents, the link arm supporting the seat on these exercise gliders disconnected during use, causing the user to fall abruptly. As such, consumers were advised to stop using the F-18 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) machine until a free repair kit had been installed. Any claims filed by a consumer in conjunction with this product have been and will continue to be handled in the normal course of business. While no assurance can be given, the Company does not believe that it will incur any material adverse effect relative to this product recall. CLAIMS RELATING TO THE RESTRUCTURING--In connection with the Restructuring, we amended the indentures governing the 13% notes to delete substantially all restrictive covenants contained in those indentures. One entity which claims to be a non-tendering holder of $1.5 million principal amount of 13% notes has informed us of its intention to pursue a claim against our company, our directors and others. Although we intend to vigorously defend any such claims and while we do not believe that these claims are material to our company, there can be no assurance that these claims would not have material adverse effect on our company. OTHER LITIGATION--The Company is party to a variety of non-product liability commercial suits involving contract claims and intellectual property claims. The Company believes that adverse resolution of these suits would not have a material adverse effect on the Company. The Company is also involved in several patent infringement claims, arising in the ordinary course of its business. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on the Company. WARRANTY--The Company warrants its products against defects in materials and workmanship for a period of 90 days after sale to the end-user. As of May 31, 1999 and 1998, the Company had an accrual for warranty costs on products sold of approximately $2,301,000 and $4,784,000, respectively, included in accrued expenses. RETIREMENT PLANS--All employees who have met minimum age and service requirements are eligible to participate in two 401(k) savings plans. Company contributions to the two plans for the fiscal years ended May 31, 1999, 1998 and 1997 were $368,000, $384,000 and $374,000 reFspectively. INTERNAL REVENUE SERVICE AUDIT--The Company is under examination by the Internal Revenue Service for its taxable year ended May 31, 1996. This examination remains in process and has not been completed. Because the Company carried forward losses claimed on its 1995 tax return to its 1996 return and carried back losses claimed on its 1997 return to its 1996 return, the IRS, as part of its examination, is reviewing the Company's tax returns for its Company's years ended May 31, 1995 and 1997. In connection with this review, the IRS has given the Company preliminary written notice of its intention to disallow approximately $26 million of option-related deductions claimed in the Company's taxable year ended May 31, 1995. Although the Company's taxable year ended May 31, 1995 is closed due to the statute of limitations, such disallowances (if successful) would affect the amount of the Company's net operating loss carryforwards. The Company intends to vigorously and aggressively defend its position on this issue and believe that the it will prevail. The IRS has also indicated that it intends to challenge the timing of other deductions in the Company's taxable year ended May 31, 1997. If the IRS were to prevail in respect of both these issues, due to the interplay of the Company's net operating loss carryforwards and carrybacks from other years, there would be a potential tax liability for the taxable year ended May 31, 1996 in an amount, through February 29, 2000, of approximately $4.2 million, including interest. In addition, there would be a substantial reduction in the Company's net operating loss carryforwards. The IRS has also inquired about the Company's treatment of a substantial amount of banking, professional and other fees incurred in its taxable year ended May 31, F-19 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) 1995. The Company is deducting the amount of those fees over the terms of the debt that was incurred in that year. The IRS has just recently preliminarily indicated that it intends to disallow the deduction of such fees and has asked the Company to respond with its position. The Company believes that a substantial majority of such fees are properly amortizable over the terms of the debt we incurred in 1995 and is in the process of discussing with the IRS the merits of its preliminary position. The Company cannot ensure that the IRS will not raise other issues in the course of its examination. If the IRS were to prevail in its position that the 1995 option-related and the 1997 deductions should be disallowed, as noted above, the Company's available net operating loss carryforwards would be substantially reduced and there would be a potential liability for the year ended May 1996 of approximately $4.2 million (including interest calculated through February 29, 2000). Based on information currently available to the Company, the Company does not believe that the reduction in its net operating losses should materially adversely affect our financial condition. However, a reduction in its available net operating losses could materially adversely affect its financial condition if the IRS were successfully to assert other issues (including the deductibility of the 1995 banking, professional and other fees) on audit or if it were to be determined that the Company recognized additional cancellation of indebtedness income upon the exchange of the 13% notes for the old notes as a result of the old notes being determined to have been issued with original issue discount, or OID. It is the Company's belief that the old notes were not issued with OID and that, therefore, it did not recognize such additional cancellation of indebtedness income. 14. RELATED PARTY TRANSACTIONS SETTLEMENT OF WHF LITIGATION On September 6, 1996, the Company and WHF and its affiliates settled the litigation between WHF and certain of its affiliates and the Company and certain of its officers and directors (the "WHF Litigation") through a number of agreements (the "WHF Settlement"). The WHF Settlement includes releases of certain claims previously asserted by WHF and its affiliates, amendments to certain of the agreements existing between the Company and WHF and its affiliates and certain new agreements among the Company and WHF and its affiliates. Other than the releases, the significant terms of the WHF Settlement are outlined below. SETTLEMENT EXPENSES AND INTERCOMPANY PAYABLES. The Company: (i) paid $12,100,000 to terminate the lawsuits; (ii) paid $3,900,000 to WHF and its affiliates as payment in full under its brand license agreements with them; and (iii) received $1,200,000 in full payment and settlement of the Company's payable to WHF and its affiliates ($1,800,000) and amounts due the Company under the amended Management Agreement ($3,000,000). The Company also received $500,000 in full payment and settlement of CanCo's Management fee obligations to the Company under the CanCo Management and Advisory Agreement. As a result of the above, the Company recorded Weider Settlement expenses of $16,600,000, which includes the expenses noted in (i) and (ii) and other individually insignificant settlement expenses totaling $1,100,000, offset by the $500,000 of CanCo management fees. The Company also recorded the balance reductions noted in (iii) in its consolidated balance sheet. PAYMENTS TO MESSRS. WATTERSON AND STEVENSON. In connection with the WHF Settlement, WHF and its affiliates: (i) paid Messrs. Watterson and Stevenson an aggregate amount of approximately $4,200,000 in exchange for the surrender of their options to purchase stock of WHF and its affiliates; F-20 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RELATED PARTY TRANSACTIONS (CONTINUED) and (ii) paid Messrs. Watterson and Stevenson an aggregate amount of $500,000. Messrs. Watterson and Stevenson also each received $300,000 in full payment and settlement of CanCo's management fee obligations under the CanCo Management and Advisory Agreements. The WHF Settlement also contained various miscellaneous provisions that the Company does not believe are material. MANAGEMENT FEES The Management Agreement required the Company to the extent applicable, to source WHF products, or products substantially the same as those sold by WHF, from WHF prior to seeking sources of those products from outside vendors. During the fiscal year ended May 1997, the Company purchased approximately $7,000,000 of products from WHF. In connection with the WHF Settlement, this agreement was terminated. The Company executed an agreement with a majority shareholder who provides management and advisory services. Total annual fees due under this agreement are $800,000, and, for the fiscal years ended May 31, 1999, 1998 and 1997, the Company recorded management fee expense of $800,000 each year. In addition, if the Company enters into any acquisition transactions involving at least $10,000,000, the Company must pay a fee of approximately 1% of the gross purchase price, including liabilities assumed, of the transaction. In connection with the HealthRider Acquisition (Note 4), the Company paid this shareholder $700,000. LICENSE FEES The Company obtained certain rights to use the WHF name pursuant to two separate exclusive license agreements. Under the Weider Sports License, the Company paid a $5,000,000 license fee on November 14, 1994 for a perpetual license with respect to Weider Canadian Trademark Rights. Under the Weider Health and Fitness license, the Company was required to pay a royalty with respect to Weider U.S. and other trademark rights equal to 2% of sales of licensed products sold thereunder until such time as the Company had paid an aggregate royalty equal to $12,000,000 plus an interest factor accruing on the unpaid portion of the royalty at a per annum rate of 10%. The Company recorded license fees of $129,000 during the fiscal year ended May 31, 1997 under this agreement. In connection with the WHF Settlement, the Company paid $3,900,000 in exchange for a fully paid-up license with respect to the Weider U.S. and other trademarks. DISTRIBUTION AGREEMENT The Company had appointed a Canadian WHF affiliate to be the exclusive distributor of ICON Healths products worldwide, excluding the United States, Mexico and certain countries in Europe. Under the terms of this agreement, the Company sold its products directly to WHF affiliates for resale in the agreed-upon territory. In conjunction with this agreement, the Company recorded revenue of $3,200,000 for the fiscal year ended May 31, 1997. In connection with the WHF Settlement, the Company paid $8,000,000 to terminate this agreement. F-21 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RELATED PARTY TRANSACTIONS (CONTINUED) WEIDER SPORTS AND CANCO ACQUISITIONS In connection with the settlement of the WHF Litigation, the Company acquired certain assets, excluding cash and fixed assets, for $8,900,000 and assumed certain liabilities of the sports equipment business lines of Weider Sports (the "Weider Sports Acquisition"). The terms of the Weider Sports Acquisition and WHF Settlement also require the Company to provide Ben Weider with a salary, office space and three assistants for a period of five years after the acquisition. The estimated costs of this commitment of $2,500,000 were accrued as part of the purchase accounting for the Weider Sports Acquisition. As a result of the Weider Sports Acquisition, the Company reacquired distribution rights originally granted to Weider Sports in connection with the Recapitalization on November 14, 1994, subject to certain rights granted by Weider Sports to third parties. In addition, the Company acquired certain assets, excluding cash, cash equivalents and accounts receivable, for $1,700,000 and assumed certain liabilities of three Canadian corporations (collectively, CanCo) (the "CanCo Acquisition"). The Company also acquired two CanCo plants which were leased by other WHF affiliates in exchange for the assumption of the existing $1,500,000 Canadian mortgage on the properties and the payment of $500,000. The Weider Sports and CanCo Acquisitions have been accounted for under the purchase method of accounting. Accordingly, the purchase price plus direct costs of the acquisitions have been allocated to the assets acquired and liabilities assumed based on their relative fair values as of the closing date. The Weider Sports and CanCo Acquisitions did not represent acquisitions of significant businesses by the Company. AIRCRAFT LEASE In June 1996, the Company entered into an agreement with FG Aviation, Inc. ("FG"), a company which is jointly owned by officers of the Company, whereby the Company has committed to lease an airplane from FG. Minimum rentals under the lease, which expires in May 2005, are approximately $57,000 per month. In connection with its lease commitments, the Company recorded $864,000 of rental expense for the fiscal years ended May 31, 1999, 1998, and 1997. Also, the Company incurred $206,000 and $34,000 of maintenance expense in the fiscal years ended May 31, 1998 and 1997, respectively. No maintenance expenses were incurred by the Company for the fiscal year ended May 31, 1999. In addition, the Company advanced $280,000 to FG as a security deposit on the aircraft lease. RECEIVABLE FROM PARENT Through May 31, 1998, IHF Capital had incurred $2,362,000 in expenses and fees related to its withdrawn public equity offering. In order to fund the payment for these expenses, the Company advanced IHF Capital $2,362,000 in the form of a non-interest bearing loan. During the fiscal year ended May 31, 1999, $5,000 was added to the loan balance for franchise taxes paid on behalf of IHF Capital. During the fiscal year ended May 31, 1999, the Company determined that the loan would not be paid in cash due to the Restructuring of the Company (Note 18), therefore, the loan of $2,367,000 was canceled and the amount was treated as a return of capital to IHF Capital. F-22 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RELATED PARTY TRANSACTIONS (CONTINUED) RECEIVABLES FROM OFFICERS In connection with the exercise of options prior to 1994, the Company accepted as partial payment, notes bearing interest at the rate of prime plus 0.5%, in the amount of $102,000 from officers. In connection with the purchase of stock, the Company accepted as partial payment, notes bearing interest at a per annum rate of 7.5%, in the amount of $656,000 from officers. In the fiscal year ended May 31, 1997, the Company forgave a total of $102,000 of principal and $27,000 of accrued interest on these notes. The notes are shown as a reduction of stockholder's equity (deficit) at May 31, 1999 and 1998. 15. GEOGRAPHIC SEGMENT INFORMATION In the fiscal year ended May 31, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. The adoption of SFAS 131 did not affect the Company's results of operations or financial position. Based on the Company's method of internal reporting, the Company operates and reports as a single industry segment, which is development, manufacturing and distribution of home fitness equipment. Revenue and long-lived asset information by geographic area as of and for the fiscal years ended May 31 is as follows (table in thousands):
LONG-LIVED REVENUES FOR THE YEARS ENDED MAY 31, ASSETS AS OF MAY 31 (NET), ------------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 ---------- ---------- ---------- -------- -------- -------- United States...................... $648,641 $686,630 $746,007 $70,350 $67,704 $71,500 Foreign............................ 61,608 62,683 90,155 10,674 10,836 7,936 -------- -------- -------- ------- ------- ------- Total........................ $710,249 $749,313 $836,162 $81,024 $78,540 $79,436 ======== ======== ======== ======= ======= =======
Foreign revenue is based on the country in which the sales originate (i.e. where the legal subsidiary is domiciled). Revenue from no single foreign country was material to the consolidated revenues of the Company. 16. SUBSEQUENT EVENTS--NEW HOLDING COMPANY On July 20, 1999, prior to the Restructuring (Note 18), a new holding company, HF Holdings, Inc. a Delaware corporation ("HF Holdings"), was formed. Following the Restructuring, a wholly owned subsidiary of HF Holdings merged with ICON Health, whereupon ICON Health became a wholly owned subsidiary of HF Holdings. HF Holdings was formed through equity investments by current shareholders of IHF Capital, members of Company management and other investors. F-23 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSEQUENT EVENTS--RESTRUCTURING On September 27, 1999, the Company consummated an exchange offer (the "Exchange Offer") for all of its outstanding 13% Senior Subordinated Notes ("13% Notes"). Significant components of the Exchange Offer are as follows (in thousands): The 13% Note holders received: i. $39,401,000 in cash, ii. $45,000,000 in new 12% Subordinated Notes ("12% Notes") of ICON Health (the "Issuer") issued in connection with the exchange offering, iii. $10,086,000 payment for accrued interest and iv. warrants to purchase 423,939 shares of HF Holdings common stock for a nominal exercise price. In addition, rights to purchase an aggregate of 343,336 shares of HF Holdings common stock at a purchase price of $5.83 per share, or an aggregate purchase price of $2,000,000. In connection with the Exchange Offer, the indentures governing the 13% Notes were amended to eliminate most of the related restrictive covenant provisions of the 13% Notes. As of September 27, 1999, noteholders not tendering in the Exchange Offers totaled $1,500,000. The unexchanged 13% Notes will be subordinated in right of payment to the payment in full in cash of both the new 12% Notes and the New Credit Facilities (Note 18). The new 12% Notes are due September 2005 and are guaranteed by each of the domestic subsidiaries. Interest will be due each January 15 and July 15 of each year, beginning on January 15, 2000. The notes are redeemable at any time for a 1-4% premium, as outlined in the indenture. The 12% Notes contain certain restrictive covenants that, among other things, limit the ability of Icon Health and its subsidiaries to incur additional debt, pay dividends or make other distributions make investments, dispose of assets, issue capital stock of subsidiaries or enter into mergers or consolidations or sell all or substantially all of its assets. No gain will be realized on the extinguishment of the 13% Notes. Unamortized deferred financing fees related to the 13% Notes will be reflected as a component of the adjustment to establish the carrying value of the 12% Notes. The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal Technical Services, Inc. and ICON International Holdings, Inc. ("Subsidiary Guarantors") have fully and unconditionally guaranteed on a joint and several basis, the obligation to pay principal and interest with respect to the 12% Notes. A significant portion of the Issuer's operating income and cashflow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the 12% Notes. Although holders of the 12% Notes will be direct creditors of the Issuer's principal direct subsidiaries by virtue of the guarantees, the Issuer has indirect subsidiaries located primarily in Europe ("Non-Guarantor Subsidiaries") that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the Notes. As a result, the claims of creditors of the F-24 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED) Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Issuer, including the holders of the Notes. The following supplemental consolidating condensed financial statements present: 1. Consolidating condensed balance sheets as of November 27, 1998 (unaudited) and May 31, 1999 and 1998 and consolidating condensed statements of operations and cash flows for the six months ended November 27, 1999 (unaudited) and November 28, 1998 (unaudited) and each of the years in the three year period ended May 31, 1999. 2. The Company ("Issuer"), combined Subsidiary Guarantors and combined Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate the Parent and all of its subsidiaries. F-25 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET NOVEMBER 27, 1999 (UNAUDITED) (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash........................... $ 4,529 $ 249 $ 971 $ -- $ 5,749 Accounts receivable, net....... 183,577 31,941 10,176 (13,014) 212,680 Inventories, net............... 103,310 29,935 6,819 (316) 139,748 Deferred income taxes.......... 1,075 224 -- -- 1,299 Other assets................... 6,658 1,806 1,189 -- 9,653 --------- ------- -------- --------- --------- Total current assets........... 299,149 64,155 19,155 (13,330) 369,129 Property and equipment, net...... 39,500 4,764 423 -- 44,687 Receivable from affiliates....... 56,177 6,672 -- (62,849) -- Trademarks, net.................. 17,392 5,948 1,433 -- 24,773 Deferred income taxes............ 4,303 209 -- -- 4,512 Investments in subsidiaries...... 44,309 -- -- (44,309) -- Other assets..................... 20,821 -- 26 -- 20,847 --------- ------- -------- --------- --------- Total assets..................... $ 481,651 $81,748 $ 21,037 $(120,488) $ 463,948 ========= ======= ======== ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt......................... $ 7,704 $ 100 $ -- $ -- $ 7,804 Accounts payable............... 100,607 29,471 13,206 (13,014) 130,270 Interest payable............... 4,221 -- -- -- 4,221 Accrued expenses............... 12,125 2,181 729 -- 15,035 Income taxes payable........... 784 354 305 -- 1,443 --------- ------- -------- --------- --------- Total current liabilities.... 125,441 32,106 14,240 (13,014) 158,773 --------- ------- -------- --------- --------- Long-term debt................... 324,388 -- -- -- 324,388 --------- ------- -------- --------- --------- Payable to affiliates.......... 35,735 7,881 19,233 (62,849) -- Stockholder's equity (deficit): Common stock and additional paid-in capital.............. 232,595 11,100 4,881 (44,309) 204,267 Receivables from officers...... (2,200) -- -- -- (2,200) Accumulated comprehensive loss......................... -- (230) (948) -- (1,178) Retained earnings (accumulated deficit)..................... (234,308) 30,891 (16,369) (316) (220,102) --------- ------- -------- --------- --------- Total stockholder's equity (deficit).................. (3,913) 41,761 (12,436) (44,625) (19,213) --------- ------- -------- --------- --------- Total liabilities and stockholders' equity (deficit)...................... $ 481,651 $81,748 $ 21,037 $(120,488) $ 463,948 ========= ======= ======== ========= =========
F-26 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET MAY 31, 1999 (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash............................... $ 2,600 $ 100 $ 1,600 $ -- $ 4,300 Accounts receivable, net........... 87,800 26,500 9,700 (7,500) 116,500 Inventories, net................... 82,200 19,600 4,900 (300) 106,400 Deferred income taxes.............. 600 200 -- -- 800 Other assets....................... 4,700 1,100 500 -- 6,300 Income taxes receivable............ 100 -- -- -- 100 --------- ------- -------- --------- --------- Total current assets............. 178,000 47,500 16,700 (7,800) 234,400 Property and equipment, net.......... 39,900 4,900 500 -- 45,300 Receivable from parent............... 44,300 -- -- (44,300) -- Trademarks, net...................... 15,300 6,100 1,500 -- 22,900 Deferred income taxes................ 5,600 200 -- -- 5,800 Other assets......................... 23,500 -- -- -- 23,500 --------- ------- -------- --------- --------- $ 306,600 $58,700 $ 18,700 $ (52,100) $ 331,900 ========= ======= ======== ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt............................. $ 7,000 $ 200 $ -- $ -- $ 7,200 Accounts payable................... 74,000 20,100 9,000 (7,500) 95,600 Accrued expenses................... 19,400 1,800 1,400 -- 22,600 Income taxes payable............... -- 900 100 -- 1,000 --------- ------- -------- --------- --------- Total current liabilities........ 100,400 23,000 10,500 (7,500) 126,400 --------- ------- -------- --------- --------- Long-term debt....................... 404,100 (4,200) 19,400 (166,000) 253,300 --------- ------- -------- --------- --------- Stockholder's equity (deficit) Common stock and additional paid in capital.......................... 26,200 11,100 4,900 121,700 163,900 Receivables from officers.......... (700) -- -- -- (700) Accumulated other comprehensive loss............................. -- (300) (700) -- (1,000) Accumulated deficit................ (223,400) 29,100 (15,400) (300) (210,000) --------- ------- -------- --------- --------- Total stockholder's equity (deficit)...................... (197,900) 39,900 (11,200) 121,400 (47,800) --------- ------- -------- --------- --------- $ 306,600 $58,700 $ 18,700 $ (52,100) $ 331,900 ========= ======= ======== ========= =========
F-27 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET MAY 31, 1998 (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash......................... $ 1,500 $ 100 $ 2,300 $ -- $ 3,900 Accounts receivable, net..... 105,200 22,700 7,000 (10,600) 124,300 Inventories, net............. 95,500 21,300 6,400 (1,800) 121,400 Deferred income taxes........ 11,000 200 -- -- 11,200 Other assets................. 4,700 800 700 -- 6,200 Income taxes receivable...... 300 500 -- -- 800 --------- ------- -------- --------- --------- Total current assets....... 218,200 45,600 16,400 (12,400) 267,800 Property and equipment, net.... 43,200 4,900 700 -- 48,800 Receivable from parent......... 40,100 -- -- (37,700) 2,400 Trademarks, net................ 10,100 6,500 600 -- 17,200 Deferred income taxes.......... 4,700 200 -- -- 4,900 Other assets................... 21,600 400 -- -- 22,000 --------- ------- -------- --------- --------- $ 337,900 $57,600 $ 17,700 $ (50,100) $ 363,100 ========= ======= ======== ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt....................... $ 6,000 $ 100 $ -- $ -- $ 6,100 Accounts payable............. 70,900 14,500 9,200 (10,600) 84,000 Accrued expenses............. 21,300 2,800 600 -- 24,700 Income taxes payable......... -- -- 200 -- 200 --------- ------- -------- --------- --------- Total current liabilities.............. 98,200 17,400 10,000 (10,600) 115,000 --------- ------- -------- --------- --------- Long-term debt................. 410,600 3,400 18,100 (163,600) 268,500 --------- ------- -------- --------- --------- Stockholder's equity (Deficit) Common stock and additional paid in capital............ 28,500 11,100 700 125,900 166,200 Receivable from officer for purchase of equity......... (700) -- -- -- (700) Accumulated other comprehensive loss......... (100) (100) (400) -- (600) Accumulated deficit.......... (198,600) 25,800 (10,700) (1,800) (185,300) --------- ------- -------- --------- --------- Total stockholder's equity (deficit)................ (170,900) 36,800 (10,400) 124,100 (20,400) --------- ------- -------- --------- --------- $ 337,900 $57,600 $ 17,700 $ (50,100) $ 363,100 ========= ======= ======== ========= =========
F-28 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS SIX MONTHS ENDED NOVEMBER 27, 1999 (UNAUDITED) (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ Net sales...................... $270,612 $48,411 $15,285 $ -- $334,308 Cost of sales.................. 200,101 34,344 9,270 20 243,735 -------- ------- ------- ------- -------- Gross profit................... 70,511 14,067 6,015 (20) 90,573 Total operating expenses....... 60,026 11,483 6,168 -- 77,677 -------- ------- ------- ------- -------- Income from operations......... 10,485 2,584 (153) (20) 12,896 Interest expense............... (15,866) (432) (672) -- (16,970) Amortization of deferred financing fees............... (2,065) -- -- -- (2,065) -------- ------- ------- ------- -------- Income (loss) before income taxes and extraordinary item......................... (7,446) 2,152 (825) (20) (6,139) Provision for (benefit from) income taxes................. 2,328 353 123 -- 2,804 -------- ------- ------- ------- -------- Income (Loss) before extraordinary item......... (9,774) 1,799 (948) (20) (8,943) Extraordinary loss on extinguishment of debt..... (1,174) -- -- -- (1,174) -------- ------- ------- ------- -------- Net income (loss)............ $(10,948) $ 1,799 $ (948) $ (20) $(10,117) ======== ======= ======= ======= ========
F-29 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS SIX MONTHS ENDED NOVEMBER 28, 1998 (UNAUDITED) (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ Net sales...................... $ 274,633 $ 39,448 $17,414 $ -- $ 331,495 Cost of sales.................. 203,693 26,145 10,178 (1,047) 238,969 --------- -------- ------- ------- --------- Gross profit................... 70,940 13,303 7,236 1,047 92,526 Total operating expenses....... 58,618 10,785 6,736 -- 76,139 --------- -------- ------- ------- --------- Income from operations......... 12,322 2,518 500 1,047 16,387 Interest expense............... (14,779) (462) (740) -- (15,981) Amortization of deferred financing fees............... (2,972) -- -- -- (2,972) --------- -------- ------- ------- --------- Income (loss) before income taxes........................ (5,429) 2,056 (240) 1,047 (2,566) Provision for (benefit from) income taxes................. (1,764) 645 366 -- (753) --------- -------- ------- ------- --------- Net income (loss)............ $ (3,665) $ 1,411 $ (606) $ 1,047 $ (1,813) ========= ======== ======= ======= =========
F-30 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 1999 (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ Net sales..................................... $586,800 $85,500 $37,900 $ -- $710,200 Cost of sales................................. 435,500 58,400 21,600 (1,500) 514,000 -------- ------- ------- ------- -------- Gross profit.................................. 151,300 27,100 16,300 1,500 196,200 Total operating expenses...................... 132,000 21,100 15,700 -- 168,800 -------- ------- ------- ------- -------- Income from operations........................ 19,300 6,000 600 1,500 27,400 Interest expense.............................. (30,500) (1,000) (1,600) -- (33,100) Amortizaiton of deferred financing fees....... (7,000) -- -- -- (7,000) -------- ------- ------- ------- -------- Income (loss) before income taxes............. (18,200) 5,000 (1,000) 1,500 (12,700) Provision for (benefit from) income taxes..... 9,800 1,600 600 -- 12,000 -------- ------- ------- ------- -------- Net income (loss)........................... $(28,000) $ 3,400 $(1,600) $ 1,500 $(24,700) ======== ======= ======= ======= ========
ICON HEALTH & FITNESS INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 1998 (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ Net sales..................................... $628,100 $80,800 $40,400 $ -- $749,300 Cost of sales................................. 462,300 51,200 24,000 (1,500) 536,000 -------- ------- ------- ------- -------- Gross profit.................................. 165,800 29,600 16,400 1,500 213,300 Total operating expenses...................... 151,000 21,200 17,200 -- 189,400 -------- ------- ------- ------- -------- Income from operations........................ 14,800 8,400 (800) 1,500 23,900 Interest expense.............................. (32,500) (900) (1,700) -- (35,100) Amortization of deferred financing fees....... (4,800) -- -- -- (4,800) Other income (expense)........................ 500 -- -- -- 500 -------- ------- ------- ------- -------- Income (loss) before income taxes............. (22,000) 7,500 (2,500) 1,500 (15,500) Provision for (benefit from) income taxes..... (8,400) 2,300 200 -- (5,900) -------- ------- ------- ------- -------- Net income (loss)........................... $(13,600) $ 5,200 $(2,700) $ 1,500 $ (9,600) ======== ======= ======= ======= ========
F-31 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 1997 (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ Net sales..................................... $761,900 $110,900 $40,700 $(77,300) $836,200 Cost of sales................................. 562,600 87,800 24,700 (77,300) 597,800 -------- -------- ------- -------- -------- Gross profit.................................. 199,300 23,100 16,000 -- 238,400 Total operating expenses...................... 186,200 15,300 16,700 -- 218,200 -------- -------- ------- -------- -------- Income from operations........................ 13,100 7,800 (700) -- 20,200 Interest expense.............................. (31,700) (100) (1,800) -- (33,600) Amortization of deferred financing fees....... (3,000) -- -- -- (3,000) Other income (expense)........................ 500 -- -- -- 500 -------- -------- ------- -------- -------- Income (loss) before income taxes............. (21,100) 7,700 (2,500) -- (15,900) Provision for (benefit from) income taxes..... (6,800) 2,600 200 -- (4,000) -------- -------- ------- -------- -------- Net income (loss)........................... $(14,300) $ 5,100 $(2,700) $ -- $(11,900) ======== ======== ======= ======== ========
F-32 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSEQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS SIX MONTHS ENDED NOVEMBER 27, 1999 (UNAUDITED) (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ OPERATING ACTIVITIES: Net cash used in operating activities:...... $(85,966) $(4,660) $ (118) $ -- $(90,744) -------- ------- ------ ----- -------- INVESTING ACTIVITIES: Net cash used in investing activities:...... (8,811) (493) (73) -- (9,377) -------- ------- ------ ----- -------- FINANCING ACTIVITIES: Borrowings (payments) on revolving credit facility, net............................. (36,329) (4,294) -- -- (40,623) Proceeds from new term notes................ 180,000 -- -- -- 180,000 Payments on old term notes.................. (19,464) -- -- -- (19,464) Contributed capital from parent............. 40,000 -- -- -- 40,000 Payments for financing fees--equity......... (4,263) -- -- -- (4,263) Payments to 13% noteholders................. (39,408) -- -- -- (39,408) Payments for financing fees--debt........... (14,102) -- -- -- (14,102) Other....................................... (9,750) 9,571 (205) -- (384) -------- ------- ------ ----- -------- Net cash provided by financing activities:............................... 96,684 5,277 (205) 101,756 -------- ------- ------ ----- -------- Effect of exchange rate changes on cash....... -- 48 (209) -- (161) -------- ------- ------ ----- -------- Net increase (decrease) in cash............... 1,907 172 (605) -- 1,474 Cash, beginning of period..................... 2,622 77 1,576 -- 4,275 -------- ------- ------ ----- -------- Cash, end of period........................... $ 4,529 $ 249 $ 971 $ -- $ 5,749 ======== ======= ====== ===== ========
F-33 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS SIX MONTHS ENDED NOVEMBER 28, 1998 (UNAUDITED) (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ OPERATING ACTIVITIES: Net cash used in operating activities:...... $(48,971) $(10,625) $(2,860) $ -- $(62,456) -------- -------- ------- ----- -------- INVESTING ACTIVITIES: Net cash used in investing activities:...... (6,069) (621) (122) -- (6,812) -------- -------- ------- ----- -------- FINANCING ACTIVITIES: Borrowings (payments) on revolving credit facility, net............................. 63,053 7,615 -- -- 70,668 Other....................................... (7,144) 4,320 2,824 -- -- -------- -------- ------- ----- -------- Net cash provided by financing activities:............................... 55,909 11,935 2,824 -- 70,668 -------- -------- ------- ----- -------- Effect of exchange rate changes on cash....... 22 (470) (96) -- (544) -------- -------- ------- ----- -------- Net increase (decrease) in cash............... 891 219 (254) -- 856 Cash, beginning of period..................... 1,556 67 2,269 -- 3,892 -------- -------- ------- ----- -------- Cash, end of period........................... $ 2,447 $ 286 $ 2,015 $ -- $ 4,748 ======== ======== ======= ===== ========
ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED MAY 31, 1999 (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ OPERATING ACTIVITIES: Net cash provided by (used in) operating activities:............................... $ 31,000 $ 8,600 $(1,500) $ -- $ 38,100 -------- ------- ------- ----- -------- INVESTING ACITIVITIES: Net cash provided by (used in) operating activities:............................... (18,800) (1,100) (200) -- (20,100) FINANCING ACTIVITIES: Borrowings (payments) on revolving credit facility, net............................. (8,200) (7,400) 1,400 (14,200) Other....................................... (2,900) -- -- -- (2,900) -------- ------- ------- ----- -------- Net cash provided by (used in) financing activities:............................... (11,100) (7,400) 1,400 -- (17,100) -------- ------- ------- ----- -------- Effect of exchange rate changes on cash....... -- (100) (400) -- (500) -------- ------- ------- ----- -------- Net increase (decrease) in cash............... 1,100 -- (700) -- 400 Cash, beginning of period..................... 1,500 100 2,300 3,900 -------- ------- ------- ----- -------- Cash, end of period........................... $ 2,600 $ 100 $ 1,600 $ -- $ 4,300 ======== ======= ======= ===== ========
F-34 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SUBSQUENT EVENTS--RESTRUCTURING (CONTINUED) ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED MAY 31, 1998 (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ OPERATING ACTIVITIES: Net cash provided by (used in) operating activities:............................... $39,000 $ 5,300 $ 3,300 $ -- $ 47,600 ------- ------- ------- ----- -------- INVESTING ACITIVITIES: Net cash provided by (used in) operating activities:............................... 6,300 (500) (100) 700 6,400 ------- ------- ------- ----- -------- FINANCING ACTIVITIES: Borrowings (payments) on revolving credit facility, net............................. (43,600) (5,400) (3,000) (700) (52,700) Other....................................... (3,000) -- -- -- (3,000) ------- ------- ------- ----- -------- Net cash provided by (used in) financing activities:............................... (46,600) (5,400) (3,000) (700) (55,700) Effect of exchange rate changes on cash....... -- 100 (100) -- -- ------- ------- ------- ----- -------- Net increase (decrease) in cash............... (1,300) (500) 100 -- (1,700) Cash, beginning of period..................... 2,800 600 2,200 -- 5,600 ------- ------- ------- ----- -------- Cash, end of period........................... $ 1,500 $ 100 $ 2,300 $ -- $ 3,900 ======= ======= ======= ===== ========
ICON HEALTH & FITNESS, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED MAY 31, 1997 (IN THOUSANDS)
COMBINED COMBINED ICON HEALTH & GUARANTOR NON-GUARANTOR FITNESS, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------ ------------- ------------ ------------ OPERATING ACTIVITIES : Net cash provided by (used in) operating activities:............................... $(27,200) $(7,900) $(2,500) $ -- $(37,600) -------- ------- ------- ----- -------- INVESTING ACITIVITIES: Purchase of property and equipment.......... (9,600) (800) (700) -- (11,100) Purchase of Health Rider.................... (25,800) -- -- -- (25,800) Purchase of Weider Sports and CanCo......... (16,000) -- -- -- (16,000) -------- ------- ------- ----- -------- Net cash provided by (used in) operating activities: (51,400) (800) (700) -- (52,900) FINANCING ACTIVITIES: Borrowings (payments) on revolving credit facility, net............................. 71,200 8,300 3,600 -- 83,100 Other....................................... (5,300) -- -- -- (5,300) -------- ------- ------- ----- -------- Net cash provided by (usedin) financing activities:............................... 65,900 8,300 3,600 -- 77,800 Effect of exchange rate changes on cash....... (100) (200) (700) -- (1,000) -------- ------- ------- ----- -------- Net increase (decrease) in cash............... (12,800) (600) (300) -- (13,700) Cash, beginning of period..................... 15,600 1,200 2,500 -- 19,300 -------- ------- ------- ----- -------- Cash, end of period........................... $ 2,800 $ 600 $ 2,200 $ -- $ 5,600 ======== ======= ======= ===== ========
F-35 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUBSEQUENT EVENTS--NEW CREDIT FACILITIES In connection with the Restructuring, on September 27, 1999, the Company entered into new credit facilities (the "New Credit Facilities") of $300,000,000 with a bank and a financial services corporation which consist of the following: REVOLVER The Revolver consists of a $120,000,000 revolving credit line, which includes a letter of credit sub-facility of up to $10,000,000 and may include a swing line sub-facility of up to $10,000,000. The term is five years. The terms and conditions include a Clean Down Period to reduce the outstanding borrowings on the Revolver to $25,000,000 or less for a period of sixty days, or more, through the period of May 1 through August 31 of each year. In addition, borrowing availability is limited to certain percentages of qualified assets as specified in the agreement. A letter of credit margin of 2% and an unused facility fee of .50% per annum of the average unused daily balance of the Revolver is due monthly. TERM LOAN A The $30,000,000 Term Loan A has a 60 month term and amortizes quarterly at $2,700,000 in year one, $5,500,000 in years two and three, and $8,200,000 in years four and five. TERM LOAN B The $80,000,000 Term Loan B has a 63 month term and amortizes quarterly at a rate of $1,100,000 in years one through five and $74,500,000 at maturity. TERM LOAN C The $55,000,000 Term Loan C has a 66-month term and amortizes quarterly at a rate of $400,000 in years one through five and $52,900,000 at maturity. INVESTMENT PROPERTIES LOAN ("IP LOAN") The $15,000,000 IP Loan has a 57 month term and amortizes annually at a rate of $3,000,000 in years one through five. At the ICON Health's option, all loans will bear interest at either (a) a floating rate equal to the Index Rate plus the applicable margin of 1.5-5.5% or (b) a fixed rate for periods of one, two, three or six months equal to the LIBOR rate plus the applicable margin of 3-7%. If the Revolver is terminated, Term Loans A, B, C and IP Loan will immediately be due and payable in full. In addition, if the Revolver is terminated or if any or all of the Term Loans are prepaid, certain prepayment premiums will apply. Proceeds of the New Credit Facility were used to refinance the Company's existing Credit Agreement and 13% Notes, provide for general working capital, fund necessary future capital expenditures and fund transaction fees and expenses. All tranches will be collaterized by a first priority security interest in all of the existing and subsequently acquired assets of the Company and its domestic subsidiaries, subject to specified exceptions, and a pledge of 65% of the stock of the Company's foreign subsidiaries. All tranches will be cross-collateralized and cross-defaulted. F-36 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUBSEQUENT EVENTS--NEW CREDIT FACILITIES (CONTINUED) As of September 27, 1999, the Company's balance outstanding under the New Credit Facilities consisted of (table in thousands): Revolver.................................................... $ 45,087 Term Loan A................................................. 30,000 Term Loan B................................................. 80,000 Term Loan C................................................. 55,000 IP Loan..................................................... 15,000 -------- $225,087 ========
A loss of approximately $1.9 million will be recorded on the extinguishment of the existing credit facility due to the write-off of deferred financing fees. 19. EVENTS SUBSEQUENT TO SEPTEMBER 27, 1999 (UNAUDITED) In connection with the Recapitalization, $656,000 in nonrecourse loans from management for the purchase of stock were canceled. The stock collateralizing such loans was delivered back to the Company. In connection with the recapitalization, HF Holdings advanced two members of senior management $2,200,000. The non-recourse notes bear interest at a rate equal to that of the New Credit Facilities, have a maturity of 10 years and are collateralized by shares of HF Holdings common stock. The Company advanced to HF Holdings the amount of the notes. F-37 ICON HEALTH & FITNESS, INC. VALUATION AND QUALIFYING ACCOUNTS FINANCIAL STATEMENT SCHEDULE II (IN THOUSANDS)
VALUATION ACCOUNTS MAY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- ACCOUNTS RECEIVABLE, ALLOWANCES FOR DOUBTFUL ACCOUNTS, ADVERTISING DISCOUNTS AND CREDIT MEMOS: Balance at beginning of year................................ $ 6,887 $ 8,953 $ 7,595 Additions: Charged to costs and expenses (allowance for doubtful accounts and credit memos).............................. 13,249 4,566 6,027 Charged to costs and expenses (discounts and advertising)............................................ 19,263 33,234 33,512 Recoveries on accounts charged off........................ 205 22 -- Deductions: Accounts charged off (allowance for doubtful accounts and credit memos)........................................... (12,010) (6,478) (3,241) Accounts charged off (advertising)........................ (19,375) (33,410) (34,940) -------- -------- -------- Balance at end of year...................................... $ 8,219 $ 6,887 $ 8,953 ======== ======== ========
VALUATION ACCOUNTS MAY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- INVENTORY RESERVE: Balance at beginning of year................................ $ 3,335 $ 2,761 $ 2,122 Additions: Charged to cost and expenses (inventory reserve).......... -- 574 639 Charged to cost and expenses (NordicTrack purchase accounting)............................................. 2,216 -- -- Deductions: Reduction in reserve...................................... (736) -- -- -------- -------- -------- Balance at end of the year.................................. $ 4,815 $ 3,335 $ 2,761 ======== ======== ========
VALUATION ACCOUNTS MAY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- LONG-TERM RECEIVABLE, ALLOWANCE FOR DOUBTFUL ACCOUNTS: Balance at beginning of year................................ $ 1,602 $ 273 $ 156 Additions: Charged to costs and expenses............................. 13,136 1,329 117 -------- -------- -------- Balance at end of year...................................... $ 14,738 $ 1,602 $ 273 ======== ======== ========
VALUATION ACCOUNTS MAY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- WARRANTY RESERVE: Balance at beginning of year................................ $4,783 $6,553 $2,250 Additions: Charged to costs and expenses............................. -- -- 4,303 Deductions: Reduction in reserve...................................... 2,482 1,770 -- ------ ------ ------ Balance..................................................... $2,301 $4,783 $6,553 ====== ====== ======
F-38 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION OR TO MAKE ANY REPRESENTATION TO YOU THAT IS NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD NOT UNDER ANY CIRCUMSTANCES ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT ON ANY DATE AFTER THE DATE OF THIS PROSPECTUS. --------------------- $44,282,000 OFFER TO EXCHANGE 12% NOTES DUE 2005 THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FOR OUTSTANDING 12% NOTES DUE 2005 P R O S P E C T U S DATED , 2000 --------------------- ICON HEALTH & FITNESS, INC. ------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS ICON is a Delaware corporation. In its Certificate of Incorporation, ICON has adopted the provisions of Section 102(b)(7) of the Delaware General Corporation Law (the "Delaware Law"), which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for monetary damages for breach of the director's fiduciary duty, except (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware law (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions) or (iv) for any transaction from which a director will personally receive a benefit in money, property or services to which the director is not legally entitled. ICON has also adopted indemnification provisions pursuant to Section 145 of the Delaware Law, which provides that a corporation may indemnify any persons, including officers and directors, who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that such person was an officer, director, employee or agent of the corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify officers or directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against expenses (including attorney's fees) that such officer or director actually and reasonably incurred. ICON has entered into indemnification agreements with each of ICON's officers and directors. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS 2.1 Agreement and Plan of Merger dated as of September 27, 1999, among HF Holdings, ICON Health & Fitness and HF Acquisition, Inc. 3.1 Certificate of Incorporation of ICON Health & Fitness, Inc. 3.2 By-Laws of ICON Health & Fitness, Inc. 4.1 Indenture, dated September 27, 1999 between ICON Health & Fitness, Inc., the Subsidiary Guarantors named therein and the Bank of New York, as Trustee and successor to IBJ Whitehall and Trust Company. 4.2 Notation of Subsidiary Guarantee dated September 27, 1999. 4.3 Quebec Guaranty dated September 27, 1999 by ICON of Canada, Inc. in favor of The Bank of New York, as Trustee and successor to IBJ Whitehall and Trust Company. 4.4 Form of Note between ICON Health & Fitness, Inc and The Bank of New York, as Trustee and successor to IBJ Whitehall and Trust Company. 5.1*** Opinion of Willkie Farr and Gallagher.
II-1 10.1 Exchange and Registration Rights Agreement dated September 27, 1999 by and between ICON Health & Fitness, Inc., the Subsidiary Guarantors named therein and the Tendering Holders of 13% Senior Subordinated Notes. 10.2 Credit Agreement dated as of September 24, 1999 among ICON Health & Fitness, each of HF Holdings, JumpKing, Inc., ICON International Holdings, Inc., Universal Technical Services, ICON of Canada Inc. and 510152 N.B. Ltd, the Lenders signatory thereto from time to time, General Electric Capital Corporation, as agent for itself and the other Lenders, and Fleet National Bank, as syndication agent for itself and the other Lenders. 10.3 Omnibus Amendment Agreement dated as of September 27, 1999 by and among HF Holdings, Credit Suisse First Boston Corporation ("CSFB"), certain affiliates of Bain Capital, Inc. ("Bain") and HF Investment Holdings, LLC (the "LLC"). 10.4 Amended and Restated Limited Liability Company Agreement of the LLC, dated as of September 27, 1999, among Bain and its designees, Scott Watterson and Gary Stevenson, and CSFB. 10.5 Subscription and Stock Purchase Agreement, dated as of September 27, 1999, between HF Holdings and the LLC. 10.6 Amended and Restated Securities Purchase Agreement, dated as of September 27, 1999, among HF Holdings and CSFB. 10.7 Amended and Restated Note Agreement, dated as of September 27, 1999, between HF Holdings and CSFB. 10.8 Joinder and Supplement to Stockholders Agreement, among HF Holdings, ICON Health & Fitness and the Employee Stockholders named therein. 10.9 Amended and Restated Warrant to Purchase Class C Units of the LLC, issued to Credit Suisse First Boston Corporation, an affiliate of CSFB, on September 27, 1999. 10.10 Stockholders Agreement, dated as of September 27, 1999, among HF Holdings, ICON Health & Fitness, the LLC, Bain, certain Bain designees, Scott Watterson and Gary Stevenson and CSFB. 10.11 Restated Employment Agreement, dated as of September 27, 1999, between HF Holdings, ICON Health & Fitness and Scott Watterson. 10.12 Restated Employment Agreement, dated as of September 27, 1999, between HF Holdings, ICON Health & Fitness and Gary Stevenson. 10.13 Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings by Scott Watterson in the principal amount of $1,209,340. 10.14 Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings by Gary Stevenson in the principal amount of $990,660. 10.15 Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings and Scott Watterson. 10.16 Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings and Gary Stevenson. 10.17 1999 HF Holdings Junior Management Stock Option Plan (the "Option Plan"). 10.18 1999 ICON Health & Fitness Junior Management Deferred Bonus Plan. 10.19 Management Agreement, dated as of September 27, 1999, among HF Holdings, ICON Health & Fitness and a Bain affiliate. 10.20 Management Agreement among ICON Health & Fitness, HF Holdings and Scott Watterson. 10.21 Management Agreement among ICON Health & Fitness, HF Holdings and Gary Stevenson. 10.22 Tax Agreement, dated as of September 27, 1999, among HF Holdings and its subsidiaries. 12.1* Statements re Computation of Ratios
II-2 21.1 Subsidiaries of Registrant 23.1** Consent of PricewaterhouseCoopers LLP 23.2 Consent of Willkie Farr & Gallagher (included in their opinion filed as Exhibit 5.1) 24.1 Power of Attorney (included on the signature page of the registration statement) 25.1 Statement on Form T-1 of Eligibility of Trustee 27.1* Financial Data Schedule (Twelve Months) 27.2* Financial Data Schedule (Three Months) 27.3 Financial Data Schedule (Six Months) 99.1*** Form of Letter of Transmittal 99.2*** Form of Notice of Guaranteed Delivery 99.3*** Form of Letter to Clients 99.4*** Form of Letter to Nominees
- ------------------------ * Previously filed. ** Supersedes previously filed exhibit. *** To be filed by amendment. (B) FINANCIAL STATEMENT SCHEDULES (SEE ITEM 8) Schedule II--Valuation and Qualifying Accounts for the Three Years Ended May 31, 1999 All other schedules are omitted as the required information is not applicable or is included in the financial statements or related notes or can be derived from information contained in the consolidated financial statements and related notes. REPORTS ON FORM 8-K A Form 8-K was filed on May 27, 1999. ITEM 22. UNDERTAKINGS. Insofar as indemnifications for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 20 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the option of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is II-3 incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, ICON Health & Fitness, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing a Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on the 31st day of March, 2000. ICON HEALTH & FITNESS, INC. By: /s/ S. FRED BECK ----------------------------------------- Name: S. Fred Beck Title: Chief Financial and Accounting Officer, Vice President and Treasurer
POWER OF ATTORNEY Each person whose signature appears below appoints each of Gary E. Stevenson, S. Fred Beck and Everett Smith as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his stead, in any capacities to sign any and all amendments, including post-effective amendments to this Registration Statement and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virture hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- Chairman of the Board and * Chief Executive Officer ------------------------------------------- (Principal Executive March 31, 2000 Scott R. Watterson Officer) * President and Chief Operating ------------------------------------------- Officer and Director March 31, 2000 Gary E. Stevenson Chief Financial and Accounting /s/ S. FRED BECK Officer, Vice President and ------------------------------------------- Treasurer (Principal March 31, 2000 S. Fred Beck Financial and Accounting Officer) * Vice Chairman of the Board ------------------------------------------- March 31, 2000 Robert C. Gay * Director ------------------------------------------- March 31, 2000 Ronald P. Mika
II-5
SIGNATURE TITLE DATE --------- ----- ---- * Director ------------------------------------------- March 31, 2000 Greg Benson Director ------------------------------------------- March 31, 2000 David J. Matlin * Director ------------------------------------------- March 31, 2000 Chris R. Pechock * Director ------------------------------------------- March 31, 2000 Stanley C. Tuttleman * Director ------------------------------------------- March 31, 2000 W. McComb Dunwoody
*By: /s/ S. FRED BECK -------------------------------------- S. Fred Beck March 31, 2000 (ATTORNEY-IN-FACT)
II-6 SIGNATURES Pursuant to the requirements of the Securities Act, Jumpking, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing a Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on the 31st day of March, 2000. JUMPKING, INC. By: /s/ S. FRED BECK ----------------------------------------- Name: S. Fred Beck Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following person in the capacity and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- President and Sole Director /s/ S. FRED BECK (Principal Executive, ------------------------------------------- Financial and Accounting March 31, 2000 S. Fred Beck Officer)
II-7 SIGNATURES Pursuant to the requirements of the Securities Act, 510152 N.B. Ltd. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing a Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on the 31st day of March, 2000. 510152 N.B. LTD. By: * ----------------------------------------- Name: M. Joseph Brough Title: President
Pursuant to the requirement of the Securities Act of 1933, this Registration Statement has been signed by the following person in the capacity and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- President and Sole Director * (Principal Executive, ------------------------------------------- Financial and Accounting March 31, 2000 M. Joseph Brough Officer)
*By: /s/ S. FRED BECK -------------------------------------- S. Fred Beck March 31, 2000 (ATTORNEY-IN-FACT)
II-8 SIGNATURES Pursuant to the requirements of the Securities Act, Universal Technical Services, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing a Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on the 31st day of March, 2000. UNIVERSAL TECHNICAL SERVICES, INC. By: * ----------------------------------------- Name: Gary E. Stevenson Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * President and Director ------------------------------------------- (Principal Executive March 31, 2000 Gary E. Stevenson Officer) Assistant Secretary and /s/ S. FRED BECK Director (Principal ------------------------------------------- Financial and Accounting March 31, 2000 S. Fred Beck Officer)
*By: /s/ S. FRED BECK -------------------------------------- S. Fred Beck March 31, 2000 (ATTORNEY-IN-FACT)
II-9 SIGNATURES Pursuant to the requirements of the Securities Act, ICON International Holdings, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing a Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Logan, State of Utah, on the 31st day of March, 2000. ICON INTERNATIONAL HOLDINGS, INC. By: * ----------------------------------------- Name: Gary E. Stevenson Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * President and Director ------------------------------------------- (Principal Executive March 31, 2000 Gary E. Stevenson Officer) /s/ S. FRED BECK Treasurer and Director ------------------------------------------- (Principal Financial and March 31, 2000 S. Fred Beck Accounting Officer)
*By: /s/ S. FRED BECK -------------------------------------- S. Fred Beck March 31, 2000 (ATTORNEY-IN-FACT)
II-10 EXHIBIT INDEX
NUMBER DESCRIPTION - ------ ------------------------------------------------------------ 2.1 Agreement and Plan of Merger, dated as of September 27, 1999, among HF Holdings, ICON Health & Fitness and HF Acquisition, Inc. 3.1 Certificate of Incorporation of ICON Health & Fitness, Inc. 3.2 By-Laws of ICON Health & Fitness, Inc. 4.1 Indenture, dated September 27, 1999 between ICON Health & Fitness, Inc., the Subsidiary Guarantors named therein and the Bank of New York, as Trustee and successor to IBJ Whitehall and Trust Company. 4.2 Notation of Subsidiary Guarantee dated September 27, 1999. 4.3 Quebec Guaranty dated September 27, 1999 by ICON of Canada, Inc. in favor of The Bank of New York, as Trustee and successor to IBJ Whitehall and Trust Company. 4.4 Form of Note between ICON Health & Fitness, Inc and The Bank of New York, as Trustee and successor to IBJ Whitehall and Trust Company. 5.1*** Opinion of Willkie Farr and Gallagher. 10.1 Exchange and Registration Rights Agreement dated September 27, 1999 by and between ICON Health & Fitness, Inc., the Subsidiary Guarantors named therein and the Tendering Holders of 13% Senior Subordinated Notes. 10.2 Credit Agreement dated as of September 24, 1999 among ICON Health & Fitness, each of HF Holdings, JumpKing, Inc., ICON International Holdings, Inc., Universal Technical Services, ICON of Canada Inc. and 510152 N.B. Ltd, the Lenders signatory thereto from time to time, General Electric Capital Corporation, as agent for itself and the other Lenders, and Fleet National Bank, as syndication agent for itself and the other Lenders. 10.3 Omnibus Amendment Agreement dated as of September 27, 1999 by and among HF Holdings, Credit Suisse First Boston Corporation ("CSFB"), certain affiliates of Bain Capital, Inc. ("Bain") and HF Investment Holdings, LLC (the "LLC"). 10.4 Amended and Restated Limited Liability Company Agreement of the LLC, dated as of September 27, 1999, among Bain and its designees, Scott Watterson and Gary Stevenson, and CSFB. 10.5 Subscription and Stock Purchase Agreement, dated as of September 27, 1999, between HF Holdings and the LLC. 10.6 Amended and Restated Securities Purchase Agreement, dated as of September 27, 1999, among HF Holdings and CSFB. 10.7 Amended and Restated Note Agreement, dated as of September 27, 1999, between HF Holdings and CSFB. 10.8 Joinder and Supplement to Stockholders Agreement, among HF Holdings, ICON Health & Fitness and the Employee Stockholders named therein. 10.9 Amended and Restated Warrant to Purchase Class C Units of the LLC, issued to Credit Suisse First Boston Corporation, an affiliate of CSFB, on September 27, 1999. 10.10 Stockholders Agreement, dated as of September 27, 1999, among HF Holdings, ICON Health & Fitness, the LLC, Bain, certain Bain designees, Scott Watterson and Gary Stevenson and CSFB.
NUMBER DESCRIPTION - ------ ------------------------------------------------------------ 10.11 Restated Employment Agreement, dated as of September 27, 1999, between HF Holdings, ICON Health & Fitness and Scott Watterson. 10.12 Restated Employment Agreement, dated as of September 27, 1999, between HF Holdings, ICON Health & Fitness and Gary Stevenson. 10.13 Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings by Scott Watterson in the principal amount of $1,209,340. 10.14 Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings by Gary Stevenson in the principal amount of $990,660. 10.15 Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings and Scott Watterson. 10.16 Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings and Gary Stevenson. 10.17 1999 HF Holdings Junior Management Stock Option Plan (the "Option Plan"). 10.18 1999 ICON Health & Fitness Junior Management Deferred Bonus Plan. 10.19 Management Agreement, dated as of September 27, 1999, among HF Holdings, ICON Health & Fitness and a Bain affiliate. 10.20 Management Agreement among ICON Health & Fitness, HF Holdings and Scott Watterson. 10.21 Management Agreement among ICON Health & Fitness, HF Holdings and Gary Stevenson. 10.22 Tax Agreement, dated as of September 27, 1999, among HF Holdings and its subsidiaries. 12.1* Statements re Computation of Ratios 21.1 Subsidiaries of Registrant 23.1** Consent of PricewaterhouseCoopers 23.2 Consent of Willkie Farr & Gallagher (included in their opinion filed as Exhibit 5.1) 24.1 Power of Attorney (included on the signature page of the registration statement) 25.1 Statement on Form T-1 of Eligibility of Trustee 27.1* Financial Data Schedule (Twelve Months) 27.2* Financial Data Schedule (Three Months) 27.3 Financial Data Schedule (Six Months) 99.1*** Form of Letter of Transmittal 99.2*** Form of Notice of Guaranteed Delivery 99.3*** Form of Letter to Clients 99.4*** Form of Letter to Nominees
- ------------------------ * Previously filed. ** Supersedes previously filed exhibit. *** To be filed by amendment. EX-2.1 2 EXHIBIT 2.1 Exhibit 2.1 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of September 27, 1999, by and between HF Holdings, Inc., a Delaware corporation (the "Parent"), HF Acquisition, Inc., a Delaware corporation ("MergerSub") and Icon Health & Fitness, Inc., a Delaware corporation ("ICON"). WHEREAS, the Boards of Directors of the respective parties hereto deem it advisable and in the best interests of ICON and its stockholders to merge MergerSub with and into ICON (the "Merger") in accordance with Section 251 of the Delaware General Corporation Law (the "DGCL") and pursuant to this Agreement and the Certificate of Merger attached hereto as Annex I and incorporated herein (the "Certificate"); NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree that MergerSub shall be merged with and into ICON, which shall be the corporation surviving the Merger, and that the terms and conditions of the Merger, the mode of carrying it into effect, and the manner of converting and exchanging shares shall be as follows: ARTICLE I THE MERGER (a) At the Effective Time (as defined below in Article VI), MergerSub shall be merged with and into ICON (the "Merger"), the separate existence of MergerSub shall cease, ICON shall continue as the surviving corporation and the Merger shall in all respects have the effects provided for by the DGCL. ICON, as the surviving corporation after the Merger, is hereinafter sometimes referred to as the "Surviving Corporation." (b) Prior to and after the Effective Time, Parent, ICON and MergerSub, respectively, shall take all such actions as may be necessary or appropriate in order to effectuate the Merger. In the event that at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the officers and directors of each of the Parent, ICON and MergerSub as of the Effective Time shall take all such further action. ARTICLE II TERMS OF CONVERSION AND EXCHANGE OF SHARES At the Effective Time, by virtue of the Merger and without any action on the part of any holder thereof: (a) Each share of common stock, $.001 par value, of Merger Sub issued and outstanding immediately prior to the Merger ("MergerSub Common Stock") shall be converted into one share of common stock of the Surviving Corporation. (b) Each share of common stock, $.01 par value, of ICON issued and outstanding immediately prior to the Merger ("ICON Common Stock") shall be converted into, one outstanding share of common stock of Parent, $.001 par value. ARTICLE III CERTIFICATE OF INCORPORATION AND BY-LAWS From and after the Effective Time, and until thereafter amended as provided by law, the Certificate of Incorporation of ICON as in effect immediately prior to the Merger shall be and continue to be the Certificate of Incorporation of the Surviving Corporation. From and after the Effective Time, the By-laws of ICON shall be and continue to be the By-laws of the Surviving Corporation until amended in accordance with law. ARTICLE IV DIRECTORS AND OFFICERS The persons who are directors and officers of ICON immediately prior to the Merger shall continue as directors and officers, respectively, of the Surviving Corporation and shall continue to hold office as provided in the By-laws of the Surviving Corporation. If, at or following the Effective Time, a vacancy shall exist in the Board of Directors or in the position of any officer of the Surviving Corporation, such vacancy may be filled in the manner provided in the By-laws of the Surviving Corporation. 2 ARTICLE V AMENDMENT AND TERMINATION The parties hereto by mutual consent of their respective Boards of Directors may amend, modify or supplement this Agreement in such manner as may be agreed upon by them in writing, at any time before or after approval of this Agreement by the stockholders of Parent, ICON or MergerSub; provided, however, that no such amendment, modification or supplement shall, in the sole judgment of the Board of Directors of ICON or MergerSub, as applicable, materially and adversely affect the rights of the stockholders of ICON or MergerSub, as applicable. This Agreement may be terminated and the Merger and other transactions herein provided for abandoned at any time, whether before or after approval of this Agreement by the stockholders of ICON or MergerSub, by action of the Board of Directors of either ICON or MergerSub if the Board of Directors for such corporation determines for any reason that the consummation of the transactions provided for herein would for any reason be inadvisable or not in the best interests of such corporation or its stockholders. ARTICLE VI EFFECTIVE TIME OF THE MERGER Subject to the terms and conditions set forth in this Agreement, ICON shall cause the Certificate to be executed and thereafter delivered to the Secretary of State of Delaware for filing, as provided in Section 251 of the DGCL. The Merger shall become effective at such time as the Certificate is filed as required by law with the Secretary of State of Delaware (the "Effective Time"). ARTICLE VII MISCELLANEOUS This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 3 [Agreement & Plan of Merger] IN WITNESS WHEREOF, Parent, ICON and MergerSub, pursuant to approval and authorization duly given by resolutions adopted by their respective Boards of Directors, have each caused this Agreement and Plan of Merger to be executed by an authorized officer as of the date first written above by. HF HOLDINGS, INC. By: /s/ S. Fred Beck ------------------------------------ ICON HEALTH & FITNESS, INC. By: /s/ S. Fred Beck ------------------------------------ HF ACQUISITION, INC. By: /s/ S. Fred Beck ------------------------------------ 4 EX-3.1 3 EXHIBIT 3.1 Exhibit 3.1 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 08/02/1994 944143212 - 2423252 CERTIFICATE OF INCORPORATION ---------------------------- of -- ICON HEALTH & FITNESS, INC. --------------------------- 1. The name of this corporation is ICON Health & Fitness, Inc. 2. The registered office of this corporation in the State of Delaware is located at 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is Corporation Service Company. 3. The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 4. The total number of shares of stock that this corporation shall have authority to issue is 3,000 shares of Common Stock, $.01 par value per share. Each share of Common Stock shall be entitled to one vote. 5. The name and mailing address of the incorporator is: R. Bradford Malt, One International Place, Boston, Massachusetts 02110. 6. Except as provided to the contrary in the provisions establishing a class or series of stock, the amount of the authorized stock of this corporation of any class or classes may be increased or decreased by the affirmative vote of the holders of a majority of the stock of this corporation entitled to vote. 7. The election of directors need not be by ballot unless the by-laws shall so require. 8. In furtherance and not in limitation of the power conferred upon the board of directors by law, the board of directors shall have power to make, adopt, alter, amend and repeal from time to time by-laws of this corporation, subject to the right of the stockholders entitled to vote with respect thereto to alter and repeal by-laws made by the board of directors. 9. A director of this corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liability is not permitted under the General Corporation Law of the State of Delaware as in effect at the time such liability is determined. No amendment or repeal of this paragraph 9 shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 10. This corporation shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify and upon request shall advance expenses to any person who is or was a party or is threatened to be made a party to any claim, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to be a director or officer of this corporation or while a director or officer is or was serving at the request of this corporation as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against expenses (including attorney's fees and expenses), judgments, fines, penalties and amounts paid in settlement incurred in connection with the investigation, preparation to defend or defense of such action, suit, proceeding or claim; provided, however, that the foregoing shall not require this corporation to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person. Such indemnification shall not be exclusive of other indemnification rights arising under any by-law, agreement, vote of directors or stockholders or otherwise and shall inure to the benefit of the heirs and legal representatives of such person. Any person seeking indemnification under this paragraph 10 shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established. Any repeal or modification of the foregoing provisions of this paragraph 10 shall not adversely affect any right or protection of a director or officer of this corporation with respect to any acts or omissions of such director or officer occurring prior to such repeal or modification. 11. The books of this corporation may (subject to any statutory requirements) be kept outside the State of Delaware as may be designated by the board of directors or in the by-laws of this corporation. 12. If at any time this corporation shall have a class of stock registered pursuant to the provisions of the Securities Exchange Act of 1934, for so long as such class is so registered, any action by the stockholders of such class must be taken at an -2- annual or special meeting of stockholders and may not be taken by written consent. 13. This corporation shall not be governed by Section 203 of the General Corporation Law of the State of Delaware. THE UNDERSIGNED, the sole incorporator named above, hereby certifies that the facts stated above are true as of this 2nd day of August, 1994. /s/ R. Bradford Malt ---------------------------------------- R. Bradford Malt -3- EX-3.2 4 EXHIBIT 3.2 Exhibit 3.2 BY-LAWS OF ICON HEALTH & FITNESS, INC. Section 1. LAW CERTIFICATE OF INCORPORATION AND BY-LAWS 1.1. These by-laws are subject to the certificate of incorporation of the corporation. In these by-laws, references to law, the certificate of incorporation and by-laws mean the law, the provisions of the certificate of incorporation and the by-laws as from time to time in effect. Section 2. STOCKHOLDERS 2.1. Annual Meeting. The annual meeting of stockholders shall be held at 10:00 AM on the second Tuesday in October in each year, unless that day be a legal holiday at the place where the meeting is to be held, in which case the meeting shall be held at the same hour on the next succeeding day not a legal holiday, or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect a board of directors and transact such other business as may be required by law or these by-laws or as may properly come before the meeting. 2.2. Special Meeting. A special meeting of the stockholders may be called at any time by the chairman or any vice-chairman of the board, if any, the president or the board of directors. A special meeting of the stockholders shall be called by the secretary, or in the case of the death, absence, incapacity or refusal of the secretary, by an assistant secretary or some other officer, upon application of a majority of the directors or the holders of outstanding capital stock possessing at least 30% of the power to vote generally of all outstanding capital stock. Any such application shall state the purpose or purposes of the proposed meeting. Any such call shall state the place, date, hour, and purposes of the meeting. 2.3. Place of Meeting. All meetings of the stockholders for the election of directors or for any other purpose shall be held at such place within or without the State of Delaware as may be determined from time to time by the chairman or any vice-chairman of the board, if any, the president or the board of directors. Any adjourned session of any meeting of the stockholders shall be held at the place designated in the vote of adjournment. 2.4. Notice of Meetings. Except as otherwise provided by law, a written notice of each meeting of stockholders stating the place, day and hour thereof and, in the case of a special meeting, the purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the meeting, to each stockholder entitled to vote thereat, and to each stockholder who, by law, by the certificate of incorporation or by these by-laws, is entitled to notice, by leaving such notice with him or at his residence or usual place of business, or by depositing it in the United States mail, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the corporation. Such notice shall be given by the secretary, or by an officer or person designated by the board of directors, or in the case of a special meeting by the officer calling the meeting. As to any adjourned session of any meeting of stockholders, notice of the adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment was taken except that if the adjournment is for more than thirty days or if after the adjournment a new record date is set for the adjourned session, notice of any such adjourned session of the meeting shall be given in the manner heretofore described. No notice of any meeting of stockholders or any adjourned session thereof need be given to a stockholder if a written waiver of notice, executed before or after the meeting or such adjourned session by such stockholder, is filed with the records of the meeting or if the stockholder attends such meeting without objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders or any adjourned session thereof need be specified in any written waiver of notice. 2.5. Quorum of Stockholders. At any meeting of the stockholders a quorum as to any matter shall consist of a majority of the votes entitled to be cast on the matter, except where a larger quorum is required by law, by the certificate of incorporation or by these by-laws. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present. If a quorum is present at an original meeting, a quorum need not be present at an adjourned session of that meeting. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of any corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. 2.6. Action by Vote. When a quorum is present at any meeting, a plurality of the votes properly cast for election to any office shall elect to such office and a majority of the votes properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the certificate of incorporation or by these by-laws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. 2.7. Action without Meetings. Unless otherwise provided in the certificate of incorporation, any action required or permitted to be taken by stockholders for or in connection with any corporate action may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in Delaware by hand or certified or registered mail, return receipt requested, to its principal place of business or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Each such written consent shall bear the date of signature of each stockholder who signs the consent. No written consent shall be effective to take the corporate action referred to therein unless written consents signed by a number of stockholders sufficient to take such action are delivered to the corporation in the manner specified in this paragraph within sixty days of the earliest dated consent so delivered. If action is taken by consent of stockholders and in accordance with the foregoing, there shall be filed with the records of the meetings of stockholders the writing or writings comprising such consent. -2- If action is taken by less than unanimous consent of stockholders, prompt notice of the taking of such action without a meeting shall be given to those who have not consented in writing and a certificate signed and attested to by the secretary that such notice was given shall be filed with the records of the meetings of stockholders. In the event that the action which is consented to is such as would have required the filing of a certificate under any provision of the General Corporation Law of the State of Delaware, if such action had been voted upon by the stockholders at a meeting thereof, the certificate filed under such provision shall state, in lieu of any statement required by such provision concerning a vote of stockholders, that written consent has been given under Section 228 of said General Corporation Law and that written notice has been given as provided in such Section 228. 2.8. Proxy Representation. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, objecting to or voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. The authorization of a proxy may but need not be limited to specified action, provided, however, that if a proxy limits its authorization to a meeting or meetings of stockholders, unless otherwise specifically provided such proxy shall entitle the holder thereof to vote at any adjourned session but shall not be valid after the final adjournment thereof. 2.9. Inspectors. The directors or the person presiding at the meeting may, but need not, appoint one or more inspectors of election and any substitute inspectors to act at the meeting or any adjournment thereof . Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the share of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. 2.10. List of Shareholders. The secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. The stock ledger shall be the only evidence as to who are stockholders entitled to examine such list or to vote in person or by proxy at such meeting. Section 3. BOARD OF DIRECTORS -3- 3.1. Number. The number of directors which shall constitute the whole board shall not be less than one nor more than fifteen in number. Thereafter, within the foregoing limits, the stockholders at the annual meeting shall determine the number of directors and shall elect the number of directors as increased at any time or from time to time by the stockholders or by the directors by vote of a majority of the directors then in office. The number of directors may be decreased to any number permitted by the foregoing at any time either by the stockholders or by the directors by vote of a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation or removal of one or more directors. Directors need not be stockholders. 3.2. Tenure. Except as otherwise provided by law, by the certificate of incorporation or by these by-laws, each director shall hold office until the next annual meeting and until his successor is elected and qualified, or until he sooner dies, resigns, is removed or becomes disqualified. 3.3. Powers. The business and affairs of the corporation shall be managed by or under the direction of the board of directors who shall have and exercise all the powers of the corporation and do all such lawful acts and things as are not by law, the certificate of incorporation or these by-laws directed or required to be exercised or done by the stockholders. 3.4. Vacancies. Vacancies and any newly created directorships resulting from any increase in the number of directors may be filled by vote of the stockholders at a meeting called for the purpose, or by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. When one or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have resigned, shall have power to fill such vacancy or vacancies, the vote or action by writing thereon to take effect when such resignation or resignations shall become effective. The directors shall have and may exercise all their powers notwithstanding the existence of one or more vacancies in their number, subject to any requirements of law or of the certificate of incorporation or of these by-laws as to the number of directors required for a quorum or for any vote or other actions. 3.5. Committees. The board of directors may, by vote of a majority of the whole board, (a) designate, change the membership of or terminate the existence of any committee or committees, each committee to consist of one or more of the directors; (b) designate one or more directors as alternate members of any such committee who may replace any absent or disqualified member at any meeting of the committee; and (c) determine the extent to which each such committee shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, including the power to authorize the seal of the corporation to be affixed to all papers which require it and the power and authority to declare dividends or to authorize the issuance of stock; excepting, however, such powers which by law, by the certificate of incorporation or by these by-laws they are prohibited from so delegating. In the absence or disqualification of any member of such committee and his alternate, if any, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Except as the board of directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the board or such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these by-laws for the conduct of business by the board of directors. Each committee -4- shall keep regular minutes of its meetings and report the same to the board of directors upon request. 3.6. Regular Meetings. Regular meetings of the board of directors may be held without call or notice at such places within or without the State of Delaware and at such times as the board may from time to time determine, provided that notice of the first regular meeting following any such determination shall be given to absent directors. A regular meeting of the directors may be held without call or notice immediately after and at the same place as the annual meeting of stockholders. 3.7. Special Meetings. Special meetings of the board of directors may be held at any time and at any place within or without the State of Delaware designated in the notice of the meeting, when called by the chairman or any vice-chairman of the board, if any, the president, or by one-third or more in number of the directors, reasonable notice thereof being given to each director by the secretary or by the chairman of the board, if any, the president or any one of the directors calling the meeting. 3.8. Notice. It shall be reasonable and sufficient notice to a director to send notice by mail at least forty-eight hours or by telegram at least twenty-four hours before the meeting addressed to him at his usual or last known business or residence address or to give notice to him in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 3.9. Quorum. Except as may be otherwise provided by law, by the certificate of incorporation or by these by-laws, at any meeting of the directors a majority of the directors then in office shall constitute a quorum; a quorum shall not in any case be less than one-third of the total number of directors constituting the whole board. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 3.10. Action by Vote. Except as may be otherwise provided by law, by the certificate of incorporation or by these by-laws, when a quorum is present at any meeting the vote of a majority of the directors present shall be the act of the board of directors. 3.11. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the board of directors or a committee thereof may be taken without a meeting if all the members of the board or of such committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the records of the meetings of the board or of such committee. Such consent shall be treated for all purposes as the act of the board or of such committee, as the case may be. 3.12. Participation in Meetings by Conference Telephone. Members of the board of directors, or any committee designated by such board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other or by any other means permitted by law. Such participation shall constitute presence in person at such meeting. -5- 3.13. Compensation. In the discretion of the board of directors, each director may be paid such fees for his services as director and be reimbursed for his reasonable expenses incurred in the performance of his duties as director as the board of directors from time to time may determine. Nothing contained in this section shall be construed to preclude any director from serving the corporation in any other capacity and receiving reasonable compensation therefor. 3.14. Interested Directors and Officers. (a) No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the corporation's directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if : (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee thereof, or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction. Section 4. OFFICERS AND AGENTS 4.1. Enumeration; Qualification. The officers of the corporation shall be a chairman of the board, a president, a treasurer, a secretary and such other officers, if any, as the board of directors from time to time may in its discretion elect or appoint including without limitation one or more vice chairmen of the board, one or more vice presidents and a controller. The corporation may also have such agents, if any, as the board of directors from time to time may in its discretion choose. Any officer may be but none need be a director or stockholder. Any two or more offices may be held by the same person. Any officer may be required by the board of directors to secure the faithful performance of his duties to the corporation by giving bond in such amount and with sureties or otherwise as the board of directors may determine. 4.2. Powers. Subject to law, to the certificate of incorporation and to the other provisions of these by-laws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such additional duties and powers as the board of directors may from time to time designate. -6- 4.3. Election. The officers may be elected by the board of directors at their first meeting following the annual meeting of the stockholders or at any other time. At any time or from time to time the directors may delegate to any officer their power to elect or appoint any other officer or any agents. 4.4. Tenure. Each officers shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders and until his respective successor is chosen and qualified unless a shorter period shall have been specified by the terms of his election or appointment, or in each case until he sooner dies, resigns, is removed or becomes disqualified. Each agent shall retain his authority at the pleasure of the directors, or the officers by whom he was appointed or by the officer who then holds agent appointive power. 4.5. Chairman of the Board of Directors, Vice Chairman, President and Vice President. The chairman of the board, if any, shall have such duties and powers as shall be designated from time to time by the board of directors. Unless the board of directors otherwise specifies, the chairman of the board shall preside at all meetings of the stockholders and of the board of directors. Unless the board of directors otherwise specifies, subject to the control of the directors, the chairman of the board shall be the chief executive officer and shall have direct charge of all business operations of the corporation and shall have general charge and supervision of the business of the corporation. Any Vice Chairman, the President and any vice presidents shall have such duties and powers as shall be set forth in these by-laws or as shall be designated from time to time by the board of directors. 4.6. Treasurer and Assistant Treasurers. Unless the board of directors otherwise specifies, the treasurer shall be the chief financial officer of the corporation and shall be in charge of its funds and valuable papers, and shall have such other duties and powers as may be designated from time to time by the board of directors. If no controller is elected, the treasurer shall, unless the board of directors otherwise specifies, also have the duties and powers of the controller. Any assistant treasurers shall have such duties and powers as shall be designated from time to time by the board of directors or the treasurer. 4.7. Controller and Assistant Controllers. If a controller is elected, he shall, unless the board of directors otherwise specifies, be the chief accounting officer of the corporation and be in charge of its books of account and accounting records, and of its accounting procedures. He shall have such other duties and powers as may be designated from time to time by the board of directors. Any assistant controller shall have such duties and powers as shall be designated from time to time by the board of directors. 4.8. Secretary and Assistant Secretaries. The secretary shall record all proceedings of the stockholders, of the board of directors and of committees of the board of directors in a book or series of books to be kept therefor and shall file therein all actions by written consent of stockholders or directors. In the absence of the secretary from any meeting, an assistant secretary, or if there be none or he is absent, a temporary secretary chosen at the meeting, shall record the proceedings thereof. Unless a transfer agent -7- has been appointed the secretary shall keep or cause to be kept the stock and transfer records of the corporation, which shall contain the names and record addresses of all stockholders and the number of shares registered in the name of each stockholder. He shall have such other duties and powers as may from time to time be designated by the board of directors. Any assistant secretaries shall have such duties and powers as shall be designated from time to time by the board of directors. Section 5. RESIGNATIONS AND REMOVALS 5.1. Any director or officer may resign at any time by delivering his resignation in writing to the chairman of the board, if any, the president, or the secretary or to a meeting of the board of directors. Such resignation shall be effective upon receipt unless specified to be effective at some other time, and without in either case the necessity of its being accepted unless the resignation shall so state. A director (including persons elected by directors to fill vacancies in the board) may be removed from office without cause by the vote of the holders of a majority of the shares issued and outstanding and entitled to vote in the election of directors. The board of directors may at any time remove any officer either with or without cause. The board of directors may at any time terminate or modify the authority of any agent. No director or officer resigning and (except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the corporation) no director or officer removed shall have any right to any compensation as such director or officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise; unless, in the case of a resignation, the directors, or, in the case of removal, the body acting on the removal, shall in their or its discretion provide for compensation. Section 6. VACANCIES 6.1. If the office of the chairman of the board or the president or the treasurer or the secretary becomes vacant, the directors may elect a successor by vote of a majority of the directors then in office. If the office of any other officer becomes vacant, any person or body empowered to elect or appoint that officer may choose a successor. Each such successor shall hold office for the unexpired term, and in the case of the president, the treasurer and the secretary until his successor is chosen and qualified or in each case until he sooner dies, resigns, is removed or becomes disqualified. Any vacancy of a directorship shall be filled as specified in Section 3.4 of these by-laws. Section 7. CAPITAL STOCK 7.1 Stock Certificates. Each stockholder shall be entitled to a certificate stating the number and the class and the designation of the series, if any, of the shares held by him, in such form as shall, in conformity to law, the certificate of incorporation and the by-laws, be prescribed from time to time by the board of directors. Such certificate shall be signed by the chairman or vice chairman of the board, if any, or the president or a vice president and by the treasurer or an assistant treasurer or by the secretary or an assistant secretary. Any of or all the signatures on the certificate may be a facsimile. In case an officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with -8- the same effect as if he were such officer, transfer agent, or registrar at the time of its issue. 7.2. Loss of Certificates. In the case of the alleged theft, loss, destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms, including receipt of a bond sufficient to indemnify the corporation against any claim on account thereof, as the board of directors may prescribe. Section 8. TRANSFER OF SHARES OF STOCK 8.1. Transfer on Books. Subject to the restrictions, if any, stated or noted on the stock certificate, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assistant and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the board of directors or the transfer agent of the corporation may reasonably require. Except as may be otherwise required by law, by the certificate of incorporation or by these by-laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote or to give any consent with respect thereto and to be held liable for such calls and assessments, if any, as may lawfully be made thereon, regardless of any transfer, pledge or other disposition of such stock until the shares have been properly transferred on the books of the corporation. It shall be the duty of each stockholder to notify the corporation of his post office address. 8.2. Record Date and Closing Transfer Books. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no such record date is fixed by the board of directors, the record date for determining the stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no such record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by the General Corporation Law of the State of Delaware, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware by hand or certified or -9- registered mail, return receipt requested, to its principal place of business or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. If no record date has been fixed by the board of directors and prior action by the board of directors is required by the General Corporation Law of the State of Delaware, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record is adopted, and which record date shall be not more than sixty days prior to such payment, exercise or other action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. Section 9. CORPORATE SEAL 9.1. Subject to alteration by the directors, the seal of the corporation shall consist of a flat-faced circular die with the word "Delaware" and the name of the corporation cut or engraved thereon, together with such other words, dates or images as may be approved from time to time by the directors. Section 10. EXECUTION OF PAPERS 10.1. Except as the board of directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts or other obligations made, accepted or endorsed by the corporation shall be signed by the chairman of the board, if any, the president, a vice president or the treasurer. Section 11. FISCAL YEAR 11.1. The fiscal year of the corporation shall end on the Saturday nearest the 31st of May. Section 12. AMENDMENTS 12.1. These by-laws may be adopted, amended or repealed by vote of a majority of the directors then in office or by vote of a majority of the stock outstanding and entitled to vote. Any by-law, whether adopted, amended or repealed by the stockholders or directors, may be amended or reinstated by the stockholders or the directors. -10- EX-4.1 5 EXHIBIT 4.1 Exhibit 4.1 EXECUTION COPY ================================================================================ ICON HEALTH & FITNESS, INC., as Issuer THE SUBSIDIARY GUARANTORS NAMED HEREIN, and IBJ WHITEHALL BANK & TRUST COMPANY, as Trustee --------------------------------- Indenture Dated as of September 27, 1999 ------------------------- $45,000,000 12% Notes due 2005, Series A and 12% Notes due 2005, Series B ================================================================================ ICON HEALTH & FITNESS, INC. Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of ___________, 1999 Trust Indenture Indenture Act Section Section - ----------- ------- [to be revised] ss.310 (a)(1)..........................................................6.7 (a)(2)..........................................................6.7 (b).............................................................6.8 ss.312 (c).............................................................7.1 ss.314 (a)(4).........................................................10.8(a) (c)(1)..........................................................1.3 (c)(2)..........................................................1.3 (e).............................................................1.3 ss.315 (b).............................................................6.1 ss.316 (a)(last sentence).................................1.1 ("Outstanding") (a)(1)(A)..................................................5.2, 5.12 (a).............................................................5.13 (b).............................................................5.8 (c)............................................................ 1.5(d) ss.317 (a)(1)..........................................................5.3 (a)(2)..........................................................5.4 (b)............................................................10.3 ss.318 (a).............................................................1.12 TABLE OF CONTENTS Page ---- ARTICLE I. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.1. Definitions.....................................................1 Section 1.2. Incorporation by Reference of Trust Indenture Act..............29 Section 1.3. Compliance Certificates and Opinions..........................30 Section 1.4. Form of Documents Delivered to Trustee.........................30 Section 1.5. Acts of Holders................................................31 Section 1.6. Notices, Etc., to Trustee and the Company......................32 Section 1.7. Notice to Holders; Waiver......................................33 Section 1.8. Effect of Headings and Table of Contents.......................34 Section 1.9. Successors and Assigns.........................................34 Section 1.10. Separability Clause...........................................34 Section 1.11. Benefits of Indenture.........................................34 Section 1.12. Governing Law.................................................34 Section 1.13. Legal Holidays................................................34 ARTICLE II. SECURITY FORMS Section 2.1. Forms Generally................................................35 Section 2.2. Restrictive Legends............................................36 ARTICLE III. THE SECURITIES Section 3.1. Title and Terms................................................37 Section 3.2. Denominations..................................................38 Section 3.3. Execution, Authentication, Delivery and Dating.................38 Section 3.4. Temporary Securities...........................................40 Section 3.5. Registration, Registration of Transfer and Exchange...........40 Section 3.6. Book-Entry Provisions for U.S. Global Security................42 Section 3.7. Special Transfer Provisions...................................43 Section 3.8. Mutilated, Destroyed, Lost and Stolen Securities..............45 Section 3.9. Payment of Interest; Interest Rights Preserved................46 Section 3.10. Persons Deemed Owners........................................48 Section 3.11. Cancellation.................................................48 Section 3.12. Computation of Interest......................................48 ARTICLE IV. SATISFACTION AND DISCHARGE Section 4.1. Satisfaction and Discharge of Indenture.......................49 Section 4.2. Application of Trust Money....................................50 ARTICLE V. REMEDIES i Section 5.1. Events of Default.............................................50 Section 5.2. Acceleration of Maturity; Rescission and Annulment............53 Section 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee ..................................................54 Section 5.4. Trustee May File Proofs of Claim..............................55 Section 5.5. Trustee May Enforce Claims Without Possession of Securities...56 Section 5.6. Application of Money Collected................................56 Section 5.7. Limitation on Suits...........................................57 Section 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest.........................................57 Section 5.9. Restoration of Rights and Remedies............................58 Section 5.10. Rights and Remedies Cumulative...............................58 Section 5.11. Delay or Omission Not Waiver.................................58 Section 5.12. Control by Holders...........................................58 Section 5.13. Waiver of Past Defaults......................................59 Section 5.14. Waiver of Stay or Extension Laws.............................59 ARTICLE VI. THE TRUSTEE Section 6.1. Notice of Defaults............................................60 Section 6.2. Certain Rights of Trustee.....................................60 Section 6.3. Trustee Not Responsible for Recitals or Issuance of Securities ......................................61 Section 6.4. May Hold Securities...........................................62 Section 6.5. Money Held in Trust...........................................62 Section 6.6. Compensation and Reimbursement................................62 Section 6.7. Corporate Trustee Required; Eligibility.......................63 Section 6.8. Resignation and Removal; Appointment of Successor.............63 Section 6.9. Acceptance of Appointment by Successor........................65 Section 6.10. Merger, Conversion, Consolidation or Succession to Business..65 ARTICLE VII. HOLDERS' LISTS AND REPORTS BY TRUSTEE Section 7.1. Disclosure of Names and Addresses of Holders..................66 Section 7.2. Reports by Trustee............................................67 ARTICLE VIII. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 8.1. Company May Consolidate, Etc., Only on Certain Terms..........67 Section 8.2. Successor Substituted.........................................69 Section 8.3. Securities to Be Secured in Certain Events.....................69 ARTICLE IX. SUPPLEMENTAL INDENTURES Section 9.1. Supplemental Indentures Without Consent of Holders............70 ii Section 9.2. Supplemental Indentures with Consent of Holders...............70 Section 9.3. Execution of Supplemental Indentures..........................71 Section 9.4. Effect of Supplemental Indentures.............................72 Section 9.5. Conformity with Trust Indenture Act...........................72 Section 9.6. Reference in Securities to Supplemental Indentures............72 Section 9.7. Notice of Supplemental Indentures.............................72 ARTICLE X. COVENANTS Section 10.1. Payment of Principal, Premium, if any, and Interest..........72 Section 10.2. Maintenance of Office or Agency..............................73 Section 10.3. Money for Security Payments to Be Held in Trust..............74 Section 10.4. Corporate Existence...........................................75 Section 10.5. Payment of Taxes and Other Claims.............................76 Section 10.6. Maintenance of Properties.....................................76 Section 10.7. Insurance.....................................................76 Section 10.8. Statement by Officers as to Default...........................76 Section 10.9. Provision of Financial Statements.............................77 Section 10.10. Limitation on Indebtedness and Issuance of Preferred Stock...78 Section 10.11. Limitation on Restricted Payments............................79 Section 10.12. [Intentionally Omitted].....................................84 Section 10.13. Limitation on Transactions with Affiliates..................84 Section 10.14. Limitation on Liens.........................................85 Section 10.15. Change of Control Offer.....................................86 Section 10.16. Limitation on Line of Business..............................88 Section 10.17. Limitation on Sale of Assets................................88 Section 10.18. Limitation on Issuances of Guarantees of Indebtedness......90 Section 10.19. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries.....................................91 Section 10.20. Limitation on Sale and Leaseback Transactions...............92 Section 10.21. [Intentionally Omitted].....................................92 Section 10.22. Limitation on Designations of Unrestricted Subsidiaries.....92 Section 10.23. Waiver of Certain Covenants.................................93 Section 10.24. Limitation on Other Senior Indebtedness.....................94 Section 10.25. Rating......................................................94 Section 10.26. Payments for Consent........................................94 Section 10.27. Additional Subsidiary Guarantees............................94 ARTICLE XI. REDEMPTION OF SECURITIES Section 11.1. Right of Redemption..........................................95 Section 11.2. Applicability of Article.....................................95 Section 11.3. Election to Redeem; Notice to Trustee........................95 Section 11.4. [Intentionally Omitted]......................................95 Section 11.5. Notice of Redemption.........................................95 iii Section 11.6. Deposit of Redemption Price..................................96 Section 11.7. Securities Payable on Redemption Date........................96 ARTICLE XII. DEFEASANCE AND COVENANT DEFEASANCE Section 12.1. Company's Option to Effect Defeasance or Covenant Defeasance ........................................97 Section 12.2. Defeasance and Discharge.....................................97 Section 12.3. Covenant Defeasance..........................................98 Section 12.4. Conditions to Defeasance or Covenant Defeasance..............98 Section 12.5. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions..............101 Section 12.6. Reinstatement...............................................101 ARTICLE XIII. SUBORDINATION OF SECURITIES Section 13.1. Securities Subordinated to Senior Indebtedness..............102 Section 13.2. No Payment on Securities in Certain Circumstances...........102 Section 13.3. Payment over Proceeds upon Dissolution, Etc.................103 Section 13.4. Subrogation.................................................105 Section 13.5. Obligations of Company Unconditional........................106 Section 13.6. Notice to Trustee...........................................106 Section 13.7. Reliance on Judicial Order or Certificate of Liquidating Agent .........................................107 Section 13.8. Trustee's Relation to Senior Indebtedness...................108 Section 13.9. Subordination Rights Not Impaired by Acts or Omissions of the Trustee, the Holders, the Company or Holders of Senior Indebtedness.................................108 Section 13.10. Holders Authorize Trustee to Effectuate Subordination of Securities.............................................109 Section 13.11. Not to Prevent Events of Default...........................109 Section 13.12. Trustee's Compensation Not Prejudiced......................109 Section 13.13. No Waiver of Subordination Provisions......................109 Section 13.14. Payments May Be Paid Prior to Dissolution..................110 ARTICLE XIV. SUBSIDIARY GUARANTEES Section 14.1. Guarantee...................................................110 Section 14.2. Guarantee Limitation On Subsidiary Guarantor Liability......112 Section 14.3. Execution And Delivery Of Subsidiary Guarantee..............112 Section 14.4. Subsidiary Guarantors May Consolidate, Etc., Only on Certain Terms..............................................113 Section 14.5. Releases of Subsidiary Guarantee............................114 Section 14.6. Subordination of Subsidiary Guarantee.......................115 iv SCHEDULES SCHEDULE I List of Subsidiary Guarantors. SCHEDULE II Agreements. EXHIBITS EXHIBIT A Form of Securities, Trustee's Certificate of Authentication. EXHIBIT B [Intentionally Omitted] EXHIBIT C Form of Certificate to be Delivered in Connection with Transfers to Non-QIB Institutional Accredited Investors. EXHIBIT D Form of Notation of Subsidiary Guarantee. EXHIBIT E Form of Supplemental Indenture to be Delivered by Subsequent Subsidiary Guarantors. v INDENTURE, dated as of September 27, 1999, between ICON HEALTH & FITNESS, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company" or "ICON"), as Issuer, having its principal office at 1500 South 1000 West, Logan, Utah 84321, the Subsidiary Guarantors listed on Schedule I hereto (collectively, the "Subsidiary Guarantors") and IBJ Whitehall Bank & Trust Company, a New York banking association, as trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue which will consist of up to $45,000,000 principal amount at maturity of 12% Notes due 2005, Series A (herein called the "Initial Securities"), and 12% Notes due 2005, Series B (the "Exchange Securities" and, together with the Initial Securities, the "Securities"). All things necessary have been done to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of the Company, in accordance with their and its terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as set forth herein. ARTICLE I. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.1. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein, and the terms "cash transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act; c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; and d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Articles Two, Ten and Twelve, are defined in those Articles. "Acquired Indebtedness" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Subsidiary of, such specified Person and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Act", when used with respect to any Holder, has the meaning specified in Section 1.5. "Affiliate" of any specified Person means any other Person (i) which directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, such Person, (ii) which directly or indirectly through one or more intermediaries beneficially owns or holds 10% or more of the combined voting power of the total Voting Stock of such Person, or (iii) of which 10% or more of the combined voting power of the total Voting Stock (or in the case of a Person that is not a corporation, 10% or more of the equity interest), directly or indirectly, through one or more intermediaries is beneficially owned or held by such Person; provided that the term "Affiliate" shall not be deemed to apply to any Bank solely by virtue of its ownership directly or indirectly of up to 20% of the Voting Stock of the Company. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling", "controlled by" and "under common control with" have meanings correlative to the foregoing. For the avoidance of doubt, Holdings, Bain and Credit Suisse First Boston Corporation ("CSFB") shall be deemed Affiliates of the Company as of the Issue Date. "Asset Sale" means: (i) the sale, lease, conveyance or other disposition of any assets or rights, other than sales of inventory in the ordinary course of business consistent with past practices; provided that the sale, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole shall be governed by Article Eight and Section 10.15 of the Indenture and -2- not Section 10.17 of the Indenture and (ii) the issuance or sale of Capital Stock by any of the Company's Restricted Subsidiaries. Notwithstanding the preceding, the following items shall not be deemed to be Asset Sales: (i) any single transaction or series of related transactions that (a) involves assets having a Fair Market Value of less than $500,000 or (b) results in net proceeds to the Company and its Restricted Subsidiaries of less than $500,000, (ii) a transfer of assets between or among the Company and its Restricted Subsidiaries, (iii) an issuance of Capital Stock by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (iv) a Restricted Payment that is permitted by Section 10.11 and (v) the sale of accounts receivable transferred to an Unrestricted Subsidiary or any other Person that is not a Subsidiary of the Company in connection with a Securitization Transaction for the Fair Market Value thereof, including cash in an amount at least equal to 75% of the Fair Market Value thereof. For purposes of clause (v) of the immediately preceding sentence, Securitization Notes shall be deemed to be cash. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP. "Average Life to Stated Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by (b) the then outstanding principal amount of such Indebtedness. "Bain" means Bain Capital, Inc. "Bankruptcy Law" means Title 11, United States Code, as amended, or any similar United States Federal or State law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Banks" means General Electric Capital Corporation and Fleet National Bank, as agents for the lenders, and the banks and other financial institutions from time to time that are agents or lenders under the Credit Agreement. -3- "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York or in the city where the Corporate Trust Office or the principal office of the Paying Agent is located are authorized or obligated by law or executive order to close. "Canadian Subsidiary Borrowing Base" means, as of any date, an amount equal to the sum of (a) 85.0% of the book value of all accounts receivable owned by the Company's Canadian Restricted Subsidiaries) (excluding any accounts receivable from an Affiliate of such Canadian Restricted Subsidiaries or that are more than 90 days past due, less (without duplication) the allowance for doubtful accounts attributable to current trade accounts receivable) and (b) 60.0% of the book value of all inventory owned by such Canadian Restricted Subsidiaries as of such date (with a seasonal increase of 70.0% of inventory in effect from July 1 through November 30 of each year), all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, Canadian Subsidiary Borrowing Base shall be calculated utilizing the most recent available information. "Capital Stock" means (a) in the case of a corporation, corporate stock; (b) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (c) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and (d) any other interest or participation that confers on a person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing person; and in each case, all warrants, options or other rights to acquire any of the foregoing (but excluding any debt security that is convertible into, or exchangeable for, any of the foregoing). "Capitalized Lease Obligation" means any obligation under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed) that is required to be classified and accounted for as a capital lease obligation under GAAP and, for the purpose of this Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. -4- "Cash Equivalents" means (a) United States dollars, (b) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than nine months from the date of acquisition, (c) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition and overnight bank deposits, in each case with any United States commercial bank having capital and surplus in excess of $500 million, (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) entered into with any financial institution meeting the qualifications specified in clause (c) above, and (e) commercial paper having the highest rating obtainable from Moody's Investors Service or Standard & Poors Ratings Group and bankers' acceptances of a financial institution with such a commercial paper rating and in each case maturing within 270 days after the date of acquisition. "Change of Control" means the occurrence of any of the following events: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than Bain or its Affiliates or CSFB or its Affiliates, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that (x) a Person shall be deemed to have beneficial ownership of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time and (y) "beneficial owner" shall not include any "person" or "group" solely by reason of such Person being party to the Stockholders Agreement or a member of the limited liability company referred to in the Exchange Offer and Consent Solicitation Statement), directly or indirectly, of more than 50% of the total outstanding Voting Stock of the Company or Holdings, as the case may be measured by voting power rather than number of shares; (ii) the sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" or "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than Bain or its Affiliates or CSFB or its Affiliates; (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company or Holdings, as the case may be (together with any new directors whose election to such Board or whose nomination for election by the stockholders of the Company or Holdings, as the case may be, was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of such Board of Directors then in office; (iv) the Company or Holdings, as the case may be, consolidates with or merges with or into another Person, or any Person consolidates with or merges into or with the Company or Holdings, as the case may be, in any such event pursuant to a -5- transaction in which any of the outstanding Voting Stock of the Company or Holdings, as the case may be, is converted into or exchanged for cash, securities or other property, other than any such transaction where the outstanding Voting Stock of the Company or Holdings, as the case may be, is not changed or exchanged at all (except only to the extent necessary to reflect a change in the jurisdiction of incorporation of the Company or Holdings, as the case may be) or where (A) the outstanding Voting Stock of the Company or Holdings, as the case may be, outstanding immediately prior to such transaction is changed into or exchanged for Voting Stock of the surviving transferee Person (other than Redeemable Capital Stock) constituting a majority of the outstanding shares of such Voting Stock of such surviving transferee Person immediately after giving effect to such issuance and (B) no "person" or "group" other than Bain or its Affiliates or CSFB or its Affiliates, owns immediately after such transaction, directly or indirectly, more than 50% of the total outstanding Voting Stock of the surviving corporation; (v) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution; or (vi) Holdings shall hold less than 100% of the common stock of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Borrowing Base" means, as of any date, an amount equal to the sum of (a) 85.0% of the book value of all accounts receivable owned by the Company and its Domestic Subsidiaries and Canadian Restricted Subsidiaries (excluding any accounts receivable from an Affiliate of such Person or that are more than 90 days past due, less (without duplication) the allowance for doubtful accounts attributable to current trade accounts receivable) and (b) 60.0% of the book value of all inventory owned by the Company and its Domestic Subsidiaries and Canadian Restricted Subsidiaries as of such date (with a seasonal increase of 70.0% of inventory in effect from July 1 through November 30 of each year), all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, Company Borrowing Base shall be calculated utilizing the most recent available information. -6- "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any two of the following: its Chairman, Chief Executive Officer, its President, any Vice President, its Treasurer, its Chief Financial Officer, Director of Finance or an Assistant Treasurer, and delivered to the Trustee. "Consolidated Adjusted Net Income (Loss)" means, for any period, the consolidated net income (or loss) of the Company and its Restricted Subsidiaries for such period as determined in accordance with GAAP, adjusted, to the extent included therein, by excluding, without duplication, (i) any net after-tax extraordinary gains or losses (less all fees and expenses relating thereto), (ii) the portion of net income (or loss) of the Company and its consolidated Restricted Subsidiaries allocable to minority interests in unconsolidated Persons or Persons that are accounted for by equity method of accounting to the extent that cash dividends or distributions have not actually been received by the Company or any Restricted Subsidiary, (iii) net income (or loss) of any Person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan, (v) net after-tax gains or losses (less all fees and expenses relating thereto) in respect of dispositions of assets other than in the ordinary course of business, (vi) the net income of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its shareholders, or (vii) the cumulative effect of a change in accounting principles. "Consolidated Fixed Charge Coverage Ratio" of the Company means, for any period, the ratio of (a) the sum of (i) Consolidated Adjusted Net Income (Loss), (ii) Consolidated Interest Expense, (iii) Consolidated Income Tax Expense and (iv) Consolidated NonCash Charges, in the case of (ii), (iii) and (iv) only to the extent such expense or charge was deducted in computing Consolidated Adjusted Net Income (Loss), in each case, for such period, of the Company and its Restricted Subsidiaries on a consolidated basis, all determined in accordance with GAAP to (b) the sum of Consolidated Interest Expense for such period and cash and non-cash dividends paid on any Preferred Stock of the Company or any Restricted Subsidiary during such period; provided that in making such computation, the Consolidated Interest Expense attributable to (A) interest on any Indebtedness computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period, (B) interest on any Indebtedness under a revolving credit -7- facility computed on a pro forma basis shall be computed based upon the average daily balance of such Indebtedness during the applicable period and (C) notwithstanding clauses (A) and (B) above, interest on any Indebtedness determined on a fluctuating basis, to the extent such interest is covered by Interest Rate Protection Agreements, shall be deemed to have accrued at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Income Tax Expense" means for any period the provision for federal, state, local and foreign income taxes of the Company and its consolidated Subsidiaries for such period as determined in accordance with GAAP. "Consolidated Interest Expense" means, without duplication, for any period, (x) the sum of (a) the interest expense of the Company and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized, as determined on a consolidated basis in accordance with GAAP including, without limitation, (i) amortization of original issue discount and non-cash interest payments, (ii) the net payment under Interest Rate Protection Agreements (including amortization of discounts), (iii) the interest portion of any deferred payment obligation (iv) imputed interest with respect to Attributable Debt, (v) commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings and (vi) accrued interest and (b)(i) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company or any Restricted Subsidiary during such period and (ii) all capitalized interest of the Company and its consolidated Restricted Subsidiaries, in each case as determined in accordance with GAAP, minus (y) any amortization of financing fees and expenses of the Company and its consolidated Restricted Subsidiaries for such period. "Consolidated Net Worth" means, with respect to any Person as of any date, the sum of: (1) the consolidated equity of the common stockholders of such Person and its consolidated Subsidiaries as of such date; plus (2) the respective amounts reported on such Persons's balance sheet as of such date with respect to any series of Preferred Stock (other than Redeemable Stock) that by its terms is not entitled to the payment of dividends unless such dividends may be declared and paid only out of net earnings in respect of the year of such declaration and payment, but only to the extent of any cash received by such Person upon issuance of such Preferred Stock. "Consolidated Non-Cash Charges" means, for any period, the aggregate depreciation, amortization and other non-cash charges of the Company and its consolidated Restricted -8- Subsidiaries for such period, as determined in accordance with GAAP (excluding any non-cash charge which requires an accrual or reserve for cash charges for any future period or amortization of a prepaid cash expense that was paid in a prior period). "Consolidation" means, with respect to the Company, the consolidation of the accounts of the Restricted Subsidiaries with those of the Company, all in accordance with GAAP consistently applied; provided that, "consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of the Company. The term "Consolidated" shall have a similar meaning. "Corporate Trust Office" means the principal corporate trust office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which office at the date of this Indenture is located at IBJ Whitehall Bank & Trust Company, One State Street, New York, New York 10004, Attention: Corporate Trust Administration, except that with respect to presentation of Securities for payment or for registration of transfer or exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate agency business shall be conducted. "Corporation" includes corporations, associations, companies and business trusts. "Credit Agreement" means one or more Credit Agreements among the Company and the Banks, as in effect as of the date of this Indenture, providing for a revolving credit facility and term loans to the Company, as such agreements may be amended, renewed, extended, substituted, refinanced, restructured, replaced, supplemented or otherwise modified from time to time, including, without limitation, amendments and modifications that provide for loans to Canadian Restricted Subsidiaries and for sub-facilities (including, without limitation, any successive renewals, extensions, substitutions, refinancings, restructurings, replacements, supplementations or other modifications of any of the foregoing), together with the security agreements and other agreements in favor of the Banks entered into from time to time in connection with such credit agreements as such security agreements and other agreements may be amended, supplemented or otherwise modified from time to time. "Currency Agreements" means any spot or forward foreign exchange agreements and currency swap, currency option or other similar financial agreements or arrangements entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and designed to protect against or manage exposure to fluctuations in foreign currency exchange rates. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. -9- "Defaulted Interest" has the meaning specified in Section 3.9. "Depositary" means, with respect to the Securities issuable or issued in whole or in part in global form, The Depository Trust Company, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "Disinterested Directors" means, with respect to any transaction or series of related transactions, a member of the Board of Directors who does not have any material direct or indirect financial interest in or with respect to such transaction or series of related transactions. "Domestic Subsidiary" means any Restricted Subsidiary that is incorporated under the laws of the United States or any state thereof or the District of Columbia. "Event of Default" has the meaning set forth in Section 5.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Offer and Consent Solicitation Statement" means that certain Exchange Offer and Consent Solicitation Statement dated July 30, 1999 relating to the offer of the Securities. "Exchange and Registration Rights Agreement" means the Exchange and Registration Rights Agreement between the Company and the holders of the Initial Securities, dated as of September 27, 1999, relating to the Securities, as such agreement may be amended, modified or supplemented from time to time. "Exchange Registration Statement" means the Exchange Registration Statement as defined in the Exchange and Registration Rights Agreement. "Exchange Securities" has the meaning stated in the first recital of this Indenture and refers to any Exchange Securities containing terms substantially identical to the Initial Securities (except that such Exchange Securities shall not contain terms with respect to transfer restrictions) that are issued and exchanged for the Initial Securities pursuant to the Exchange and Registration Rights Agreement and this Indenture. "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer. -10- "Foreign Subsidiary" means any Subsidiary that is incorporated in a jurisdiction outside of the U.S. and territories thereof. "Foreign Subsidiary Borrowing Base" means, as of any date, an amount equal to the sum of (a) 85.0% of the book value of all accounts receivable owned by the Company's Foreign Subsidiaries (other than Canadian Restricted Subsidiaries) (excluding any accounts receivable from an Affiliate of such Foreign Subsidiaries or that are more than 90 days past due, less (without duplication) the allowance for doubtful accounts attributable to current trade accounts receivable) and (b) 60.0% of the book value of all inventory owned by such Foreign Subsidiaries (other than Canadian Restricted Subsidiaries) as of such date (with a seasonal increase of 70.0% of inventory in effect from July 1 through November 30 of each year), all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, Foreign Subsidiary Borrowing Base shall be calculated utilizing the most recent available information. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in other statements by any other entity as have been approved by a significant segment of the accounting profession, which are in effect on the Issue Date. "Guarantee" or "guarantee" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness. "Holder" means a Person in whose name a Security is registered in the Security Register. "Holdings" means HF Holdings, Inc. and its successors. "Indebtedness" means, with respect to any Person, without duplication, (a) all liabilities of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other current liabilities incurred in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letter of credit, bankers' acceptance or other similar credit transaction and in connection with any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock, now or hereafter outstanding, if, and -11- to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, (b) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, (c) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding accounts payable arising in the ordinary course of business, (d) all Capitalized Lease Obligations of such Person, (e) all indebtedness referred to in the preceding clauses of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness or of such dividend (the amount of such obligation being deemed to be the lesser of the value of such property or asset or the amount of the obligation so secured), (f) all guarantees by such Person of indebtedness referred to in this definition, (g) all Redeemable Capital Stock of such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued dividends and (h) all obligations of such Person under or in respect of Interest Rate Protection Agreements and Currency Agreements. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness issued with original issue discount and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Initial Securities" has the meaning stated in the first recital of this Indenture. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Interest Rate Protection Agreements" means any interest rate protection agreements and other types of interest rate hedging agreements (including, without limitation, interest rate swaps, caps, collars and similar agreements) designed to minimize exposure to fluctuations in interest rates in respect of Indebtedness. -12- "Investment" means, with respect to any Person, directly or indirectly, any advance, loan, or other extension of credit (including by means of a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by any other Person, except for purchases of assets in the ordinary course of business of the Company or any of its Restricted Subsidiaries, and all other items that would be classified as investments on a balance sheet prepared in accordance with GAAP. "Issue Date" means the closing date for the original issuance of the Initial Securities under this Indenture. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), security interest, hypothecation or other encumbrance of any kind upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the return thereof, any option or other agreement to sell or give a security interest in and any filing or agreement to give any financing statement under the Uniform Commercial Code or equivalent statutes of any jurisdiction. "Liquidated Damages" means all liquidated damages then owing pursuant to the Registration Rights Agreement. "Maturity" when used with respect to any Security means the date on which the principal of such Security or an installment of principal becomes due and payable as therein provided or as provided in this Indenture, whether at Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means with respect to any Asset Sale the proceeds thereof received by the Company or any of its Restricted Subsidiaries in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or Cash Equivalents (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of (i) reasonable out-of-pocket fees and expenses (including legal, accounting and investment banking and sales commissions) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) payments made to retire Indebtedness where payment of such Indebtedness is secured by the -13- assets or properties which are the subject of such Asset Sale, (iv) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale and (v) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale (provided that the amount of any such reserves shall be deemed to constitute Net Cash Proceeds at the time such reserves shall have been released or are not otherwise required to be retained as a reserve), all as reflected in an Officers' Certificate delivered to the Trustee. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Indebtedness) or (b) is directly or indirectly liable (as a guarantor, general partner or otherwise), or (c) constitutes a lender; and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness (other than the Securities) of the Company or any of its Restricted Subsidiaries to declare a default under such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Officers' Certificate" means a certificate signed by the Chairman, the Chief Executive Officer, the President or a Vice President, and by the Treasurer, the Chief Financial Officer, the Director of Finance, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be acceptable to the Trustee. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: -14- (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Securities, except to the extent provided in Sections 12.2 and 12.3, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Twelve; and (iv) Securities which have been paid pursuant to Section 3.8 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands the Securities are valid obligations of the Company; provided, however, that, in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, consent, notice or waiver hereunder, and for the purpose of making the calculations required by TIA Section 313, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any, on) or interest on any Securities on behalf of the Company. "Permitted Business" means the lines of business that the Company and its Restricted Subsidiaries currently conduct on the date of the Indenture and any businesses that derive (or are -15- expected to derive) a majority of their revenues from products and activities reasonably related thereto. "Permitted Indebtedness" means any of the following: (i) Indebtedness of the Company and any Subsidiary Guarantor (including Canadian Restricted Subsidiaries that are also Subsidiary Guarantors) under the Credit Agreement; provided that the aggregate principal amount of such Indebtedness at any one time outstanding shall not exceed the greater of (1) the Company Borrowing Base plus $120 million and (2) $350 million, in each case less (a) the aggregate amount of all Net Cash Proceeds of Asset Sales applied by the Company and any of its Subsidiaries since the date of this Indenture to permanently repay Indebtedness under the Credit Agreement pursuant to Section 10.17 hereof and (b) the amount of outstanding Indebtedness incurred by Canadian Restricted Subsidiaries pursuant to clause (xiii) below; provided further that the amount of Indebtedness permitted to be incurred pursuant to this clause (i) shall be in addition to any Indebtedness permitted to be incurred under the Credit Agreement in reliance on, and in accordance with, clauses (viii) and (xii) of this definition of "Permitted Indebtedness"; (ii) Indebtedness of the Company and any Restricted Subsidiary under the Securities; (iii) Indebtedness of the Company and any Restricted Subsidiary (other than under the Credit Agreement) outstanding on the date of this Indenture until such amounts are repaid; (iv) obligations of the Company and any Restricted Subsidiary incurred in connection with Interest Rate Protection Agreements relating to Indebtedness (including Permitted Indebtedness) permitted pursuant to Section 10.10 that are entered into in the ordinary course of business; (v) obligations of the Company and any Restricted Subsidiary incurred in connection with Currency Agreements that are entered into in the ordinary course of business of the Company and its Restricted Subsidiaries; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, however, that: (A) if the Company or any Subsidiary Guarantor is the obligor on such Indebtedness and the obligee is not the Company or any Subsidiary Guarantor, such Indebtedness must be expressly subordinated to the prior payment in full in cash of all obligations with -16- respect to the Securities, in the case of the Company, or the Subsidiary Guarantee of such Subsidiary Guarantor, in the case of a Subsidiary Guarantor; and (B) (1) any subsequent issuance or transfer of Capital Stock that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary thereof and (2) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary thereof; shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (vi); (vii) Indebtedness arising from customary agreements providing for indemnification or similar obligations, or from guarantees, letters of credit, surety bonds or performance bonds securing any obligations of the Company pursuant to such agreements, in any case entered into in a commercially reasonable manner in the ordinary course of business consistent with past practices incurred in connection with the disposition of any business, assets or Restricted Subsidiary of the Company, in a principal amount not to exceed the proceeds received by the Company and its Restricted Subsidiaries in connection with such disposition; (viii) Purchase Money Obligations and Capitalized Lease Obligations of the Company and one or more Restricted Subsidiaries not to exceed, in the aggregate at any time outstanding (including the amount of any additional Indebtedness incurred under clause (i) of this definition of "Permitted Indebtedness" in reliance on this clause (viii)), $10 million; (ix) Indebtedness of Foreign Subsidiaries (other than Canadian Restricted Subsidiaries) in an aggregate principal amount not to exceed, at any time outstanding, the lesser of $50 million or the Foreign Subsidiary Borrowing Base; provided, however, that such amount shall be reduced by the amount of Indebtedness incurred by such Foreign Subsidiaries pursuant to clause (i) above; (x) any renewals, extensions, substitutions, refundings, refinancings or replacements (each, a "refinancing") of any Indebtedness (other than intercompany Indebtedness) described in clauses (ii) and (iii) and clause (xii) of this definition of "Permitted Indebtedness," including any successive refinancings so long as (A) the aggregate principal amount or accreted value, if applicable,(or, if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, then such lesser amount as of the date of determination) of Indebtedness -17- represented thereby is not increased by such refinancing other than by an amount equal to the stated amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus the amount of reasonable expenses of the Company incurred in connection with such refinancing, (B) such refinancing does not reduce the Average Life to Stated Maturity or shorten the Stated Maturity of such Indebtedness, (C) such new Indebtedness is subordinated to the Securities at least to the same extent as the Indebtedness being refinanced if the Indebtedness being refinanced is Subordinated Indebtedness and (D) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary which is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (xi) the accrual of interest, accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Redeemable Capital Stock in the form of additional shares of the same class of Redeemable Capital Stock; provided, in each such case, that the amount thereof is included in Consolidated Interest Expense of the Company as accrued; (xii) Indebtedness of the Company and one or more Restricted Subsidiaries in addition to that described in clauses (i) through (xi) of this definition of "Permitted Indebtedness," including Indebtedness incurred pursuant to clause (x) above to refinance any Indebtedness incurred pursuant to this clause (xii), not to exceed $15 million in the aggregate at any one time outstanding (including the amount of any additional Indebtedness incurred under clause (i) of this definition of "Permitted Indebtedness" in reliance on this clause (xii)); and (xiii) Indebtedness of Canadian Restricted Subsidiaries (to the extent they are not also Subsidiary Guarantors) under the Credit Agreement in an aggregate principal amount not to exceed, at any time outstanding, the lesser of $50 million or the Canadian Subsidiary Borrowing Base. "Permitted Investment" means: (i) Investments in any Restricted Subsidiary or any Investment in any Person by the Company or any Restricted Subsidiary as a result of which such Person becomes a Restricted Subsidiary (provided, however, that in each case such Restricted Subsidiary is engaged in a Permitted Business) or any Investment in the Company by a Restricted Subsidiary; -18- (ii) intercompany Indebtedness to the extent permitted under clause (vi) of the definition of "Permitted Indebtedness"; (iii) Investments in Cash Equivalents; (iv) Investments in an amount not to exceed $2 million in the aggregate at any given time outstanding; (v) Investments in existence on the date of this Indenture; (vi) Investments by the Company or any Restricted Subsidiary in any Person (including any Unrestricted Subsidiary) whose operations consist of, or has been formed to operate, a Permitted Business in an amount not to exceed $8 million in the aggregate at any given time outstanding; and (vii) any Investment made by the Company or a Restricted Subsidiary in an Unrestricted Subsidiary or any other Person that is not a Subsidiary of the Company in connection with a Securitization Transaction; provided that any such Investment is in the form of a Securitization Note or an equity interest. "Permitted Liens" means any of the following: (a) any Lien existing as of the date of this Indenture (other than Liens securing Indebtedness under the Credit Agreement); (b) any Lien arising by reason of (1) any judgment, decree or order of any court, so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment, decree or order shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired, the claims secured thereby are being contested in good faith by appropriate proceedings, adequate reserves have been established with respect to such claims in accordance with GAAP and no Default or Event of Default would result thereby; (2) taxes, assessments, governmental charges or levies not yet delinquent or which are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that, any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (3) security for payment of workers' compensation or other insurance incurred in the ordinary course of business; (4) security for the performance of tenders, contracts (other than contracts for the payment of money) or leases incurred in the ordinary course of business; (5) deposits to secure public or -19- statutory obligations incurred in the ordinary course of business; (6) operation of law in favor of carriers, warehousemen, mechanics, materialmen, laborers, employees or suppliers and similar Liens incurred in the ordinary course of business for sums which are not yet delinquent or are being contested in good faith by negotiations or by appropriate proceedings which suspend the collection thereof incurred in the ordinary course of business; or (7) security for surety or appeal bonds incurred in the ordinary course of business; (c) any Lien existing on the assets of the Company or any Subsidiary Guarantor (including Canadian Restricted Subsidiaries that are also Subsidiary Guarantors) securing the Indebtedness of the Company or any such Subsidiary Guarantor under the Credit Agreement, provided that the principal amount of Indebtedness secured by such Lien does not exceed the amount of Indebtedness permitted to be incurred under clause (i) of the definition of "Permitted Indebtedness"; (d) any Lien in favor of the Company or a Subsidiary Guarantor; (e) any Lien securing any Interest Rate Protection Agreements to the extent such Agreements relate to Indebtedness that is otherwise permitted to be incurred pursuant to this Indenture; (f) any Lien securing the Securities; (g) any Liens on assets acquired by the Company or any Restricted Subsidiary after the date of this Indenture, whether by acquisition of shares, assets or otherwise, provided that such Lien (i) existed on the date such asset was acquired, (ii) only extends to assets that were subject to such Lien prior to such acquisition, and (iii) was not incurred in anticipation of such acquisition; (h) Liens relating to Purchase Money Obligations, provided, however, that (i) the principal amount of any Indebtedness secured by such Liens shall not exceed 100% of the applicable purchase price or cost and (ii) the Lien securing such Indebtedness shall be created (A) in the case of any asset acquisition within 180 days of the closing of such asset acquisition and (B) in all other cases, in the ordinary course of business, within 90 days of such acquisition and (iii) such Lien does not apply to any assets other than those acquired with such Purchase Money Obligations and (iv) the Indebtedness secured by the Lien was permitted to be incurred pursuant to clause (viii) of the definition of Permitted Indebtedness; -20- (i) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods not yet delinquent, incurred in the ordinary course of business; provided that, any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (j) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods incurred in the ordinary course of business; (k) [Intentionally Omitted]; (1) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or any Restricted Subsidiary relating to such property or assets incurred in the ordinary course of business; (m) Liens securing an aggregate of $2.0 million of Indebtedness permitted to be incurred under this Indenture by the Company and any Restricted Subsidiary; (n) easements, rights-of-way and other similar charges or encumbrances which were not incurred in connection with the incurrence of Indebtedness and do not interfere in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (o) Liens on the assets of Foreign Subsidiaries (other than Canadian Restricted Subsidiaries) securing Indebtedness of Foreign Subsidiaries (other than Canadian Restricted Subsidiaries) permitted to be incurred under clause (ix) under the definition of "Permitted Indebtedness"; (p) any extension, renewal, substitution or replacement (or successive extensions, renewals, substitutions or replacements), as a whole or in part, of any of the Liens referred to in clauses (a), (c), (f), (g), (o) and (q) of this definition or the Indebtedness secured thereby; provided that (i) such extension, renewal, substitution or replacement Lien shall be limited to all or any part of the same property or assets, now owned or hereafter acquired, that secured the Lien extended, renewed, substituted or replaced (plus improvements on such property or assets) and (ii) the Indebtedness secured by such Lien (assuming all available amounts were borrowed) at such time is not increased, except to the extent permitted under clause (x) of the definition of "Permitted Indebtedness"; and -21- (q) Liens on the assets of Canadian Restricted Subsidiaries securing Indebtedness of Canadian Restricted Subsidiaries permitted to be incurred under clause (xiii) under the definition of "Permitted Indebtedness". Notwithstanding the foregoing, under no circumstances shall any Lien securing Indebtedness of the Company or any of its Subsidiaries, issued, directly or indirectly, in exchange for or upon the conversion of any Indebtedness of IHF Holdings, Inc. or ICON Fitness Corporation be deemed to be a "Permitted Lien". "Person" means any individual, corporation, limited liability company, partnership, joint venture, joint-stock company, trust, unincorporated organization, association, government or any agency or political subdivision thereof or any other entity. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.8 in exchange for a mutilated security or in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred stock whether now outstanding, or issued after the date of this Indenture, and including, without limitation, all classes and series of preferred or preference stock. "Purchase Money Obligations" of any Person means any Indebtedness (including Capitalized Lease Obligations) of such Person incurred in the ordinary course of business for the purpose of financing all or any part of the acquisition price or the cost of construction or improvement of equipment or property, but only if such equipment or property is included in "addition to property, plant or equipment" in accordance with GAAP and only if such equipment or property is not being purchased as part of an acquisition of any business. "Redeemable Capital Stock" means any Capital Stock that, either by its terms or by the terms of any security into which it is convertible or exchangeable or otherwise, is or upon the happening of any event or passage of time, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the Stated Maturity of the principal of the Securities, or is convertible into or exchangeable for debt securities at any time prior to the date that is 91 days after such Stated Maturity at the option of the holder thereof; provided, however, that any -22- Capital Stock that would constitute Redeemable Capital Stock solely because the holders thereof have the right to require the issuer thereof to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Redeemable Capital Stock if the terms of such Capital Stock provide that such issuer may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with Section 10.11 hereof. "Redemption Date", when used with respect to any Security to be redeemed, in whole or in part, means the date fixed for such redemption pursuant to Article X of this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Registered Exchange Offer" means the registered exchange offer for the Securities which may be effected pursuant to the Exchange and Registration Rights Agreement. "Registrar" has the meaning specified in Section 3.5. "Registration Statement" means the Registration Statement as defined in the Exchange and Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the January 1 or July 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above-designated officers, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated as an Unrestricted Subsidiary; provided that on the date the Initial Securities are -23- originally issued, all Subsidiaries of the Company shall be Restricted Subsidiaries of the Company. "S&P" means Standard and Poor's Rating Group and its successors. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. For all purposes of this Indenture, the term "Securities" shall include any Exchange Securities issued and exchanged for any Securities pursuant to the Exchange and Registration Rights Agreement and this Indenture and, for purposes of this Indenture, all Securities and Exchange Securities shall vote together as one series of Securities under this Indenture. "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder. "Securitization Note" means a promissory note of an Unrestricted Subsidiary or any other Person that is not a Subsidiary of the Company evidencing a line of credit, which may be irrevocable, from the Company or any Restricted Subsidiary of the Company in connection with a Securitization Transaction, which note shall be repaid from cash available to the Unrestricted Subsidiary or such Person other than amounts required to be established as reserves pursuant to agreements, amounts paid to investors in respect of interest, principal and other amounts owing to such investors and amounts paid in connection with the purchase of newly generated receivables. "Securitization Transaction" means any transaction or series of transactions pursuant to which the Company or any of its Restricted Subsidiaries may sell, convey or otherwise transfer to an Unrestricted Subsidiary or any other Person that is not a Subsidiary of the Company any accounts receivable (whether now existing or arising or acquired in the future) of the Company or any of its Restricted Subsidiaries, and any assets related thereto including, without limitation, all collateral securing such accounts receivable, all contracts and contract rights and all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets (including contract rights) which are customarily transferred in connection with asset securitization transactions involving accounts receivable. "Security Register" has the meaning specified in Section 3.5. "Senior Indebtedness" means the principal of, premium, if any, and interest, fees and expenses (including, without limitation, post-petition interest at the rate provided for in the documentation with respect thereto, whether or not allowed as -24- a claim in bankruptcy, reorganization, insolvency, receivership or similar proceeding) with respect to any Permitted Indebtedness of the Company and its Restricted Subsidiaries under the Credit Agreement, including without limitation any guarantees thereof. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Exchange and Registration Rights Agreement. "Significant Subsidiary" means, as of any date, any corporation or partnership that is a Subsidiary of the Company and that, as of the end of the most recently completed fiscal year of the Company for which financial statements are available, was a "significant subsidiary" as defined in Regulation S-X under the Securities Act and the Exchange Act or that, if acquired after such date, would have been a "significant subsidiary" as defined therein if it had been acquired as of such date. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.9. "Specified Senior Indebtedness" means Indebtedness under the Credit Agreement. "Standard Securitization Undertakings" means representations, warranties, covenants and indemnities entered into by the Company or any Subsidiary of the Company that are customary in accounts receivable securitization transactions. "Stated Maturity" when used with respect to any Indebtedness or any installment of principal thereof or interest thereon, means the dates specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of principal or interest is due and payable. "Stockholders Agreement" means the stockholders agreement substantially in the form attached as an annex to the Exchange Offer and Consent Solicitation Statement. "Subordinated Indebtedness" means Indebtedness of the Company or any Restricted Subsidiary contractually subordinated in right of payment to the Securities. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the equity ownership or the Voting Stock of which is at the time owned, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). -25- "Subsidiary Guarantee" means the Guarantee by each Subsidiary Guarantor of the Company's payment obligations under this Indenture and the Securities, executed pursuant to the provisions of this Indenture. "Subsidiary Guarantors" means each of (i) the Company's Domestic Subsidiaries, and (ii) any future Subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture and their respective successors and assigns. "Tax Sharing Agreement" means the tax sharing agreement dated as of September 27, 1999 among Holdings and its Subsidiaries, as amended from time to time; provided that, such amendments shall not, in aggregate, provide for terms that are materially less favorable to the Company than those in effect on the Issue Date. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 9.5. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt, (b) is not a party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company, (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Capital Stock or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results, and (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; provided that, notwithstanding the above, the Company and its Restricted Subsidiaries may (i) make payments to, provide credit or credit support for or make Investments in the Unrestricted Subsidiaries to the extent that such payments or investments in Unrestricted Subsidiaries are in compliance with Section 10.11 and (ii) may make Standard Securitization Undertakings to an Unrestricted Subsidiary and other Persons, and loans to an Unrestricted Subsidiary under a Securitization Note, -26- in connection with a Securitization Transaction with such Unrestricted Subsidiary. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not, at the time, stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency.) "Wholly Owned Subsidiary" of any specified Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. Section 1.2. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the Trust Indenture Act, the provision is incorporated by reference in and made a part of this Indenture. The following Trust Indenture Act terms used in this Indenture have the following meanings: "indenture securities" means the Securities; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Securities. All other Trust Indenture Act terms used in this Indenture that are defined by the Trust Indenture Act, defined by reference in the Trust Indenture Act to another statute or defined by a rule of the Commission and not otherwise defined herein shall have the meanings assigned to them therein. -27- Section 1.3. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate and an opinion of Counsel each satisfactory in form and substance to the Trustee, which, taken together, state that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 10.8(a)) shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 1.4. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless -28- such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 1.5. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where such execution is by a signer acting in a capacity other than his or her individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The principal amount and serial numbers of Securities held by any Person, and the date of holding the same, shall be proved by the Security Register. -29- (d) If the Company shall solicit from the Holders of Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that, no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. Section 1.6. Notices, Etc., to Trustee and the Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company or any Guarantor shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Division, or (2) the Company or the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the -30- address of its principal office specified in the first paragraph of this Indenture, or at any other address previously furnished in writing to the Trustee by the Company. Section 1.7. Notice to Holders; Waiver. Where this Indenture provides for notice of any event to Holders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. Section 1.8. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 1.9. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. -31- Section 1.10. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 1.11. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Securities Registrar and their successors hereunder or the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 1.12. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the law of the State of New York, without regard to the principles of conflicts of law. Upon the issuance of the Exchange Securities or the effectiveness of the Shelf Registration Statement, this Indenture shall be subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. Section 1.13. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Stated Maturity or Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date or at the Stated Maturity or Maturity; provided that, no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Stated Maturity or Maturity, as the case may be. ARTICLE II. SECURITY FORMS Section 2.1. Forms Generally. The definitive Securities and the certificates of authentication thereon shall be printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner, all as determined by the officers of the Company executing such Securities, as evidenced by their execution of such Securities. The Initial Securities shall be known as the "12% Senior Notes due 2005, Series A" and the Exchange Securities shall be known as the "12% Senior Notes due 2005, Series B", in -32- each case, of the Company. The Securities and the Trustee's certificate of authentication shall be in substantially the form annexed hereto as Exhibit A. The Securities may have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by the Indenture and may have letters, notations or other marks of identification and such notations, legends or endorsements required by law, or by stock exchange agreements to which the Company is subject or usage. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. The Company shall approve the form of the Securities and any notation, legend or endorsement on the Securities. The terms and provisions contained in the form of the Securities annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Initial Securities offered and sold in reliance on Rule 144A (together with any Securities sold pursuant to other exemptions from the Securities Act which are permitted to be evidenced by the U.S. Global Security (as defined below)) shall be issued initially in the form of one or more permanent global Securities substantially in the form set forth in Exhibit A (the "U.S. Global Security") deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Security may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Initial Securities which are not permitted to be evidenced by the U.S. Global Security shall be issued in the form of permanent certificated Securities in registered form in substantially the form set forth in Exhibit A (the "U.S. Physical Securities"). Section 2.2. Restrictive Legends. Unless and until (i) an Initial Security is sold under an effective Registration Statement or (ii) an Initial Security is exchanged for an Exchange Security in connection with an effective Registration Statement, in each case pursuant to the Exchange and Registration Rights Agreement, each such U.S. Global Security and each U.S. Physical Security shall bear the following legend (the "Private Placement Legend") on the face thereof: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS -33- SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY, OR ANY AFFILIATE OF THE COMPANY, WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A11), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (1), (2), (3) OR (7) OF PARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR", IN EACH CASE FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. Each U.S. Global Security, whether or not an Initial Security, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE -34- OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 3.6 AND 3.7 OF THE INDENTURE. ARTICLE III. THE SECURITIES Section 3.1. Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $45,000,000, except for Securities authenticated and delivered upon registration of transfer or, or in exchange for, or in lieu of, other Securities pursuant to Section 3.4, 3.5, 3.6, 3.7, 3.8, 9.6, 10.15, 10.17 or 11.8. The principal of (and premium, if any, on) and interest on the Securities shall be payable at the office of the Paying Agent, if any, or at the office or agency of the Company maintained for such purpose; provided, however, that, at the option of the Company, interest may be paid by check mailed to addresses of the Persons entitled thereto as such addresses shall appear on the Security Register. The Securities shall be redeemable as provided in Article Eleven. Section 3.2. Denominations. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. Section 3.3. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman, Chief Financial Officer, its President or a Vice President, under its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Securities may be -35- manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Securities. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Initial Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Initial Securities, and the Trustee in accordance with such Company Order shall authenticate and deliver such Initial Securities. On Company Order, the Trustee shall authenticate for original issue Exchange Securities in an aggregate principal amount not to exceed $45,000,000; provided that such Exchange Securities shall be issuable only upon the valid surrender for cancellation of Initial Securities of a like aggregate principal amount in accordance with a Registered Exchange Offer pursuant to the Exchange and Registration Rights Agreement. In each case, the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel of the Company that it may reasonably request in connection with such authentication of Securities. Such order shall specify the amount of Securities to be authenticated and the date on which the original issue of Initial Securities or Exchange Securities is to be authenticated. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for in Exhibit A duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to -36- Article Eight, any of the Securities authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Securities executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Securities surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, shall authenticate and deliver Securities as specified in such request for the purpose of such exchange. If Securities shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section in exchange or substitution for or upon registration of transfer of any Securities, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Securities at the time outstanding for Securities authenticated and delivered in such new name. Section 3.4. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 10.2, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 3.5. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.2 being herein sometimes referred to as -37- the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Security Register shall be open to inspection by the Trustee. The Trustee is hereby initially appointed as security registrar (the "Registrar") for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at the office or agency of the Company designated pursuant to Section 10.2, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denomination or denominations of a like aggregate principal amount. Furthermore, any Holder of the U.S. Global Security shall, by acceptance of such Global Security, agree that transfers of beneficial interest in such Global Security may be effected only through a book-entry system maintained by the Holder at such Global Security (or its agent), and that ownership of a beneficial interest in the Security shall be required to be reflected in a book entry. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denomination and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange (including an exchange of Initial Securities for Exchange Securities), the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive; provided that, no exchange of Initial Securities for Exchange Securities shall occur until an Exchange Registration Statement shall have been declared effective by the Commission and that the Initial Securities exchanged for the Exchange Securities shall be canceled by the Trustee. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Registrar) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Registrar, duly executed by the Holder thereof or its attorney duly authorized in writing. -38- No service charge shall be made for any registration of transfer or exchange or redemption of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.4, 9.6, 10.15, 10.17 or 11.8 not involving any transfer. Section 3.6. Book-Entry Provisions for U.S. Global Security. (a) The U.S. Global Security initially shall (i) be registered in the name of the Depositary for such global Security or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 2.2. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any U.S. Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under the U.S. Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such U.S. Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Security. (b) Transfers of the U.S. Global Security shall be limited to transfers of such U.S. Global Security in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in the U.S. Global Security may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 3.7. Beneficial owners may obtain U.S. Physical Securities in exchange for their beneficial interests in the U.S. Global Security upon request in accordance with the Depository's and the Registrar's procedures. In addition, U.S. Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in the U.S. Global Security if (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for the U.S. Global Security and a successor depositary is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a request from the Depositary. (c) In connection with any transfer of a portion of the beneficial interest in the U.S. Global Security to beneficial owners pursuant to subsection (b) of this Section, the Registrar -39- shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the beneficial interest in the U.S. Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Securities of like tenor and amount. (d) In connection with the transfer of the entire U.S. Global Security to beneficial owners pursuant to subsection (b) of this Section, the U.S. Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the U.S. Global Security, an equal aggregate principal amount of U.S. Physical Securities of authorized denominations. (e) Any U.S. Physical Security delivered in exchange for an interest in the U.S. Global Security pursuant to subsection (c) or subsection (d) of this Section shall, except as otherwise provided by paragraph (a)(i)(x) and paragraph (c)(ii) of Section 3.7, bear the applicable legend regarding transfer restrictions applicable to the U.S. Physical Security set forth in Section 2.2. (f) The registered holder of the U.S. Global Security may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. Section 3.7. Special Transfer Provisions. Unless and until (i) an Initial Security is sold under an effective Registration Statement, or (ii) an Initial Security is exchanged for an Exchange Security in connection with an effective Registration Statement, in each case pursuant to the Exchange and Registration Rights Agreement, the following provisions shall apply: (a) Transfers to Non-QIB Institutional Accredited Investors. The following provisions shall apply with respect to the registration of any proposed transfer of an Initial Security to any institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) which is not a qualified institutional buyer, as defined in Rule 144A under the Securities Act (a "QIB"), excluding Non-U.S. Persons: (i) The Registrar shall register the transfer of any Initial Security, whether or not such Initial Security bears the Private Placement Legend, if (x) the requested transfer is at least two years after the later of the original issue date of the Initial Securities and the last date on which -40- such security was held by the Company or its Affiliates or (y) the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit C hereto. (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Security, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the beneficial interest in the U.S. Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Certificates of like tenor and amount. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of an Initial Security to a QIB (excluding Non-U.S. Persons): (i) If the Security to be transferred consists of U.S. Physical Securities or Temporary Offshore Global Securities, the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Initial Security stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Initial Security stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Initial Security for its own account or an account with respect to which it exercises sole investment discretion and that it, or the person on whose behalf it is acting with respect to any such account, is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A. (ii) If the proposed transferee is an Agent Member, and the Initial Security to be transferred consists of U.S. Physical Securities or Temporary Offshore Physical Securities, upon receipt by the Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the U.S. Physical Securities or Temporary Offshore Physical Securities, as the -41- case may be, to be transferred, and the Trustee shall cancel the Physical Security so transferred. (c) Private Placement Legend. Upon the transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Registrar shall deliver Securities that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Registrar shall deliver only Securities that bear the Private Placement Legend unless either (i) the circumstances contemplated by paragraph (a)(i)(x) of this Section 3.7 exist or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (d) General. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security as set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 3.6 or this Section 3.7. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. Section 3.8. Mutilated, Destroyed, Lost and Stolen Securities. If (i) any mutilated Security is surrendered to the Trustee, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. -42- Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 3.9. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 10.2; provided, however, that each installment of interest may at the Company's option be paid by (i) mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 3.10, to the address of such Person as it appears in the Security Register or (ii) transfer to an account maintained by the payee located in the United States. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Securities (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the -43- proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date, and in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given in the manner provided for in Section 1.6, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. Section 3.10. Persons Deemed Owners. Prior to the due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any, on) and (subject to Sections 3.5 and 3.7) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. -44- Section 3.11. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly canceled by the Trustee. If the Company shall so acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of by the Trustee in accordance with its customary procedures and certification of their disposal delivered to the Company unless by Company Order the Company shall direct that canceled Securities be returned to it. Section 3.12. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE IV. SATISFACTION AND DISCHARGE Section 4.1. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Securities herein expressly provided for) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when (1) either (a) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.8 and (ii) Securities for whose payment money has theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.3) have been delivered to the Trustee for cancellation; or -45- (b) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company or any Subsidiary Guarantor, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company and any Guarantor; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each satisfactory in form and substance to the Trustee, which, taken together, state that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with and that such satisfaction and discharge will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which the Company is bound. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.6 and, if money shall have been deposited with the Trustee pursuant to subclause (b) of clause (1) of this Section, the obligations of the Trustee under Section 4.2 and the last paragraph of Section 10.3 shall survive. Section 4.2. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.3, all money deposited with the Trustee pursuant to Section 4.1 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. -46- ARTICLE V. REMEDIES Section 5.1. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of the principal of or premium, if any, when due and payable, on any of the Securities, whether or not prohibited by Article Thirteen; or (2) default in the payment of an installment of interest or Liquidated Damages on any of the Securities, when due and payable, and continuance of such default for a period of 30 days, whether or not prohibited by Article Thirteen; or (3) default in the performance or breach of the provisions of Article Eight of this Indenture, the failure to make or consummate a Change in Control Offer in accordance with the provisions of Section 10.15 or the failure to make or consummate an Excess Proceeds Offer in accordance with the provisions of Section 10.17; or (4) the Company or any Restricted Subsidiary shall fail to perform or observe any other term, covenant or agreement contained in the Securities or this Indenture (other than a default specified in (1), (2) or (3) above) for a period of 45 days after written notice of such failure requiring the Company to remedy the same shall have been given (x) to the Company by the Trustee or (y) to the Company and the Trustee by the Holders of 25% in aggregate principal amount of the Securities then Outstanding; or (5) default or defaults under one or more mortgages, bonds, debentures or other evidences of Indebtedness under which the Company or any of its Restricted Subsidiaries then has outstanding Indebtedness in excess of $5,000,000, individually or in the aggregate, and either (a) such Indebtedness is already due and payable in full or (b) such default or defaults have resulted in the acceleration of the maturity of such Indebtedness; or (6) one or more final judgments, orders or decrees of any court or regulatory or administrative agency of competent jurisdiction for the payment of money in excess of $5,000,000, individually or in the aggregate, shall be entered against the Company or any of its Restricted -47- Subsidiaries or any of their properties and shall not be discharged or fully bonded and there shall have been a period of 60 consecutive days after the date on which any period for appeal has expired and during which a stay of enforcement of such judgment, order or decree, shall not be in effect; or (7) (A) any holder of at least $5,000,000 in aggregate principal amount of secured Indebtedness of the Company or of any of its Restricted Subsidiaries as to which a default has occurred and is continuing shall commence judicial proceedings (which proceedings shall remain unstayed for 5 Business Days) to foreclose upon assets of the Company or such Restricted Subsidiary having an aggregate Fair Market Value, individually or in the aggregate, in excess of $5,000,000 or shall have exercised any right under applicable law or applicable security documents to take ownership of any such assets in lieu of foreclosure or (B) any action described in the foregoing clause (A) shall result in any court of competent jurisdiction issuing any order for the seizure of such assets; or (8) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any Significant Subsidiary or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustments or composition of or in respect of the Company, any Significant Subsidiary or any Subsidiary Guarantor or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, under applicable Bankruptcy Law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company, any Significant Subsidiary, or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (9) the institution by the Company or any Significant Subsidiary or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, of proceedings to be adjudicated bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under applicable Bankruptcy Law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Significant Subsidiary or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, of any -48- substantial part of its property, or the making by it of assignment for the benefit of creditors, or it is generally not paying its debts as they become due; or (10) except as otherwise permitted by this Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Subsidiary Guarantor shall deny or disaffirm its obligations under its Subsidiary Guarantee. Section 5.2. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 5.1(8) or 5.1(9)) occurs and is continuing, then the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities may declare the principal of, premium, if any, and accrued interest on all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount shall become immediately due and payable. If an Event of Default specified in Section 5.1(8) or 5.1(9) occurs and is continuing, then the principal of, premium, if any, and accrued interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay, (A) all overdue interest on all Outstanding Securities, (B) all unpaid principal of (and premium, if any, on) any Outstanding Securities which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest on overdue interest at the rate borne by the Securities, and -49- (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; (2) such rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (3) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. Notwithstanding the preceding paragraph, in the event of a declaration of acceleration in respect of the Securities because of an Event of Default specified in Section 5.1(5) or 5.1(7) shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or the holders thereof have rescinded their declaration of acceleration or notification or action, as applicable, in respect of such Indebtedness, and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Company or such Subsidiary and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders or the Person or Persons entitled to take the actions described in Section 5.1(5)(b) or 5.1(7), within 30 days after such declaration of acceleration in respect of the Securities, and no other Event of Default has occurred during such 30-day period which has not been cured or waived during such period. Section 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (a) default is made in the payment of any installment of interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue -50- installment of interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 5.4. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; -51- and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.6. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 5.5. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and amounts due the Trustee under Section 6.6, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. Section 5.6. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.6; SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any, on) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and -52- THIRD: The balance, if any, to the Person or Persons entitled thereto. Section 5.7. Limitation on Suits. No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 30 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 30-day period by the Holders of a majority or more in aggregate principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. Section 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Twelve) and in such Security of the principal of (and premium, if any, on) and (subject to Section 3.9) interest on, such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. -53- Section 5.9. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 5.10. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.8, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 5.12. Control by Holders. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that, (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and -54- (3) the Trustee need not take any action which might subject it to personal liability or be unjustly prejudicial to the Holders not consenting. Section 5.13. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in respect of the payment of the principal of (or premium, if any, on) or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Section 5.14. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VI. THE TRUSTEE Section 6.1. Notice of Defaults. If any Default or Event of Default occurs and is continuing and is known to the Trustee, the Trustee shall transmit in the manner and to the extent provided in TIA Section 313(c), notice of such Default within 30 days after the occurrence thereof or, if later, when known to the Trustee; provided, however, that, except in the case of a Default or an Event of Default in the payment of the principal of (or premium, if any) or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good -55- faith determines that the withholding of such notice is in the interest of the Holders. Section 6.2. Certain Rights of Trustee. Subject to the provisions of TIA Sections 315(a) through 315(d): (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an officers' Certificate; (4) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; -56- (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (8) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Section 6.3. Trustee Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except for the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder and except, upon the effectiveness of a Registration Statement, that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. Section 6.4. May Hold Securities. The Trustee, any Paying Agent, any Registrar or any other agent of the Company or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Registrar or such other agent. Section 6.5. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. -57- Section 6.6. Compensation and Reimbursement. The Company agrees: (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust): (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel); and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of such obligations of the Company, the Trustee shall have a claim prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any, on) or interest on particular Securities previously called for redemption. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.1(8) or Section 5.1(9), the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy law. Section 6.7. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be -58- deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 6.8. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.9. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.9 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in principal amount of the outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, except when the Trustee's duty to resign is stayed in accordance with the provisions of TIA Section 310(b), or (2) the Trustee shall cease to be eligible under Section 6.7 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee, or (ii) subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction -59- for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Securities in the manner provided for in Section 1.7. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Section 6.9. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder subject to the retiring Trustee's rights as provided under the last sentence of Section 6.6. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. -60- Section 6.10. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities; and in case at that time any of the Securities shall not have been authenticated, any successor Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. ARTICLE VII. HOLDERS' LISTS AND REPORTS BY TRUSTEE Section 7.1. Disclosure of Names and Addresses of Holders. Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company or the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). The Company will furnish or cause to be furnished to the Trustee: (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and -61- addresses of the Holders of Securities as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, excluding from any such list names and addresses received by the Trustee in its capacity as Registrar. Section 7.2. Reports by Trustee. Within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Securities, the Trustee shall transmit to the Holders, in the manner and to the extent provided in TIA Section 313(c), a brief report dated as of such May 15 if required by TIA Section 313(a). ARTICLE VIII. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 8.1. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not, in a single transaction or a series of related transactions, directly or indirectly, consolidate or merge with or into any other Person or, sell, assign, convey, transfer or otherwise dispose of all or substantially all of its properties and assets as an entirety to any other Person or group of affiliated Persons, or permit any of its Restricted Subsidiaries to enter into any such transaction or transactions, if such transaction or transactions, in the aggregate, would effectively result in a sale, assignment, conveyance, transfer or disposition of all or substantially all of the properties and assets of the Company and those of its Restricted Subsidiaries on a consolidated basis to any other Person or group of affiliated Persons, unless: (a) either (i) the Company shall be the continuing corporation or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company or such Restricted Subsidiary is merged or the Person which acquires by sale, assignment, conveyance, transfer or disposition of all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries on a consolidated basis (the "Surviving Entity") shall be a corporation duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and such Person assumes by a supplemental indenture in a form reasonably satisfactory to the Trustee all the obligations of the Company under the Securities and this Indenture and by an agreement in form reasonably satisfactory to the Trustee all the obligations -62- of the Company under the Exchange and Registration Rights Agreement, and in each case, this Indenture shall remain in full force and effect; (b) immediately after giving effect to such transaction or transactions, no Default or Event of Default shall have occurred and be continuing; (c) immediately before and immediately after giving effect to such transaction or transactions the Company (or the Surviving Entity if the Company is not the continuing obligor under this Indenture) (i) will have a Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of the Company immediately preceding the transaction and (ii) would be permitted to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 10.10 if the ratio referred to therein were "2.0:1.0"; and (d) in connection with any consolidation, merger, transfer, sale, assignment, conveyance or other disposition contemplated hereby, the Company or the Surviving Entity, as the case may be, shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers Certificate stating that such consolidation, merger, transfer, sale, assignment, conveyance or other disposition and the supplemental indenture and any other agreements in respect thereof, if any, comply with the requirements under this Indenture and that all conditions precedent herein provided for relating to such transaction or series of transactions have been complied with, and an Opinion of Counsel stating that the requirements of this Section 8.1 have been complied with. In addition, the Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. Notwithstanding the foregoing, the Company may not, in a single transaction or a series of related transactions, directly or indirectly, consolidate or merge with or into IHF Holdings, Inc. or ICON Fitness Corporation, or sell, assign, convey, transfer or otherwise dispose of all or substantially all of its properties and assets as an entirety to IHF Holdings, Inc. or ICON Fitness Corporation, or permit any of its Restricted Subsidiaries to enter into any such transaction or transactions with IHF Holdings, Inc. or ICON Fitness Corporation, unless all of the Indebtedness of IHF Holdings, Inc. or ICON Fitness Corporation is unsecured and is expressly subordinate in right of payment to the Securities. Notwithstanding the foregoing, the Company or any Wholly Owned Restricted Subsidiary may consolidate, combine or -63- amalgamate with or merge with or into any Wholly Owned Restricted Subsidiary or sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of its properties and assets to any Wholly Owned Restricted Subsidiary. Section 8.2. Successor Substituted. Upon any consolidation of the Company with or merger of the Company with or into any other corporation or any sale, assignment, transfer, conveyance or other disposition of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 8.1, the Surviving Entity formed by such consolidation or into which the Company is merged or to which such sale, assignment, transfer, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the Surviving Entity and not to the Company), and may exercise every right and power of, the Company under this Indenture with the same effect as if such Surviving Entity had been named as the Company herein, provided, however, that the predecessor Company shall not be relieved from the obligation to pay the principal of and interest on the Securities except in the case of a sale, conveyance or transfer of the Company's assets that meets the requirements of Section 8.1 hereof. For all purposes of this Indenture and the Securities (including the provision of this Article Eight and Section 10.10, Section 10.11 and Section 10.14), Subsidiaries of any Surviving Entity will, upon such transaction or series of related transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries and all Indebtedness, and all Liens on property or assets, of the Company and the Restricted Subsidiaries in existence immediately prior to such transaction or series of related transactions will be deemed to have been incurred upon such transaction or series of related transactions. Section 8.3. Securities to Be Secured in Certain Events. If, upon any such consolidation of the Company with or merger of the Company into any other corporation, or upon any sale, assignment, transfer, conveyance or other transfer of the property or assets of the Company substantially as an entirety to any other Person, any property or assets of the Company would thereupon become subject to any Lien, then unless such Lien could be created pursuant to Section 10.14 without equally and ratably securing the Securities, the Company, prior to or simultaneously with such consolidation, merger, sale, assignment, transfer, conveyance or other transfer, will as to such property or assets, secure the Outstanding Securities equally and ratably with (or prior to) the Indebtedness which upon such consolidation, merger, sale, assignment, transfer, conveyance or other transfer is to -64- become secured as to such property or assets by such Lien, or will cause such Securities to be so secured. ARTICLE IX. SUPPLEMENTAL INDENTURES Section 9.1. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board of Resolution, and the Trustee at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders, to make any change that otherwise would provide additional rights or benefits to the Holders or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default; or (4) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Section 6.9; or (5) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided that, such action shall not adversely affect the interests of the Holders in any material respect. Section 9.2. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that, no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby: -65- (1) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which any Security or any premium or the interest thereon is payable (except with respect to liquidated damages as provided in the Exchange and Registration Rights Agreement), or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); or (2) reduce the percentage in principal amount of the outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture, or (3) modify any of the provisions of this Section or Sections 5.13 and 10.23, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; or (4) except as otherwise permitted under Section 8.1, consent to the assignment or transfer by the Company of any of its rights and obligations under this Indenture; or (5) make any change in the provisions of Article Thirteen that adversely affects the rights of any Holder. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Section 9.3. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. -66- Section 9.4. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 9.5. Conformity with Trust Indenture Act. Each supplemental indenture executed pursuant to the Article shall conform to the requirements of the Trust Indenture Act as in effect on the date of such supplemental indenture. Section 9.6. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. Section 9.7. Notice of Supplemental Indentures. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 9.2, the Company shall give notice thereof to the Holders of each Outstanding Security affected, in the manner provided for in Section 1.7, setting forth in general terms the substance of such supplemental indenture. ARTICLE X. COVENANTS Section 10.1. Payment of Principal, Premium, if any, and Interest. The Company covenants and agrees for the benefit of the Holders that it will duly and punctually pay the principal of (and premium, if any, on) and interest on the Securities in accordance with the terms of the Securities and this Indenture. The Company shall pay all Liquidate Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement and shall inform the Trustee of any such payments of Liquidated Damages pursuant thereto. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue -67- principal at the rate equal to 2% per annum in excess of the then applicable interest rate on the Securities to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Section 10.2. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.3. Section 10.3. Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of (and premium, if any, on) or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. -68- Whenever the Company shall have one or more Paying Agents for the Securities, it will, on or before each due date of the principal of (and premium, if any, on) or interest on, any Securities, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. The Company will cause each Paying Agent (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of (and premium, if any, on) or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal (and premium, if any) or interest; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any, on) or interest on any Security and remaining unclaimed for four years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make -69- any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, and in each Place of Payment, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. Section 10.4. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate, partnership or other existence, rights (charter and statutory), licenses and franchises of the Company and each of its Restricted Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company and each of its Restricted Subsidiaries; provided, however, that, the Company shall not be required to preserve any such right, license or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries, taken as a whole and that the loss thereof is not adverse in any material respect to the Holders; provided, further, that the foregoing will not prohibit a sale, transfer or conveyance of a Subsidiary of the Company or any of its assets in compliance with the terms of Section 10.17 of this Indenture. Section 10.5. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any of its Subsidiaries or upon the income, profits or property of the Company or any of its Subsidiaries and (b) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a Lien upon the property of the Company or any Subsidiary; provided, however, that, the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings promptly instituted and diligently concluded and shall not have been finally determined or the period within which such proceedings may be initiated shall not have expired. Section 10.6. Maintenance of Properties. The Company will cause all properties owned by the Company or any Restricted Subsidiary, or used, useful or held for use in the conduct of its business or the business of any Restricted Subsidiaries to be maintained and kept in good -70- condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that, nothing in this Section shall prevent the Company or any Restricted Subsidiary from discontinuing the maintenance of any of such properties, if such discontinuance or disposal is, in the judgment of the Company, desirable in the conduct of its business or the business of any of its Restricted Subsidiaries and not disadvantageous in any material respect to the Holders. Section 10.7. Insurance. The Company will at all times keep and will keep all of its and all of its Restricted Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties. Section 10.8. Statement by Officers as to Default. (a) The Company will deliver to the Trustee, within 120 days after the end of each fiscal year and within 45 days after the end of each fiscal quarter of the Company, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year or quarter, as the case may be, has been made under the supervision of the signing officer with a view to determining whether the Company and its Subsidiaries has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such officer signing such certificate, that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Securities is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. For purposes of this Section 10.8(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. (b) Whenever any Default or Event of Default has occurred under this Indenture, or if the trustee for or the holder of any other evidence of Indebtedness of the Company or -71- any Restricted Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness in the principal amount of less than $5,000,000), the Company shall deliver to the Trustee by registered or certified mail or by telegram, telex or facsimile transmission an Officers' Certificate specifying such event, notice or other action forthwith upon any Officer becoming aware of such event, notice or other action, but in no event later than 10 days of its occurrence. Section 10.9. Provision of Financial Statements. Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the Company will prepare and, unless the Commission will not accept such filing, file with the Commission the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Section 13(a) or 15(d) if the Company were so subject, such documents to be filed with the Commission, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants, on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required to file such documents if the Company were so subject. The Company will also in any event (x) within 15 days of each Required Filing Date (i) transmit by mail to all Holders, as their names and addresses appear in the Security Register, and to such other Persons as may reasonably request, without cost to such Holders or other Persons and (ii) file with the Trustee copies of the annual reports, quarterly reports and other documents which the Company has filed with the Commission or would have been required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were subject to such Section and (y) if filing such documents by the Company with the Commission is not permitted under the Exchange Act, promptly upon written request of any Holder or prospective Holder, supply copies of such documents to any Holder or prospective Holder or other Person at the Company's cost. If any Guarantor's financial statements would be required to be included in the financial statements filed or delivered pursuant hereto if the Company were subject to Section 13(a) or 15(d) of the Exchange Act, the Company shall include such Person's financial statements in any filing or delivery pursuant hereto. For so long as any Securities remain outstanding, the Company and the Subsidiary Guarantors shall furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144(d)(4) under the Securities Act. -72- Section 10.10. Limitation on Indebtedness and Issuance of Preferred Stock. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur"), any Indebtedness (including Acquired Indebtedness), other than Permitted Indebtedness, and the Company will not issue any Redeemable Stock and will not permit any of its Restricted Subsidiaries to issue any shares of Preferred Stock; provided, however, that, the Company and any Subsidiary Guarantor may incur Indebtedness (including Acquired Indebtedness) or issue Redeemable Stock, and any Subsidiary Guarantor may issue Preferred Stock, if (I) the Company's Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or Preferred Stock is issued taken as one period (and after giving pro forma effect to (i) the incurrence of such Indebtedness or issuance of such Redeemable Stock or Preferred Stock and (if applicable) the application of the net proceeds therefrom, including the refinancing of other Indebtedness or Redeemable Stock or Preferred Stock, as if such Indebtedness was incurred or Redeemable Stock or Preferred Stock was issued, and the application of such proceeds occurred, on the first day of such four-quarter period; (ii) the incurrence, repayment or retirement of any other Indebtedness by the Company and of its Subsidiary Guarantors, or issuance or redemption of Redeemable Stock or Preferred Stock, since the first day of such four-quarter period, as if such Indebtedness was incurred, repaid or retired, Redeemable Stock or Preferred Stock was issued or redeemed, on the first day of such four-quarter period; and (iii) notwithstanding clause (iii) of the definition of Consolidated Adjusted Net Income, any acquisition or disposition by the Company or any Restricted Subsidiary of any company, entity or any business, in each case since the first day of such four-quarter period, as if such acquisition or disposition had occurred on the first day of such four-quarter period) would have been at least equal to (A) 2.25:1.0 for the period from the date of this Indenture through January 31, 2001 and (B) 2.50:1.0 for all periods thereafter; (II) such Indebtedness is unsecured and is expressly subordinate in right of payment to the Securities and (III) the Weighted Average Life to Maturity of such Indebtedness or Redeemable Stock is greater than the remaining Weighted Average Life to Maturity of the Securities. Notwithstanding the foregoing, the Company shall not, and shall not permit any Subsidiary to incur Indebtedness or issue any shares of Preferred Stock of such Subsidiary, directly or indirectly, in exchange for or upon the conversion of any Indebtedness of IHF Holdings, Inc. or ICON Fitness Corporation, unless such Indebtedness is unsecured and is expressly subordinate in right of payment to the Securities. -73- Section 10.11. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Capital Stock (including without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries) or to the direct or indirect holders of, any shares of Capital Stock of the Company or any Restricted Subsidiary (other than dividends or distributions payable solely in shares of Capital Stock of the Company or in options, warrants or other rights to purchase such Capital Stock but excluding dividends or distributions payable in Redeemable Capital Stock or in options, warrants or other rights to purchase Redeemable Capital Stock and other than to the Company or a Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire for value, directly or indirectly, any shares of the Capital Stock of the Company or any direct or indirect parent of the Company or any Restricted Subsidiary of the Company or any Affiliate thereof or any options, warrants or other rights to acquire such Capital Stock, held by a Person other than the Company or any of its Restricted Subsidiaries (other than such a purchase, redemption or acquisition of Capital Stock of a Restricted Subsidiary as a result of which such Restricted Subsidiary becomes a Wholly Owned Restricted Subsidiary); (iii) make any payment on or with respect to, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to a scheduled principal payment, interest payment, scheduled sinking fund payment or maturity, any Subordinated Indebtedness or Indebtedness that ranks pari passu with the Securities; (iv) make any payment on or with respect to, or purchase or repurchase, redeem, defease or otherwise acquire or retire for value any Indebtedness of IHF Holdings, Inc. or ICON Fitness Corporation; (v) incur any guarantee of Indebtedness of any Affiliate of the Company or any Restricted Subsidiary of the Company (other than with respect to (1) guarantees of Indebtedness of any Restricted Subsidiary by the Company or (2) guarantees of Indebtedness of the Company or any Restricted Subsidiary by any Restricted Subsidiary); or (vi) make any Investment (other than any Permitted Investment) in any Person -74- (all such payments described in clauses (i) through (vi) above and not excepted therefrom are collectively referred to herein as "Restricted Payments"), unless at the time of and immediately after giving effect to the proposed Restricted Payment (the amount of any such Restricted Payment, if other than cash, as determined in good faith by the Board of Directors of the Company, whose determination shall be conclusive and evidenced by a Board Resolution delivered to the Trustee), (1) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (2) the Company could, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 10.10; and (3) the aggregate amount of all such Restricted Payments declared or made after the date of this Indenture shall not exceed the sum of: (A) 50% of the aggregate cumulative Consolidated Adjusted Net Income of the Company accrued on a cumulative basis during the period beginning on the first day of the month commencing immediately after the date of this Indenture and ending on the last day of the Company's last fiscal quarter ending prior to the date of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Adjusted Net Income shall be a loss, minus 100% of such loss); (B) the aggregate net cash proceeds received after the date of this Indenture by the Company from the issuance or sale (other than to any of its Restricted Subsidiaries) of shares of Capital Stock of the Company (other than Redeemable Capital Stock) or any options, warrants or rights to purchase shares of such Capital Stock; (C) the aggregate net cash proceeds received after the date of this Indenture by the Company from the issuance or sale of debt securities (other than to any Restricted Subsidiary) that have been converted into or exchanged for Capital Stock of the Company (other than Redeemable Capital Stock) to the extent such debt securities were originally sold for cash, together with the aggregate of any additional net cash proceeds received by the Company at the time of such conversion or exchange; (D) the aggregate net cash proceeds received after the date of this Indenture by the Company as capital contributions (other than from any of its Restricted Subsidiaries); (E) to the extent that any Investment (other than a Permitted Investment) that was made after the date of this Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (x) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (y) the initial amount of such Restricted Investment; (F) to the extent that any Unrestricted Subsidiary is redesignated as a Restricted Subsidiary after the date of this Indenture in accordance with Section 10.22, the lesser of (x) the net book value of the Company's Investment in the Unrestricted Subsidiary at the time of redesignation and (y) the Fair Market Value of the Company's Investment in such Unrestricted Subsidiary as of the date of such redesignation; and (G) $2 million. -75- (b) Notwithstanding paragraph (a) above, the Company and its Restricted Subsidiaries may take the following actions so long as no Default or Event of Default shall have occurred and be continuing or would be caused thereby: (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such date of declaration such declaration complied with the provisions of paragraph (a) above (and such payment shall be deemed to have been paid on such date of declaration for purposes of the calculation required by said paragraph (a)); (ii) the purchase, redemption or other acquisition or retirement of any shares of Capital Stock of the Company in exchange for or out of the net cash proceeds of, a substantially concurrent issuance and sale (other than to a Subsidiary of the Company) of shares of Capital Stock (other than Redeemable Capital Stock) of the Company, provided that the amount of any such net proceeds that are utilized for any such purchase, redemption or other acquisition or retirement shall be excluded from clause (a)(3)(B), (a)(3)(C) and (a)(3)(D) of the preceding paragraph; (iii) any purchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness (other than Redeemable Capital Stock) in exchange for, or out of the net cash proceeds of, a substantially concurrent issuance and sale (other than to any Subsidiary of the Company) of any Capital Stock (other than Redeemable Capital Stock) of the Company, provided that the amount of any such net proceeds that are utilized for any such purchase, redemption or other acquisition or retirement shall be excluded from clause (a)(3)(B), (a)(3)(C) and (a)(3)(D) of the preceding paragraph; (iv) payments to Holdings, to the extent actually used by Holdings within 180 days of such payment for the payment of taxes pursuant to the Tax Sharing Agreement as the same may be amended from time to time in a manner that is not materially adverse to the Company; (v) payments to Holdings to pay its reasonable operating and administrative expenses including, without limitation, directors' fees, legal and audit expenses, Commission compliance expenses and corporate franchise and other taxes, in an amount not to exceed in the aggregate $375,000 per year; (vi) the repurchase of Capital Stock of Holdings or options, warrants or rights to acquire Capital Stock of Holdings from the full-time members or former members of management of the Company or any Restricted Subsidiary upon death, disability, retirement or termination of employment of such members, in amounts not to exceed $1.5 million in -76- any fiscal year of the Company; provided that, if such repurchases are less than $1.5 million in any fiscal year of the Company, the amount by which $1.5 million exceeds such amount of repurchases actually made in such fiscal year of the Company shall be carried forward for the next fiscal year of the Company; (vii) loans to members of management of the Company or any Restricted Subsidiary in the ordinary course of business not to exceed $1.2 million at any one time outstanding in addition to those otherwise specifically referred to in the Exchange Offer and Consent Solicitation Statement; (viii) the purchase, redemption, defeasance or other acquisition or retirement for value or payment of principal of any Subordinated Indebtedness (other than Redeemable Capital Stock) through the issuance of new Subordinated Indebtedness permitted to be incurred under clause (x) of the definition of Permitted Indebtedness; (ix) any Restricted Payment made pursuant to agreements (A) in effect on the Issue Date (B) referred to in the Exchange Offer and Consent Solicitation Statement and the Annexes thereto and (C) listed on Schedule II hereto, as from time to time amended thereafter; provided that, as so amended, such agreements shall provide for terms that are, in the aggregate, not more disadvantageous to the Holders of Securities in any material respect than as in effect on the Issue Date; and (x) any payments made in settlement of claims arising out of the transactions contemplated by, or made pursuant to agreements or undertakings referred to in, the Exchange Offer and Consent Solicitation Statement. The actions described in clauses (i), (v), (vi), (vii), (ix) and (x) and described in clause (iv) (to the extent not deducted in determining Consolidated Adjusted Net Income of the Company in clause (a)(3)(A) above) of this paragraph (b) shall be Restricted Payments that shall be permitted to be taken in accordance with this paragraph (b) but shall reduce the amount that would otherwise be available for Restricted Payments under clause (3) of paragraph (a) (provided that any dividend paid pursuant to clause (i) of this paragraph (b) shall reduce the amount that would otherwise be available under clause (3) of paragraph (a) when declared, but not also when subsequently paid pursuant to such clause (i) and the actions described in clauses (ii), (iii) and (viii) of this paragraph (b) shall be Restricted Payments that shall be permitted to be taken in accordance with this paragraph and shall not reduce the amount that would otherwise be available for Restricted Payments under clause (3) of paragraph (a). -77- (c) In computing Consolidated Adjusted Net Income of the Company under paragraph (a) above, (1) the Company shall use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (2) the Company shall be permitted to rely in good faith on the financial statements and other financial data derived from the books and records of the Company that are available on the date of determination. If the Company or any of its Restricted Subsidiaries makes a Restricted Payment which, at the time of making such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of this Indenture, such Restricted Payment shall be deemed to have been made in compliance with this Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Adjusted Net Income of the Company for any period. The amount of all Restricted Payments (other than cash) shall be the Fair Market Value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The Board of Directors' determination must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if the Fair Market Value exceeds $2.5 million. Not later than the date of making any Restricted Payment pursuant to clause (a) of this Section, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this "Restricted Payments" covenant were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. Section 10.12. [Intentionally Omitted]. Section 10.13. Limitation on Transactions with Affiliates. The Company will not, and will not permit any of its Restricted Subsidiaries to, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services or enter into or make any payment, loan, advance or guarantee) with or for the benefit of any Affiliate of the Company or such Restricted Subsidiary unless such transaction or series of related transactions is in writing on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction in arm's-length dealings with an unrelated third party; provided, however, that, the Company will not, and will -78- not permit any of its Restricted Subsidiaries to, enter into or suffer to exist any such transaction or series of related transactions which, individually or in the aggregate, involve payments in excess of (a) $750,000, unless an Officers' Certificate stating that such transaction complies with this covenant shall be delivered to the Trustee, (b) $1.0 million, unless the prior good faith approval of a majority of the Disinterested Directors of the Company shall have been obtained and Board Resolution relating thereto shall have been passed and set forth in an Officers' Certificate delivered to the Trustee, or (c) $5.0 million, unless the prior good faith approval of a majority of the Disinterested Directors of the Company shall have been obtained and the Board of Directors shall have obtained from any nationally recognized investment banking firm a favorable opinion as to the fairness to it of the transaction (copies of which shall be filed with the Trustee); and provided, further that, the terms of this provision shall not apply to (i) reasonable fees and compensation, loans or options to purchase Common Stock, indemnification and other benefits paid or made available to directors and full time officers and employees of the Company or any of its Restricted Subsidiaries for services rendered in such person's capacity as an officer, director or employee of the Company or the applicable Restricted Subsidiary, in each case entered into in the ordinary course of business consistent with past practice, (ii) transactions with or among, or solely for the benefit of, the Company or any of its Wholly-Owned Restricted Subsidiaries, (iii) transactions with an Unrestricted Subsidiary effected as part of a Securitization Transaction, and (iv) payments and other transactions pursuant to agreements in effect on the Issue Date and described in the Exchange Offer and Consent Solicitation Statement, as from time to time amended thereafter; provided that, as so amended, such agreements shall provide for terms that are, in aggregate, not more disadvantageous to the Holders of Securities in any material respect than as in effect on the Issue Date. Section 10.14. Limitation on Liens. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, affirm or suffer to exist any Lien of any kind on or with respect to any of its property or assets, whether owned at the date of this Indenture or thereafter acquired, or any income, profits or proceeds therefrom, except if the Securities are directly secured equally and ratably with (or prior to in the case of Liens with respect to Subordinated Indebtedness) the obligation or liability secured by such Lien; provided that Permitted Liens shall not be subject to the operation of the foregoing. Section 10.15. Change of Control Offer. (a) Upon the occurrence of a Change of Control, the Company shall be obligated to make an offer to purchase all of -79- the then outstanding Securities (a "Change of Control Offer"), and shall purchase, on a Business Day (the "Change of Control Purchase Date") not more than 60 nor less than 30 days following the Change of Control, all of the then Outstanding Securities validly tendered pursuant to such Change of Control Offer, at a purchase price (the "Change of Control Purchase Price") in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, to the Change of Control Purchase Date. The Change of Control Offer is required to remain open for at least 20 Business Days and until the close of business on the Change of Control Purchase Date. (b) In order to effect such Change of Control Offer, the Company shall, not later than the 30th day after the Change of Control, mail to each Holder notice of the Change of Control Offer in the manner provided in Section 1.7, which notice shall govern the terms of the Change of Control Offer and shall state: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to repurchase such Holder's Securities in cash at the Change of Control Purchase Price; (2) the circumstances and relevant facts regarding such Change of Control (including but not limited to information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (3) the Change of Control Purchase Date; and (4) the instructions a Holder must follow in order to have its Securities repurchased in accordance with paragraph (c) of this Section. (c) Holders electing to have Securities purchased will be required to surrender such Securities to the Company at the address specified in the notice at least five Business Days prior to the Change of Control Purchase Date. Holders will be entitled to withdraw their election if the Company receives, not later than three Business Days prior to the Change of Control Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities delivered for purchase by the Holder as to which its election is to be withdrawn and a statement that such Holder is withdrawing its election to have such Securities purchased. Holders whose Securities are purchased only in part will be issued new Securities equal in principal amount of the unpurchased portion of the Securities surrendered. (d) On the Change of Control Payment Date, the Company will, to the extent lawful (1) accept payment for all Securities or portions thereof properly tendered pursuant to the Change of -80- Control Offer; (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all notes or portions thereof so tendered; and (3) deliver or cause to be delivered to the Trustee Securities so accepted together with an Officers' Certificate stating the aggregate principal amount of Securities or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Securities so tendered the Change of Control Payment for those Securities, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Security equal in principal amount to any unpurchased portion of the Securities surrendered, if any; provided that each new Security will be in a principal amount of $1,000 or an integral multiple thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (e) Prior to complying with any of the provisions of this Section, but in any event within 60 days following a Change of Control, the Company will either repay all outstanding Senior Indebtedness or obtain the requisite consents, if any, under all agreements governing outstanding Senior Indebtedness to permit the repurchase of Securities required by this Section. (f) Notwithstanding anything to the contrary in this Section 10.15, the Company shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Section 10.15 and all other provisions of this Indenture applicable to a Change of Control Offer made by the Company and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer. (g) The Company will comply with Rule l4e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that a Change of Control occurs and the Company is required to purchase Securities as described above. Section 10.16. Limitation on Line of Business. The Company will not, and the Company will not permit any of its Restricted Subsidiaries to, engage in any business other than a Permitted Business. Section 10.17. Limitation on Sale of Assets. (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale unless: (i) at least 75% of the proceeds from such Asset Sale are received in cash or Cash Equivalents; provided that, the amount of any liabilities of the Company or such Restricted Subsidiary that are assumed (and from which the -81- Company or such Restricted Subsidiary is unconditionally released) (other than contingent liabilities and liabilities that are by their terms subordinated to the Securities or any Subsidiary Guarantee) in connection with such Asset Sale by the transferee or purchaser of such assets or on behalf of such transferee or purchaser by a third party shall be deemed to be cash for purposes of this clause (i); and (ii) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Capital Stock or assets issued or sold or otherwise disposed of (as determined in good faith by the Board of Directors of the Company, whose determination shall be conclusive and evidenced in a Board Resolution delivered to the Trustee in an Officer's Certificate). (b) If either the Company or any of its Restricted Subsidiaries engages in an Asset Sale, it may use the Net Cash Proceeds thereof, within one year of the receipt of the proceeds of such Asset Sale, at its option, to (i) repay or prepay permanently any then outstanding Senior Indebtedness of the Company or of any of its Restricted Subsidiaries or (ii) invest (or enter into a legally binding agreement to invest within one year and segregate such Net Cash Proceeds from the general funds of the Company or such Restricted Subsidiary, as the case may be, for that purpose), in properties and assets to replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in a Permitted Business. Pending the making of any investment contemplated by clause (ii) of the immediately preceding sentence such Net Cash Proceeds may be used to temporarily reduce the amount of outstanding Indebtedness under the Credit Agreement and such reduction shall constitute such a segregation referred to in the immediately preceding sentence. In addition, if any such legally binding agreement to invest such Net Cash Proceeds is terminated, then the Company shall, prior to the later of (1) one year following the receipt of the proceeds of such Asset Sale and (2) 90 days following the date of such termination, invest such Net Cash Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical contained in such clause (ii)) above. The amount of such Net Cash Proceeds not so used as set forth above in this paragraph (b) constitutes "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds exceeds $5,000,000, the Company shall within 15 Business Days, be required to make an offer to purchase (an "Excess Proceeds Offer") from all Holders, on a pro rata basis, in accordance with the procedures set forth below, the maximum principal amount (expressed as a multiple of $1,000) of Securities that may be purchased with the Excess Proceeds. The offer price as to each Security shall be payable in cash in an amount equal to 100% of the principal amount of such Security plus accrued and unpaid interest and Liquidated Damages, if any, to the date such Excess Proceeds Offer is consummated. To the extent that the aggregate principal amount of Securities tendered pursuant to an Excess -82- Proceeds Offer is less than the Excess Proceeds, the Company or the applicable Restricted Subsidiary may use such deficiency for general corporate purposes. If the aggregate principal amount of Securities validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Securities to be purchased will be selected on a pro rata basis. Upon completion of any such offer to purchase, the amount of Excess Proceeds shall be reset to zero. Notwithstanding the provisions of paragraphs (a), (b) and (c) of this Section 10.17, if the Company or any Restricted Subsidiary shall incur Indebtedness (in compliance with Section 10.10) for the purpose of purchasing assets, and such assets are then sold in a Sale and Leaseback Transaction, the proceeds of such Sale and Leaseback Transaction may be used to repay such Indebtedness and, if so applied, shall not constitute "Excess Proceeds." (d) If the Company becomes obligated to make an Excess Proceeds Offer pursuant to clause (c) above, the Securities shall be purchased by the Company, in integral multiples of $1,000, on a date that is not earlier than 45 days and not later than 60 days from the date the notice is given to Holders, or such later date as may be necessary for the Company to comply with the requirements under the Exchange Act. (e) The Company shall comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and any other applicable securities laws or regulations in connection with an Excess Proceeds Offer. Section 10.18. Limitation on Issuances of Guarantees of Indebtedness. The Company shall not permit any Restricted Subsidiary (including Foreign Subsidiaries) that is not a Subsidiary Guarantor, directly or indirectly, to Guarantee or pledge any assets to secure the payment of any other Indebtedness of the Company or any Subsidiary Guarantor unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture in the form attached as Exhibit E hereto providing for the Guarantee of the payment of the Securities by such Subsidiary, which Guarantee shall be senior to or pari passu with such Restricted Subsidiary's Guarantee of or pledge to secure such other Indebtedness, unless such other Indebtedness is Senior Indebtedness, in which case the Guarantee of the Securities may be subordinated to the Guarantee of such Senior Indebtedness to the same extent as the Securities are subordinated to such Senior Indebtedness and (ii) such Restricted Subsidiary shall simultaneously waive, and agree that it will not in any manner whatsoever claim or take any benefit from, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Subsidiary as a result of any payment by such Subsidiary under its Guarantee of the Securities. -83- Notwithstanding the preceding paragraph, if any Restricted Subsidiary (including Foreign Subsidiaries) that is organized under the laws of Quebec, Canada would otherwise be required pursuant to the preceding paragraph to provide a Guarantee of the payment of the Securities by such Subsidiary, such obligation to provide such a Guarantee shall be satisfied so long as such Restricted Subsidiary delivers to the Trustee a Guarantee of another Subsidiary Guarantor's Guarantee of the payment of the Securities, which Guarantee will be substantially in the form of the Guarantee by ICON du Canada, Inc. of the obligations of 510152 N.B. LTD., as Subsidiary Guarantor under this Indenture delivered to the Trustee on the date of this Indenture. Notwithstanding the preceding paragraphs, any Subsidiary Guarantee of the Securities (including any Guarantee provided pursuant to the immediately preceding paragraph) shall provide by its terms that it shall be automatically and unconditionally released and discharged under the circumstances described in Section 14 hereof. The form of the Subsidiary Guarantee is attached as Exhibit D hereto. Section 10.19. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends, in cash or otherwise, or make any other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the Company or any Restricted Subsidiary, (iii) make any loans or advances to the Company or any Restricted Subsidiary or (iv) transfer any of its properties or assets to the Company or any Restricted Subsidiary; provided that, the terms of this Section 10.19 shall not apply to (a) any encumbrance or restriction pursuant to an agreement relating to Indebtedness in effect on the date of this Indenture, including pursuant to the Credit Agreement; (b) any encumbrance or restriction pursuant to an agreement relating to Indebtedness with respect to a Restricted Subsidiary that is not a Restricted Subsidiary on the date of this Indenture, in existence at the time such Person becomes a Restricted Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary (so long as such encumbrance or restriction does not extend to any assets of the Company or any other Restricted Subsidiary) and provided that, the Indebtedness was permitted by the terms of the Indenture to be incurred; (c) any encumbrance or restriction pursuant to customary nonassignment provisions in leases governing leasehold interests only to the extent such provisions restrict the transfer of the lease or the leased property entered into in the ordinary course of business consistent with past practices; (d) any encumbrance or restriction due to applicable law; (e) any encumbrance or -84- restriction pursuant to Purchase Money Obligations permitted under this Indenture, but only to the extent such restrictions restrict the transfer of the property purchased with the proceeds of the applicable Purchase Money Obligation; (f) [Intentionally Omitted]; (g) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business consistent with past practices; (h) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business consistent with past practices; (i) any agreement for the sale or other disposition of a Restricted Subsidiary that restricts distributions by such Restricted Subsidiary pending its sale or other disposition; (j) restrictions on the transfer of assets subject to any Permitted Lien by the holder of such Lien; (k) any agreement or instrument governing Indebtedness (whether or not outstanding) of Foreign Subsidiaries that constitutes Permitted Indebtedness; and (l) Indebtedness incurred pursuant to clause (x) of the definition of "Permitted Indebtedness"; provided, however, that, the provisions contained in such new Indebtedness are no more restrictive in any material respect than those contained in the agreements governing Indebtedness being refinanced. Section 10.20. Limitation on Sale and Leaseback Transactions. The Company will not, and will not permit its Restricted Subsidiaries to, enter into, renew or extend any transactions or series of related transactions pursuant to which the Company or any such Restricted Subsidiary sells or transfers any property or asset in connection with the leasing, or the resale against installment payments, or as part of an arrangement involving the leasing or the resale against installment payments, of such property or asset to the seller or transferor ("Sale and Leaseback Transaction") unless (i) the Company or that Restricted Subsidiary could have (x) incurred Indebtedness in an amount equal to the Attributable Debt relating to that Sale and Leaseback transaction pursuant to the Consolidated Fixed Charge Coverage Ratio test in Section 10.10 and (y) incurred Lien to secure that Indebtedness pursuant to Section 10.14; (ii) the gross cash proceeds of that Sale and Leaseback Transaction are at least equal to the Fair Market Value of the property that is the subject of that Sale and Leaseback Transaction, as determined in good faith by the Board of Directors evidenced by a Board Resolution set forth in an Officers' Certificate delivered to the Trustee; and (iii) the Sale and Leaseback Transaction is treated as an Asset Sale and all of the conditions of Section 10.17 (including the provisions concerning the application of Net Cash Proceeds) are satisfied with respect to such Sale and Leaseback Transaction, treating all of the consideration received in such Sale and Leaseback Transaction as Net Cash Proceeds for purposes of Section 10.17. -85- Section 10.21. [Intentionally Omitted]. Section 10.22. Limitation on Designations of Unrestricted Subsidiaries. The Board of Directors of the Company may designate any Restricted Subsidiary of the Company (other than any Restricted Subsidiary which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted Subsidiary" under this Indenture (a "Designation") only if: (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such Designation; and (ii) except in the case of a newly organized Subsidiary in which the Company and the Restricted Subsidiaries have made an aggregate Investment of $1,000 or less or a Subsidiary formed in connection with a Securitization Transaction with the Company or one or more Restricted Subsidiaries, the Company would be permitted under this Indenture to make an Investment constituting a Restricted Payment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the Fair Market Value of the aggregate amount of its Investments in such Subsidiary on such date. The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if: (a) no Default or Event of Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture. All Designations and Revocations must be evidenced by Officers' Certificates of the Company delivered to the Trustee certifying compliance with the foregoing provisions. Section 10.23. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 8.3 or Sections 10.7 through 10.22 and Sections 10.24, 10.25 and 10.27 inclusive, if before or after the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities, by Act of such Holders, waive such compliance in such instance with such term, provision or -86- condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. Section 10.24. Limitation on Other Senior Indebtedness. The Company will not, and will not permit any Restricted Subsidiary to, incur, create, issue, assume, guarantee or otherwise become liable for any Senior Indebtedness other than Indebtedness under the Credit Agreement. In addition, the Company shall not, and shall not permit any Restricted Subsidiary to incur Indebtedness or issue any shares of Preferred Stock of such Subsidiary, directly or indirectly, in exchange for or upon the conversion of any Indebtedness of IHF Holdings, Inc. or ICON Fitness Corporation, unless such Indebtedness is unsecured and is expressly subordinate in right of payment to the Securities. Section 10.25. Rating. The Company shall use its best efforts to have the Securities rated by an established rating agency (which, for so long as is commercially reasonable to do so, will be either Standard & Poor's Rating Group, a division of McGraw-Hill, Inc. and Moody's Investors Service) no later than 120 days after the date hereof and to maintain a rating through and including the Stated Maturity for the Securities; provided, however, that the Company shall not be required to maintain a specified rating. Section 10.26. Payments for Consent. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder of Securities for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid or is paid to all Holders of the Securities that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. Section 10.27. Additional Subsidiary Guarantees. If the Company or any of its Restricted Subsidiaries acquires or creates another Domestic Subsidiary after the date of this Indenture or if the Company is otherwise required pursuant to Section 10.18 hereof, then the Company shall cause that Domestic Subsidiary or such other Subsidiary, as the case may be, to become a Subsidiary Guarantor and execute a supplemental indenture and deliver an Opinion of Counsel to the Trustee within 10 Business Days of the date on which it was acquired or created. -87- ARTICLE XI. REDEMPTION OF SECURITIES Section 11.1. Right of Redemption. The Securities will be subject to redemption at any time after the Issue Date at the option of the Company, in whole but not in part, at the following redemption prices (expressed in percentages of principal amount thereof), plus accrued and unpaid interest and Liquidated Damages, if any, to the Redemption Date if redeemed during the 12 month period ending February 15 of each of the years set forth below: Redemption Year Price -------- ---------- Issue Date through 2001 101% 2002 102% 2003 104% 2004 102% 2005 101% Thereafter 100% Section 11.2. Applicability of Article. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. Section 11.3. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 11.1 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities to be redeemed. Section 11.4. [Intentionally Omitted] Section 11.5. Notice of Redemption. Notice of redemption shall be given in the manner provided for in Section 1.7 not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed. All notices of redemption shall state: (1) the Redemption Date, -88- (2) the Redemption Price, (3) that on the Redemption Date the Redemption Price (together with accrued interest, if any, to the Redemption Date payable as provided in Section 11.7) will become due and payable upon each such Security, or the portion thereof, to be redeemed, and that interest thereon will cease to accrue on and after said date (unless the Company defaults with respect to the payment of Securities to be redeemed), and (4) the place or places where such Securities are to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. Section 11.6. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.3) an amount of money sufficient to pay the Redemption Price of, and accrued interest on, all the Securities which are to be redeemed on that date. Section 11.7. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.9. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Securities. -89- ARTICLE XII. DEFEASANCE AND COVENANT DEFEASANCE Section 12.1. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either Section 12.2 or Section 12.3 applied to all outstanding Securities upon compliance with the conditions set forth below in this Article Twelve. Section 12.2. Defeasance and Discharge. Upon the Company's exercise under Section 12.1 of the option applicable to this Section 12.2, the Company and the Subsidiary Guarantors shall be deemed to have been discharged from their respective obligations with respect to all Outstanding Securities on the date the conditions set forth in Section 12.4 are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Securities, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 12.5 and the other Sections of this Indenture referred to in (A) and (B) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Securities to receive, solely from the trust fund described in Section 12.4 and as more fully set forth in such Section, payments in respect of the principal of (and premium, if any, on) and interest on such Securities when such payments are due, (B) the Company's obligations with respect to such Securities under Sections 3.4, 3.5, 3.8, 10.2 and 10.3, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Twelve. Subject to compliance with this Article Twelve, the Company may exercise its option under this Section 12.2 notwithstanding the prior exercise of its option under Section 12.3 with respect to the Securities. Section 12.3. Covenant Defeasance. Upon the Company's exercise under Section 12.1 of the option applicable to this Section 12.3, the Company and the Subsidiary Guarantors shall be released from their respective obligations under any covenant contained in Section 8.1 and in Sections 10.7 through 10.27 with respect to the Outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Securities shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or -90- Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Securities, the Company and the Subsidiary Guarantors may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 5.1(3) or Section 5.1(4), but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. Section 12.4. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 12.2 or Section 12.3 to the Outstanding Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.7 who shall agree to comply with the provisions of this Article Twelve applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of (and premium, if any, on) and interest on the outstanding Securities on the Stated Maturity (or Redemption Date, if applicable) of such principal (and premium, if any) or installment of interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Securities. Before such a deposit, the Company may give to the Trustee, in accordance with Section 11.3 hereof, a notice of its election to redeem all of the Outstanding Securities at a future date in accordance with Article Eleven hereof, which notice shall be irrevocable. Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing. For this -91- purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government obligation evidenced by such depository receipt. (2) No Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit. (3) Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest with respect to any securities of the Company or any Subsidiary Guarantor. (4) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture (including the provisions of Article Thirteen) or any other material or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound. (5) In the case of an election under Section 12.2, the Company shall have delivered to the Trustee an opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. -92- (6) In the case of an election under Section 12.3, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (7) The Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders or any Subsidiary Guarantor over the other creditors of the Company. (8) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that after the 123rd day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors, rights generally. (9) The Company shall have delivered to the Trustee an Officers, Certificate and an Opinion of Counsel satisfactory to the Trustee, which, taken together, state that all conditions precedent provided for relating to either the defeasance under Section 12.2 or the covenant defeasance under Section 12.3 (as the case may be) have been complied with. Section 12.5. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 10.3, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying Trustee, collectively for purposes of this Section 12.5, the "Trustee") pursuant to Section 12.4 in respect of the Outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Governmental obligations deposited pursuant to Section 12.4 or the principal and interest received in respect thereof other -93- than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Anything in this Article Twelve to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 12.4 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance, as applicable, in accordance with this Article. Section 12.6. Reinstatement. If the Trustee or any Paying Agent is unable to apply any money in accordance with Section 12.5 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's and the Subsidiary Guarantors' obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 12.2 or 12.3, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 12.5; provided, however, that if the Company or any Guarantor makes any payment of principal of (or premium, if any, on) or interest on any Security following the reinstatement of its obligations, the Company or such Guarantor shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE XIII. SUBORDINATION OF SECURITIES Section 13.1. Securities Subordinated to Senior Indebtedness. The Company and the Trustee each covenants and agrees, and each Holder, by its acceptance of a Security, likewise covenants and agrees that all Securities shall be issued subject to the provisions of this Article Thirteen; and each Person holding any Security, whether upon original issue or upon transfer, assignment or exchange thereof, accepts and agrees that payments upon or in respect of the Securities shall, to the extent and in the manner set forth in this Article Thirteen, be subordinated in right of payment to the prior payment in full, in cash or, at the option of the holders of Senior Indebtedness, cash equivalents, of all amounts payable under Senior Indebtedness (including, without limitation, any interest accruing subsequent to an event specified in Sections 5.1(8) and 5.1(9) of this Indenture, without regard to any cure periods -94- specified therein, whether or not such interest is an allowed claim enforceable against the debtor under Bankruptcy Law). Section 13.2. No Payment on Securities in Certain Circumstances. (a) Upon any default by the Company in the payment of the principal of, premium, if any, or interest on Senior Indebtedness, when the same becomes due, no payment may be made on or in respect of the Securities until such default has been cured or waived or the benefits of this sentence waived by or on behalf of the holders of such Senior Indebtedness. (b) No payment may be made by the Company upon or in respect of the Securities for the period specified below (the "Payment Blockage Period") during the continuance of any non-payment event of default with respect to Specified Senior Indebtedness pursuant to which the maturity thereof may be accelerated. A Payment Blockage Period shall commence on the earlier of (i) the commencement of judicial proceedings relating to a non-payment event of default, (ii) receipt by the Trustee of notice from the representative of the holder or holders of any Specified Senior Indebtedness (which notice shall specify the relevant default and shall specify that it is a notice initiating a Payment Blockage Period) or (iii) if such non-payment event of default results from the acceleration of the Securities, the date of such acceleration, and shall end 179 days thereafter unless such Payment Blockage Period shall have been earlier terminated or the benefits of this sentence waived by the representative of the holder or holders of the Specified Senior Indebtedness which declared such Payment Blockage Period. Not more than one Payment Blockage Period with respect to the Securities may be commenced during any period of 360 consecutive days. No event of default that existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Specified Senior Indebtedness shall be made the basis for the commencement of a second Payment Blockage Period by the representative for or the holders of such Specified Senior Indebtedness whether or not within a period of 360 consecutive days. (c) In the event that, notwithstanding the foregoing, any payment or distribution of property or assets of the Company for any reason shall be received by the Trustee or any Holder when such payment is prohibited by paragraph (a) or (b) of this Section 13.2, the Trustee shall, to the extent it is aware thereof, promptly notify the holders of Senior Indebtedness of such prohibited payment and such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives. -95- Section 13.3. Payment over Proceeds upon Dissolution, Etc. (a) Upon any payment or distribution of assets or securities of the Company of any kind or character, whether in cash, property or securities, upon any (i) bankruptcy, reorganization, insolvency, receivership or similar proceeding of the Company (whether voluntary or involuntary), (ii) assignment for the benefit of creditors or any marshaling of the assets and liabilities of the Company or (iii) distribution to creditors of the Company in a liquidation or dissolution of the Company, all amounts due or to become due upon all Senior Indebtedness (including any interest accruing subsequent to an event specified in Sections 5.1(8) and 5.1(9) of this Indenture, without regard to any cure periods specified therein and whether or not such interest is an allowed claim enforceable against the debtor under Bankruptcy Law) shall first be paid in full, in cash or, at the option of holders of Senior Indebtedness, cash equivalents, before the Holders or the Trustee on their behalf shall be entitled to receive any payment by the Company on or in respect of the Securities or any payment to acquire any of the Securities for cash, property or securities, or any distribution with respect to the Securities of any cash, property or securities (except that Holders may receive (i) securities that are subordinated to at least the same extent as the Securities to (a) Senior Indebtedness and (b) any securities issued in exchange for Senior Indebtedness and (ii) payments and other distributions made from any defeasance trust created pursuant to Section 12.4 of this Indenture). Before any payment may be made by, or on behalf of, the Company on or in respect of the Securities upon any such dissolution, winding up, liquidation or reorganization, any payment or distribution of assets or securities for the Company of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee on their behalf would be entitled, but for the provisions of this Article Thirteen, shall be made by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person making such payment or distribution, or by the Holders or the Trustee if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders) or their representatives, as their respective interests appear, to the extent necessary to pay all such Senior Indebtedness in full, in cash or, at the option of holders of Senior Indebtedness, cash equivalents after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of such Senior Indebtedness (except that Holders may receive securities that are subordinated to at least the same extent as the Securities to (i) Senior Indebtedness and (ii) any securities issued in exchange for Senior Indebtedness). (b) To the extent any payment of Senior Indebtedness (whether by or on behalf of the Company, as proceeds of security or enforcement of any right of setoff or otherwise) is declared -96- to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then if such payment is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person, the Senior Indebtedness or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred. To the extent the obligation to repay any Senior Indebtedness is declared to be fraudulent, invalid, or otherwise set aside under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then the obligations so declared fraudulent, invalid or otherwise set aside (and all other amounts that would come due with respect thereto had such obligation not been affected) shall be deemed to be reinstated and outstanding as Senior Indebtedness for all purposes hereof as if such declaration, invalidity or setting aside had not occurred. (c) In the event that, notwithstanding the foregoing provision prohibiting such payment or distribution, any payment or distribution of assets or securities of the Company or any kind or character, whether in cash, property or securities, shall be received by the Trustee or any Holder at a time when such payment or distribution is prohibited by paragraph (a) of this Section 13.3 and before all obligations in respect of Senior Indebtedness are paid in full, in cash or, at the option of holders of Senior Indebtedness, cash equivalents, such payment or distribution shall be received and held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness (pro rata to such holders on the basis of such respective amount of Senior Indebtedness held by such holders) or their representatives, as their respective interests appear, for application to the payment of Senior Indebtedness remaining unpaid until all such Senior Indebtedness has been paid in full, in cash or, at the option of the holders of Senior Indebtedness, cash equivalents, after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of such Senior Indebtedness (except to the extent that Holders receive securities that are subordinated to at least the same extent as the Securities to (i) Senior Indebtedness and (ii) any securities issued in exchange for Senior Indebtedness, in which event such securities shall neither be held in trusts for nor paid over by the Holders to the holders of Senior Indebtedness). Section 13.4. Subrogation. (a) Upon the payment in full of all Senior Indebtedness in cash or, at the option of holders of Senior Indebtedness, cash equivalents, the Holders shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company made on such Senior Indebtedness until the principal of, premium, if any, and interest on the Securities shall be paid in -97- full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holders or the Trustee on their behalf would be entitled except for the provisions of this Article Thirteen, and no payment pursuant to the provisions of this Article Thirteen to the holders of Senior Indebtedness by Holders or the Trustee on their behalf shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders, be deemed to be a payment by the Company to or on account of the Senior Indebtedness. It is understood that the provisions of this Article Thirteen are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of the Senior Indebtedness, on the other hand. (b) If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article Thirteen shall have been applied, pursuant to the provisions of this Article Thirteen, to the payment of all amounts payable under Senior Indebtedness, then, and in such case, the Holders shall be entitled to receive from the holders of such Senior Indebtedness any payments or distributions received by such holders of Senior Indebtedness in excess of the amount required to make payment in full, in cash or, at the option of holders of Senior Indebtedness, cash equivalents, of such Senior Indebtedness of such holders. Section 13.5. Obligations of Company Unconditional. (a) Nothing contained in this Article Thirteen or elsewhere in this Indenture or in the Securities is intended to or shall impair, as among the Company and the Holders, the obligation of the Company, which is absolute and unconditional, to pay to the Holders the principal of, premium, if any, and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Holders or the Trustee on their behalf from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Thirteen of the holders of the Senior Indebtedness. (b) Without limiting the generality of the foregoing, nothing contained in this Article Thirteen will restrict the right of the Trustee or the Holders to take any action to declare the Securities to be due and payable prior to their Stated Maturity pursuant to Section 5.1 or to pursue any rights or remedies hereunder; provided, however, that, all Senior Indebtedness then due and payable or thereafter declared to be due and payable shall first be paid in full, in cash, or at the option of holders of Senior Indebtedness, cash equivalents, before the Holders or the Trustee are entitled to receive any -98- direct or indirect payment from the Company on or with respect to the Securities. Section 13.6. Notice to Trustee. The Company shall give prompt written notice to the Trustee of any fact known to the Company that would prohibit the making of any payment to or by the Trustee in respect of the Securities pursuant to the provisions of this Article Thirteen. The Trustee shall not be charged with the knowledge of the existence of any default or event of default with respect to any Senior Indebtedness or of any other facts that would prohibit the making of any payment to or by the Trustee unless and until the Trustee shall have received notice in writing at its Corporate Trust Office to that effect signed by an Officer of the Company, or by a holder of Senior Indebtedness or representative thereof; and prior to the receipt of any such written notice, the Trustee shall, subject to Article Six, be entitled to assume that no such facts exist; provided that, if the Trustee shall not have received the notice provided for in this Section 13.6 at least two Business Days prior to the date upon which, by the terms of this Indenture, any monies shall become payable for any purpose (including, without limitation, the payment of the principal of, premium, if any, or interest on any Security), then, notwithstanding anything herein to the contrary, the Trustee shall have full power and authority to receive any monies from the Company and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary that may be received by it on or after such prior date except for an acceleration of the Securities prior to such application. Nothing contained in this Section 13.6 shall limit the right of the holders of Senior Indebtedness to recover payments as contemplated by this Article Thirteen. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing itself to be a holder of any Senior Indebtedness (or a representative of such holder) to establish that such notice has been given by a holder of such Senior Indebtedness or representative on behalf of any such holder. In the event that the Trustee determines in good faith that any evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article Thirteen, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article Thirteen and, if such evidence is not furnished to the Trustee, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. -99- Section 13.7. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets or securities referred to in this Article Thirteen, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which bankruptcy, dissolution, winding up, liquidation or reorganization proceedings are pending, or upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person making such payment or distribution, delivered to the Trustee or to the Holders for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payment thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Thirteen. Section 13.8. Trustee's Relation to Senior Indebtedness. (a) The Trustee and any Paying Agent shall be entitled to all the rights set forth in this Article Thirteen with respect to any Senior Indebtedness that may at any time be held by it in its individual or any other capacity to the same extent as any other holder of Senior Indebtedness and nothing in this Indenture shall deprive the Trustee or any Paying Agent of any of its rights as such holder; provided that nothing in this Section 13.8(a) shall apply to the Company or any Affiliate of the Company that is acting as Paying Agent. (b) With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article Thirteen, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness (except as provided in Sections 13.2(c) and 13.3(c) of this Indenture) and shall not be liable to any such holders if the Trustee shall in good faith (and provided such payment shall not constitute gross negligence) mistakenly pay over or distribute to Holders or to the Company or to any other person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article Thirteen or otherwise. Section 13.9. Subordination Rights Not Impaired by Acts or Omissions of the Trustee, the Holders, the Company or Holders of Senior Indebtedness. No right of any present or future holders of any Senior Indebtedness to enforce subordination as provided in this Article Thirteen will at any time in any way be prejudiced or impaired by -100- any act or failure to act on the part of the Trustee, Holders or the Company or by any act or failure to act by any such holder, or by any noncompliance by the Company with the terms of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. The provisions of this Article Thirteen are intended to be for the benefit of, and shall be enforceable directly by, the holders of Senior Indebtedness. Section 13.10. Holders Authorize Trustee to Effectuate Subordination of Securities. Each Holder by its acceptance of any Securities authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article Thirteen, and appoints the Trustee its attorney-in-fact for such purposes, including, in the event of any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency, receivership, reorganization or similar proceedings or upon an assignment for the benefit of creditors or otherwise) tending towards liquidation of the property and assets of the Company, the filing of a claim for the unpaid balance of its Securities in the form required in those proceedings. If the Trustee does not file a proper claim or proof of indebtedness in the form required in such proceeding at least 30 days before the expiration of the time to file such claim or claims, each holder of Senior Indebtedness is hereby authorized to file an appropriate claim for and on behalf of the Holders. Section 13.11. Not to Prevent Events of Default. The failure to make a payment on account of principal of, premium, if any, or interest on the Securities by reason of any provision of this Article Thirteen will not be construed as preventing the occurrence of an Event of Default. Section 13.12. Trustee's Compensation Not Prejudiced. Nothing in this Article Thirteen will apply to amounts due to the Trustee pursuant to other sections of this Indenture. Section 13.13. No Waiver of Subordination Provisions. Without in any way limiting the generality of Section 13.9, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders, without incurring responsibility to the Holders and without impairing or releasing the subordination provided in this Article Thirteen or the obligations hereunder of the Holders to the holders of Senior Indebtedness may amend, renew, extend, substitute, refinance, restructure, replace, supplement or otherwise modify the Credit Agreement, including, without limitation, the following: (a) change the manner, place -101- or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding or secured; (b) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (c) release any Person liable in any manner for the collection of Senior Indebtedness; and (d) exercise or refrain from exercising any rights against the Company and any other Person. Section 13.14. Payments May Be Paid Prior to Dissolution. Nothing contained in this Article Thirteen or elsewhere in this Indenture shall prevent (i) the Company, except under the conditions described in Section 13.2 or 13.3, from making payments of principal of, premium, if any, and interest on the Securities, or from depositing with the Trustee any money for such payments, or (ii) the application by the Trustee of any money deposited with it for the purpose of making such payments of principal of, premium, if any, and interest on the Securities to the holders entitled thereto unless, at least two Business Days prior to the date upon which such payment becomes due and payable, the Trustee shall have received the written notice provided for in Section 13.2(b) (or there shall have been an acceleration of the Securities prior to such application) or in Section 13.6 of this Indenture. The Company shall give prompt written notice to the Trustee of any dissolution, winding up, liquidation or reorganization of the Company or other fact known to the Company which would prohibit the making of payments hereunder. ARTICLE XIV. SUBSIDIARY GUARANTEES Section 14.1. Guarantee. Subject to this Article XIV, each of the Subsidiary Guarantors hereby, jointly and severally, unconditionally guarantees to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Securities or the obligations of the Company hereunder or thereunder, that: (a) the principal of, premium, if any, interest and Liquidated Damages, if any, on the Securities will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal, premium, if any, and to the extent permitted by law, interest on any interest, if any, and Liquidated Damages, if any, on the Securities, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Securities or any -102- of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantors shall be jointly and severally obligated to pay the same immediately. Each Subsidiary Guarantor agrees that this is a guarantee of payment and not a guarantee of collection. The Subsidiary Guarantors hereby agree that their obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Subsidiary Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenant that this Subsidiary Guarantee shall not be discharged except by complete performance of the obligations contained in the Securities and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Subsidiary Guarantors or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Subsidiary Guarantors, any amount paid by either to the Trustee or such Holder, this Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Subsidiary Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. Each Subsidiary Guarantor further agrees that, as between the Subsidiary Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article V hereof for the purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article V hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantors for the purpose of this Subsidiary Guarantee. The Subsidiary Guarantors shall have the right to seek contribution from any non-paying Subsidiary Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Guarantee. -103- Section 14.2. Guarantee Limitation On Subsidiary Guarantor Liability. Each Subsidiary Guarantor, and by its acceptance of Securities, each Holder, hereby confirms that it is the intention of all such parties that the Subsidiary Guarantee of such Subsidiary Guarantor not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to any Subsidiary Guarantee. To effectuate the foregoing intention, the Trustee, the Holders and the Subsidiary Guarantors hereby irrevocably agree that the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee and this Article XIV shall be limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of such Subsidiary Guarantor that are relevant under such laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under this Article XIV, result in the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee not constituting a fraudulent transfer or conveyance. Section 14.3. Execution And Delivery Of Subsidiary Guarantee. To evidence its Subsidiary Guarantee set forth in Section 14.1, each Subsidiary Guarantor hereby agrees that a notation of such Subsidiary Guarantee substantially in the form included in Exhibit D shall be endorsed by an officer of such Subsidiary Guarantor on each Security authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of such Subsidiary Guarantor by its President or one of its Vice Presidents. Each Subsidiary Guarantor hereby agrees that its Subsidiary Guarantee set forth in Section 14.1 shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Subsidiary Guarantee. If an officer whose signature is on this Indenture or on the Subsidiary Guarantee no longer holds that office at the time the Trustee authenticates the Security on which a Subsidiary Guarantee is endorsed, the Subsidiary Guarantee shall be valid nevertheless. The delivery of any Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Subsidiary Guarantee set forth in this Indenture on behalf of the Subsidiary Guarantors. -104- Section 14.4. Subsidiary Guarantors May Consolidate, Etc., Only on Certain Terms. No Subsidiary Guarantor may in a single transaction or a series of related transactions consolidate or merge with or into (whether or not such Subsidiary Guarantor is the surviving Person) or, sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties to any other Person or group of affiliated Persons unless: (a) except in the case of a merger of a Subsidiary Guarantor with or into the Company or another Subsidiary Guarantor but subject to Section 14.5 hereof, the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) expressly assumes by a supplemental indenture in a form reasonably satisfactory to the Trustee, all the obligations of such Subsidiary Guarantor under the Securities, this Indenture and the Subsidiary Guarantee on the terms set forth herein or therein; and (b) immediately after giving effect to such transaction or series of transactions, no Default or Event of Default shall have occurred or be continuing. Upon any consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the Subsidiary Guarantee endorsed upon the Securities and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Subsidiary Guarantor, such successor Person shall succeed to and be substituted for and may exercise every right and power of, the Subsidiary Guarantor under this Indenture and the Securities with the same effect as if such successor Person had been named herein as a Subsidiary Guarantor. Such successor Person thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof. Section 14.5. Releases of Subsidiary Guarantee. The Subsidiary Guarantee of a Subsidiary Guarantor will be released: (a) in connection with any sale or disposition of all or substantially all of the assets of that Subsidiary Guarantor (including by way of merger or consolidation), if the disposition is to the Company or another Subsidiary Guarantor or if the -105- Company applies the Net Proceeds of that sale or other disposition in accordance with the applicable provisions of this Indenture, including without limitation Section 10.17 hereof; or (b) in connection with any sale of all of the capital stock of a Subsidiary Guarantor, if the Company applies the Net Proceeds of that sale in accordance with the applicable provisions of this Indenture, including without limitation Section 10.17 hereof; or (c) if the Company designates any Restricted Subsidiary that is a Subsidiary Guarantor as an Unrestricted Subsidiary; or (d) upon the release or discharge of all guarantees of such Subsidiary Guarantor, and all pledges of property or assets of such Subsidiary Guarantor securing all other Indebtedness of the Company and the other Subsidiary Guarantors. Upon delivery by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the applicable provisions of this Indenture, including without limitation Section 10.17 hereof, the Trustee shall execute any documents reasonably required in order to evidence the release of any Subsidiary Guarantor from its obligations under its Subsidiary Guarantee. Any Subsidiary Guarantor not released from its obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the Securities and for the other obligations of any Subsidiary Guarantor under this Indenture as provided in this Article XIV. Section 14.6. Subordination of Subsidiary Guarantee. Each Subsidiary Guarantor agrees, and each Holder by accepting a Security agrees, that the obligations of each Subsidiary Guarantor under its Subsidiary Guarantee, are subordinated and junior in right of payment to the prior payment of all Senior Indebtedness of each Subsidiary Guarantor on the same basis as the obligations on, or relating to the Securities, are subordinated and junior in right of payment to the prior payment of all Senior Indebtedness of the Company pursuant to Article Thirteen. In furtherance of the foregoing, each Subsidiary Guarantor agrees, and the Trustee and each Holder by accepting a Security agrees, that the subordination and related provisions applicable to the obligations of each Subsidiary Guarantor under its Subsidiary Guarantee by virtue of the preceding sentence shall be as set forth in Article Thirteen as if each reference to "Company" therein were instead a reference to "a Subsidiary Guarantor", each reference to "Senior Indebtedness of the Company" therein were instead a reference to "Senior Indebtedness of each Subsidiary Guarantor" and each -106- reference to "Securities" therein were instead a reference to "this Subsidiary Guarantee", with such appropriate modifications as the context may require. For the purposes of the foregoing sentence, the Trustee and the Holders shall have the right to receive and/or retain payments by any of the Subsidiary Guarantors only at such times as they may receive and/or retain payments in respect of the Securities pursuant to this Indenture, including Article Thirteen hereof. -107- IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. ICON HEALTH & FITNESS, INC., as Issuer By: _______________________________ Name: Title Attest:_________________________ JUMPKING, INC. as Subsidiary Guarantor By: _______________________________ Name: Title Attest:_________________________ ICON INTERNATIONAL HOLDINGS, INC. as Subsidiary Guarantor By: _______________________________ Name: Title Attest:_________________________ UNIVERSAL TECHNICAL SERVICES, INC. as Subsidiary Guarantor By: _______________________________ Name: Title Attest:_________________________ 510152 N.B. LTD. as Subsidiary Guarantor By: _______________________________ Name: Title Attest:_________________________ IBJ WHITEHALL BANK & TRUST COMPANY, as Trustee By: _______________________________ Title -108- STATE OF UTAH ) ) ss.: COUNTY OF CACHE ) On the ___ day of __________, 1999, before me personally came ____________, to me known who, being by me duly sworn, did depose and say that he _____________ is of ICON Health & Fitness, Inc. one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. [stamp of notary] __________________ STATE OF ) ) ss.: COUNTY OF ) On the ____ day of _______________, 1999, before me personally came __________________, to be known who, being by me duly sworn, did depose and say that he is ___________________ of __________________ one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. __________________ SCHEDULE I Subsidiary Guarantors - -------------------------------------------------------------------------------- Jumpking, Inc. c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 510152 N.B. LTD. c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Universal Technical Services, Inc. c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 ICON International Holdings, Inc. c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 SCHEDULE II Agreements - -------------------------------------------------------------------------------- 1. Securities Purchase Agreement, dated as of the Closing Date, among Holdings and CSFB. 2. Note Agreement, dated as of the Closing Date, between Holdings and CSFB. 3. Stockholders Agreement, dated as of the Closing Date, among Holdings, ICON Health & Fitness, Inc. ("Borrower"), the LLC, participating old 13% holders, if any, Scott Watterson and Gary Stevenson, CSFB and other equity holders. 4. Restated Employment Agreements, dated as of the Closing Date, between New Holdings, Borrower and each of Scott Watterson and Gary Stevenson. 5. Termination Agreements, dated as of the Closing date, between IHF Holdings, Inc., Borrower and each of Scott Watterson and Gary Stevenson. 6. Funding to Holdings of $500,000 for payments to junior management. 7. ICON Junior Management Deferred Bonus Plan. 8. Management Agreement, dated as of the Closing Date, among Holdings, Borrower and Bain. 9. Management Agreements among Borrower, New Holdings and each of Scott Watterson and Gary Stevenson. 10. Agreement and Plan of Merger, dated as of the Closing Date, among Holdings, Borrower and Merger Sub. Exhibit A REGISTERED REGISTERED THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (1), (2), (3) OR (7) OF PARAGRAPH A OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN "ACCREDITED INVESTOR", IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $500,000 FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR A-1 TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 3.6 AND 3.7 OF THE INDENTURE. ICON HEALTH & FITNESS, INC. 12% Series A Note due 2005 No.1 CUSIP 44929HACZ ICON HEALTH & FITNESS, INC., a Delaware corporation (the "Company", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to ____________, or its registered assigns, the principal sum of __________________________ ($_______________), on September 27, 2005. Interest Rate: 12% per annum. Interest Payment Dates: January 15 and July 15 of each year commencing January 15, 2000. Regular Record Dates: January 1 and July 1 of each year. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. A-2 IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers. Date: _____________, ___ ICON HEALTH & FITNESS, INC. Attested by: By: __________________________ _______________________________ Title: President Title: Secretary This is one of the 12% Series A Notes due 2005 described in the within-mentioned Indenture. Date of Authentication: IBJ WHITEHALL BANK & TRUST COMPANY, as Trustee ______________,____ By: ______________________ Authorized Signatory A-3 [REVERSE SIDE OF SECURITY] ICON HEALTH & FITNESS, INC. 12% Series A Note due 2005 1. Principal and Interest. The Company will pay the principal of this Security on September 27, 2005. The Company promises to pay interest on the principal amount of this Security on each Interest Payment Date, as set forth below, at the rate of 12% per annum. Interest will be payable semiannually (to the owners of record (the "Holders") of the Securities (or any predecessor Securities) at the close of business on the January 1 or July 1 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing January 15, 2000. In addition, as provided in the Exchange and Registration Rights Agreement dated September 27, 1999, liquidated damages may be required to be paid by the Company. 2. Method of Payment. The Company will pay interest (except defaulted interest) on the principal amount of the Securities on each Interest Payment Date to the persons who are Holders (as reflected in the Security Register at the close of business on the Regular Record Dates immediately preceding the Interest Payment Date), in each case, even if the Security is canceled on registration of transfer or registration of exchange after such record date; provided that, with respect to the payment of principal, the Company will make payment to the Holder that surrenders this Security to any Paying Agent on or after September 27, 2005. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal, premium, if any, and interest by its check payable in such money. The Company may mail an interest check to a Holder's registered address (as reflected in the Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding date that is a Business Day and no interest shall accrue for the intervening period. A-4 3. Paying Agent and Registrar. Initially, IBJ Whitehall Bank & Trust Company (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar upon written notice thereto. The Company, any Restricted Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-registrar. 4. Indenture; Limitations. The Company issued the Securities under an Indenture dated as of September 27, 1999 (the "Indenture"), between the Company and the Trustee. Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Securities are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Security and the terms of the Indenture, the terms of the Indenture shall control. The Securities are general unsecured obligations of the Company. The Indenture limits the aggregate principal amount of the Securities to $45,000,000. 5. Subordination. The payment of the Securities will to the extent set forth in the Indenture, be subordinated in right of payment to the prior payment in full, in cash or cash equivalents, of all Senior Indebtedness. 6. Subsidiary Guarantee. The payment of principal of, premium, if any, interest and Liquidated Damages, if any, on the Securities are unconditionally guaranteed, jointly and severally, on a senior subordinated basis by the Subsidiary Guarantors. 7. Redemption. The Securities will be subject to redemption at any time after the Issue Date at the option of the Company, in whole but not in part, at the following redemption prices (expressed in percentages of principal amount thereof), plus accrued and unpaid interest and Liquidated Damages, if any, to the Redemption Date if redeemed during the 12 month period ending February 15 of each of the years set forth below: A-5 Redemption Year Price -------- --------- Issue Date through 2001 101% 2002 102% 2003 104% 2004 102% 2005 101% Thereafter 100% Notice of a redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder to be redeemed at such Holder's last address as it appears in the Security Register. On and after the Redemption Date, interest ceases to accrue on Securities, unless the Company defaults in the payment of the Redemption Price. 7. Repurchase upon a Change in Control and Asset Sales. Upon the occurrence of (a) a Change of Control, the Company is obligated to make an offer to purchase all outstanding Securities at a purchase price of 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase or (b) certain Asset Sales, the Company may be obligated to make offers to purchase Securities with a portion of the Net Cash Proceeds of such Asset Sales at a purchase price of 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. 8. Denominations; Transfer; Exchange. The Securities are in registered form without coupons, in denominations of $1,000 and multiples of $1,000 in excess thereof. A Holder may register the transfer or exchange of Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. 9. Persons Deemed Owners. A Holder may be treated as the owner of a Security for all purposes. 10. Unclaimed Money. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the A-6 Paying Agent will pay the money back to the Company at its request. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 11. Discharge Prior to Redemption or Maturity. If the Company irrevocably deposits, or causes to be deposited, with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Securities (a) to redemption or maturity, the Company will be discharged from the Indenture and the Securities, except in certain circumstances for certain sections thereof, and (b) to the Stated Maturity, the Company will be discharged from certain covenants set forth in the Indenture. 12. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency and make any change that does not materially adversely affect the rights of any Holder. 13. Restrictive Covenants. The Indenture contains certain covenants, including, without limitation, covenants with respect to the following matters: (i) Indebtedness; (ii) Restricted Payments; (iii) Transactions with Affiliates; (iv) Liens; (v) Change of Control; (vi) Asset Sales; (vii) Guarantees by Restricted Subsidiaries; (viii) Dividends and Other Payment Restrictions Affecting Subsidiaries; (ix) Sale and Leaseback Transactions; (x) Designation of Unrestricted Subsidiaries; (xi) Incurrence of Other Senior Indebtedness; and (xii) Additional Subsidiary Guarantees. Within 120 days after the end of each fiscal year and within 45 days after each fiscal quarter, the Company must report to the Trustee on compliance with the Indenture. 14. Successor Persons. When a successor person or other entity assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor person will be released from those obligations. A-7 15. Remedies for Events of Default. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities then outstanding may declare all the Securities to be immediately due and payable. If a bankruptcy or insolvency default with respect to the Company or any of its Significant Subsidiaries occurs and is continuing, the Securities automatically become immediately due and payable. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of at least a majority in principal amount of the Securities then outstanding may direct the Trustee in its exercise of any trust or power. 16. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may make loans to, accept deposits from, perform services for, and otherwise deal with, the Company and its Affiliates as if it were not the Trustee. 17. Authentication. This Security shall not be valid until the Trustee signs the certificate of authentication on the other side of this Security. 18. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to Icon Health & Fitness, Inc., 1500 South 1000 West, Logan, Utah 84321, Attention: President. A-8 FOR VALUE RECEIVED the undersigned registered Holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please print or typewrite name and address including zip code of assignee) - -------------------------------------------------------------------------------- the within Security and all rights thereunder, hereby irrevocably - -------------------------------------------------------------------------------- constituting and appointing attorney to transfer such Security on the books of the Company with full power of substitution in the premises. In connection with any transfer of this Security occurring prior to the Resale Restriction Termination Date, the undersigned confirms that without utilizing any general solicitation or general advertising: Check One [ ](a) this Security is being transferred in compliance with the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder. or [ ](b) this Security is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Security and the Indenture. If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Security in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 3.7 of the Indenture shall have been satisfied. A-9 Date: __________________ -------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within- mentioned instrument in every particular, without alteration or any change whatsoever. Signature Guarantee: ___________________________________________________________ Participant in a Recognized Signature Guaranty Medallion Program TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ________________________ ________________________________________ NOTICE: To be executed by an executive officer A-10 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 10.15 or Section 10.17 of the Indenture, check the Box: [ ]. If you wish to have a portion of this Security purchased by the Company pursuant to Section 10.15 or Section 10.17 of the Indenture, state the amount (in principal amount at maturity) below: $___________________. Date: ________________ Your Signature: _________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ______________________________________ Participant in a Recognized Signature Guaranty Medallion Program A-11 Exhibit C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Institutional Accredited Investors ________________ , ______ Icon Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 IBJ Whitehall Bank & Trust Company One State Street New York, NY 10004 Re: Icon Health & Fitness, Inc. (the "Company") 12% Notes due 2005 (the "Securities") Ladies and Gentlemen: In connection with our proposed purchase of $__________ aggregate principal amount of the Securities: 1. We understand that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing the Securities to offer, sell or otherwise transfer such Securities prior to the date which is two years after the later of the date of original issue of the Securities and the last date on which the Company or any affiliate of the Company was the owner of such Securities, or any predecessor thereto (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) for so long as the Securities are eligible for resale pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring the Securities for its own account or for the account of such an institutional "accredited investor" for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or (e) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the C-1 disposition of our property and the property of such investor account or accounts be at all times within our or their control and to compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Securities is proposed to be made pursuant to clause (d) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Trustee or the Registrar, as the case may be, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) or Rule 501 under the Securities Act and that it is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. We acknowledge that the Company and the Trustee or the Registrar, as the case may be, reserve the right prior to any offer, sale or other transfer prior to the Resale Restriction Termination Date of the Securities pursuant to clauses (d) and (e) above to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to the Company and the Trustee or the Registrar, as the case may be. We further understand that the securities purchased by us will bear a legend to the foregoing effect. 2. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2) (3) or (7) of Regulation D under the Securities Act) purchasing for our own account or for the account of such an institutional "accredited investor," and we are acquiring the Securities for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 3. We are acquiring the Securities purchased by us for our own account or for one or more accounts as to each of which we exercise sole investment discretion. C-2 4. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, By: __________________ (NAME OF PURCHASER) Date: ___________________ Upon transfer, the Securities should be registered in the name of the new beneficial owner as follows: Name: __________________________________________________________________________ Address: _______________________________________________________________________ Taxpayer ID Number: ____________________________________________________________ C-3 Exhibit D FORM OF NOTATION OF SUBSIDIARY GUARANTEE For value received, each Subsidiary Guarantor (which term includes any successor Person under the Indenture) has, jointly and severally, unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture, dated as of September 27, 1999 (the "Indenture"), among ICON Health & Fitness, Inc., the Subsidiary Guarantors party thereto and IBJ Whitehall Bank & Trust Company, as trustee (the "Trustee"), (a) the due and punctual payment of the principal of, premium, if any, and interest on the Securities (as defined in the Indenture), whether at maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on overdue principal and premium, and, to the extent permitted by law, interest, and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee all in accordance with the terms of the Indenture and (b) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of the Subsidiary Guarantors to the Holders of Securities and to the Trustee pursuant to the Subsidiary Guarantee and the Indenture are expressly set forth in Article 14 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Subsidiary Guarantee. The obligations of the Subsidiary Guarantors will be released only in accordance with the provisions of Article 14 of the Indenture. Each Holder of a Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee, on behalf of such Holder, to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (c) appoints the Trustee attorney-in-fact of such Holder for such purpose; provided, however, that the Indebtedness evidenced by this Subsidiary Guarantee shall cease to be so subordinated and subject in right of payment upon any defeasance of this Security in accordance with the provisions of the Indenture. [Name of Subsidiary Guarantor(s)] By:______________________________ Name: Title: D-1 Exhibit E FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED BY SUBSEQUENT SUBSIDIARY GUARANTORS SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of ______________, among _______________ (the "Guaranteeing Subsidiary"), a subsidiary of ICON Health & Fitness, Inc. (or its permitted successor), a Delaware corporation (the "Company"), the Company, the other Subsidiary Guarantors (as defined in the Indenture referred to herein) and IBJ Whitehall Bank & Trust Company, as trustee under the indenture referred to below (the "Trustee"). W I T N E S S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of ____________, providing for the issuance of an aggregate principal amount of up to $45,000,000 of 12% Notes due 2005 (the "Securities"); WHEREAS, the Indenture provides that under certain circumstances the Guaranteeing Subsidiary shall execute and deliver to the Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally guarantee all of the Company's obligations under the Securities and the Indenture on the terms and conditions set forth herein (the "Subsidiary Guarantee"); and WHEREAS, pursuant to Section 9.3 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guaranteeing Subsidiary and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Securities as follows: 1. Capitalized Terms. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. Agreement To Guarantee. The Guaranteeing Subsidiary hereby agrees as follows: (a) Along with all Subsidiary Guarantors named in the Indenture, to jointly and severally Guarantee to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns,irrespective of the E-1 validity and enforceability of the Indenture, the Securities or the obligations of the Company hereunder or thereunder, that: (i) the principal of and interest on the Securities will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Securities, if any, if lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantors shall be jointly and severally obligated to pay the same immediately. (b) The obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. (c) The following is hereby waived: diligence presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever. (d) This Subsidiary Guarantee shall not be discharged except by complete performance of the obligations contained in the Securities and the Indenture. (e) If any Holder or the Trustee is required by any court or otherwise to return to the Company, the E-2 Subsidiary Guarantors, or any Custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Subsidiary Guarantors, any amount paid by either to the Trustee or such Holder, this Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. (f) The Guaranteeing Subsidiary shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. (g) As between the Subsidiary Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 5 of the Indenture for the purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 5 of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantors for the purpose of this Subsidiary Guarantee. (h) The Subsidiary Guarantors shall have the right to seek contribution from any non-paying Subsidiary Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantee. (i) Pursuant to Section 14.2 of the Indenture, after giving effect to any maximum amount and any other contingent and fixed liabilities that are relevant under any applicable Bankruptcy or fraudulent conveyance laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under Article 14 of the Indenture shall result in the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee not constituting a fraudulent transfer or conveyance. 3. Execution And Delivery. Each Guaranteeing Subsidiary agrees that the Subsidiary Guarantees shall remain in full force and effect notwithstanding E-3 any failure to endorse on each Security a notation of such Subsidiary Guarantee. 4. Guaranteeing Subsidiary May Consolidate, Etc. on Certain Terms. (a) A Guaranteeing Subsidiary may not sell or otherwise dispose of all or substantially all of properties, or consolidate with or merge with or into (whether or not such Guaranteeing Subsidiary is the surviving Person) another Person or group of affiliated Persons unless: (i) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred or be continuing; and (ii) except in the case of a merger of a Subsidiary Guarantor with or into the Company or another Subsidiary Guarantor but subject to Section 14.5 hereof, the Person formed by or surviving any such consolidation or merger (if other than such Subsidiary Guarantor) expressly assumes by a supplemental indenture in a form reasonably satisfactory to the Trustee, all the obligations of such Subsidiary Guarantor under the Securities, the Indenture and the Subsidiary Guarantee on the terms set forth therein. (b) In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the Subsidiary Guarantee endorsed upon the Securities and the due and punctual performance of all of the covenants and conditions of the Indenture to be performed by the Subsidiary Guarantor, such successor Person shall succeed to and be substituted for and may exercise every right and power of, the Subsidiary Guarantor under the Indenture and the Securities with the same effect as if it had been named herein as a Subsidiary Guarantor. Such successor Person thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under the Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of the Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof. E-4 5. Releases. (a) The Subsidiary Guarantee of a Subsidiary Guarantor will be released (i) in connection with any sale or other disposition of all or substantially all of the assets of that Subsidiary Guarantor (including by way of merger or consolidation), if the disposition is to the Company or another Subsidiary Guarantor or if the Company applies the Net Proceeds of that sale or other disposition in accordance with the applicable provisions of the Indenture, including without limitation Section 10.17 thereof; (ii) in connection with any sale of all of the capital stock of a Subsidiary Guarantor, if the Company applies the Net Proceeds of that sale in accordance with the applicable provisions of the Indenture, including without limitation Section 10.17 thereof; (iii) if the Company designates any Restricted Subsidiary that is a Subsidiary Guarantor as an Unrestricted Subsidiary; or (iv) upon the release or discharge of all guarantees of such Subsidiary Guarantor, and all pledges of property or assets of such Subsidiary Guarantor securing all other Indebtedness of the Company and other Subsidiary Guarantors. Upon delivery by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the provisions of the Indenture, including without limitation Section 10.17 of the Indenture, the Trustee shall execute any documents reasonably required in order to evidence the release of any Subsidiary Guarantor from its obligations under its Subsidiary Guarantee. (b) Any Subsidiary Guarantor not released from its obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the Securities and for the other obligations of any Subsidiary Guarantor under the Indenture as provided in Article 14 of the Indenture. 6. No Recourse Against Others. No past, present or future director, officer, employee, incorporator, stockholder or agent of the Guaranteeing Subsidiary, as such, shall have any liability for any obligations of the Company or any Guaranteeing Subsidiary under the Securities, any Subsidiary Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of the Securities by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. Such waiver may not be effective to waive liabilities under the federal E-5 securities laws and it is the view of the Commission that such a waiver is against public policy. 7. New York Law To Govern. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 8. Counterparts. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 9. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof. 10. The Trustee. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiary and the Company. E-6 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated: _________, _____ [GUARANTEEING SUBSIDIARY] By:______________________ Name: Title: IBJ WHITEHALL BANK & TRUST COMPANY, as Trustee By:______________________ Name: Title: E-7 EX-4.2 6 EXHIBIT 4.2 Exhibit 4.2 NOTATION OF SUBSIDIARY GUARANTEE For value received, each Subsidiary Guarantor (which term includes any successor Person under the Indenture) has, jointly and severally, unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture, dated as of September 27, 1999 (the "Indenture"), among ICON Health & Fitness, Inc., the Subsidiary Guarantors party thereto and IBJ Whitehall Bank & Trust Company, as trustee (the "Trustee"), (a) the due and punctual payment of the principal of, premium, if any, and interest on the Securities (as defined in the Indenture), whether at maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on overdue principal and premium, and, to the extent permitted by law, interest, and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee all in accordance with the terms of the Indenture and (b) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of the Subsidiary Guarantors to the Holders of Securities and to the Trustee pursuant to the Subsidiary Guarantee and the Indenture are expressly set forth in Article 14 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Subsidiary Guarantee. The obligations of the Subsidiary Guarantors will be released only in accordance with the provisions of Article 14 of the Indenture. Each Holder of a Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee, on behalf of such Holder, to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (c) appoints the Trustee attorney-in-fact of such Holder for such purpose; provided, however, that the Indebtedness evidenced by this Subsidiary Guarantee shall cease to be so subordinated and subject in right of payment upon any defeasance of this Security in accordance with the provisions of the Indenture. Closing Doc Sub Guarantees (Exh. 4.2) JUMPKING, INC. By:________________________________ Name: Title: ICON INTERNATIONAL HOLDINGS, INC. By:________________________________ Name: Title: UNIVERSAL TECHNICAL SERVICES, INC. By:________________________________ Name: Title: 510152 N.B. LTD. By:________________________________ Name: Title: Closing Doc Sub Guarantees (Exh. 4.2) -2- EX-4.3 7 EXHIBIT 4.3 Exhibit 4.3 QUEBEC GUARANTY This GUARANTY (this "Guaranty"), dated as of September 27, 1999, by ICON OF CANADA INC., a Quebec company ("Guarantor"), in favor of IBJ WHITEHALL BANK & TRUST COMPANY, as Trustee (the "Trustee") under that certain Indenture (the "Indenture") dated September 27, 1999 between Icon Health & Fitness, Inc. (the "Company") and the Trustee. W I T N E S S E T H: WHEREAS, pursuant to Article XIV of the Indenture, 510152 N.B. LTD. ("New Brunswick") has guaranteed to each Holder of a Security (as each term is defined in the Indenture) the obligations of the Company under the Indenture and the Securities (the "New Brunswick Guaranty"); WHEREAS, Guarantor is required pursuant to Section 10.18 of the Indenture to provide this Guaranty; and WHEREAS, 100% of the outstanding stock of Guarantor and New Brunswick is owned directly by ICON International Holdings, Inc.; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, it is agreed as follows: 1. DEFINITIONS. Capitalized terms used herein shall have the meanings assigned to them in the Indenture, unless otherwise defined herein. References to this "Guaranty" shall mean this Guaranty, including all amendments, modifications and supplements and any annexes, exhibits and schedules to any of the foregoing, and shall refer to this Guaranty as the same may be in effect at the time such reference becomes operative. 2. THE GUARANTY. Subject to the terms hereof, Guarantor hereby, jointly and severally, unconditionally guarantees to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Securities, the New Brunswick Guaranty or the obligations of the Company or New Brunswick thereunder that the obligations of New Brunswick under the New Brunswick Guaranty will be promptly paid in full or performed, all in accordance with the terms thereof. Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the New Brunswick Guaranty, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions thereof, the recovery of any judgment against New Brunswick, any GBS canadian guaranty (Exh. 4.3) action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of New Brunswick, any right to require a proceeding first against New Brunswick, protest, notice and all demands whatsoever and covenant that this Guaranty shall not be discharged except by complete performance of the obligations contained in the New Brunswick Guaranty. If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Subsidiary Guarantors or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Subsidiary Guarantors, any amount paid by either to the Trustee or such Holder, this Guaranty, to the extent theretofore discharged, shall be reinstated in full force and effect. Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. 3. Guaranty Limitation On Guarantor Liability. Guarantor, and by its acceptance of Securities, each Holder, hereby confirms that it is the intention of all such parties that the Guaranty of Guarantor not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to this Guaranty. To effectuate the foregoing intention, the Trustee, the Holders and Guarantor hereby irrevocably agree that the obligations of Guarantor under its this Guaranty shall be limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of Guarantor that are relevant under such laws, and after giving effect to any collections from, rights to receive contribution from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under Article XIV of the Indenture, result in the obligations of Guarantor under this Guaranty not constituting a fraudulent transfer or conveyance. 4. Releases of Guaranty. The Guaranty of Guarantor will be released upon the terms set forth in Section 14.5 of the Indenture as if it were a Subsidiary Gurantor thereunder, with such appropriate modifications as the context may require. 5. Subordination of Guaranty. Guarantor agrees, and each Holder by accepting a Security agrees, that the obligations of Guarantor under this Guaranty, are subordinated and junior in right of payment to the prior payment of all Senior Indebtedness of each Subsidiary Guarantor on the same basis as the obligations on, or relating to the Securities, are subordinated and junior in right of payment to the prior payment of all Senior Indebtedness of the Company pursuant to Article Thirteen of the Indenture, including, without limitation, the obligations of Guarantor under that certain guaranty, 2 GBS canadian guaranty (Exh. 4.3) dated the date hereof, in favor of the Banks pursuant to the Credit Agreement. In furtherance of the foregoing, Guarantor agrees, and the Trustee and each Holder by accepting a Security agrees, that the subordination and related provisions applicable to the obligations of Guarantor under this Guaranty by virtue of the preceding sentence shall be as set forth in Article Thirteen of the Indenture as if each reference to "Company" therein were instead a reference to "New Brunswick", each reference to "Senior Indebtedness of the Company" therein were instead a reference to "Senior Indebtedness of Guarantor" and each reference to "Securities" therein were instead a reference to "this Guaranty", with such appropriate modifications as the context may require. For the purposes of the foregoing sentence, the Trustee and the Holders shall have the right to receive and/or retain payments by Guarantor only at such times as they may receive and/or retain payments in respect of the New Brunswick Guaranty pursuant to the Indenture, including Article Thirteen thereof. 3 GBS canadian guaranty (Exh. 4.3) IN WITNESS WHEREOF, the undersigned has executed and delivered this Guaranty as of the date first above written. ICON OF CANADA INC./ ICON DU CANADA INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ GBS canadian guaranty (Exh. 4.3) 4 EX-4.4 8 EXHIBIT 4.4 Exhibit 4.4 REGISTERED REGISTERED THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (1), (2), (3) OR (7) OF PARAGRAPH A OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN "ACCREDITED INVESTOR", IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $500,000 FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR 12% Note (Exh. 4.4) TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 3.6 AND 3.7 OF THE INDENTURE. ICON HEALTH & FITNESS, INC. 12% Series A Note due 2005 No. 1 CUSIP No: 44929HAC2 ICON HEALTH & FITNESS, INC., a Delaware corporation (the "Company", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to Cede & Co., or its registered assigns, the principal sum of Forty Four Million Two Hundred Eighty Two Thousand and 00/100 ($44,282,000), on September 27, 2005. Interest Rate: 12% per annum. Interest Payment January 15 and July 15 of each year Dates: commencing January 15, 2000. Regular Record Dates: January 1 and July 1 of each year. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. 2 12% Note (Exh. 4.4) IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers. Date: September 27, 1999 ICON HEALTH & FITNESS, INC. Attested by: By: __________________________ _______________________________ Title: President Title: Secretary This is one of the 12% Series A Notes due 2005 described in the within-mentioned Indenture. Date of Authentication: IBJ WHITEHALL BANK & TRUST COMPANY, as Trustee September 27, 1999 By: ______________________ Authorized Signatory 3 12% Note (Exh. 4.4) [REVERSE SIDE OF SECURITY] ICON HEALTH & FITNESS, INC. 12% Series A Note due 2005 1. Principal and Interest. The Company will pay the principal of this Security on September 27, 2005. The Company promises to pay interest on the principal amount of this Security on each Interest Payment Date, as set forth below, at the rate of 12% per annum. Interest will be payable semiannually (to the owners of record (the "Holders") of the Securities (or any predecessor Securities) at the close of business on the January 1 or July 1 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing January 15, 2000. In addition, as provided in the Exchange and Registration Rights Agreement dated September 27, 1999, liquidated damages may be required to be paid by the Company. 2. Method of Payment. The Company will pay interest (except defaulted interest) on the principal amount of the Securities on each Interest Payment Date to the persons who are Holders (as reflected in the Security Register at the close of business on the Regular Record Dates immediately preceding the Interest Payment Date), in each case, even if the Security is canceled on registration of transfer or registration of exchange after such record date; provided that, with respect to the payment of principal, the Company will make payment to the Holder that surrenders this Security to any Paying Agent on or after September 27, 2005. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal, premium, if any, and interest by its check payable in such money. The Company may mail an interest check to a Holder's registered address (as reflected in the Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding date that is a Business Day and no interest shall accrue for the intervening period. 4 12% Note (Exh. 4.4) 3. Paying Agent and Registrar. Initially, IBJ Whitehall Bank & Trust Company (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar upon written notice thereto. The Company, any Restricted Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-registrar. 4. Indenture; Limitations. The Company issued the Securities under an Indenture dated as of September 27, 1999 (the "Indenture"), between the Company and the Trustee. Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Securities are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Security and the terms of the Indenture, the terms of the Indenture shall control. The Securities are general unsecured obligations of the Company. The Indenture limits the aggregate principal amount of the Securities to $44,282,000. 5. Subordination. The payment of the Securities will to the extent set forth in the Indenture, be subordinated in right of payment to the prior payment in full, in cash or cash equivalents, of all Senior Indebtedness. 6. Subsidiary Guarantee. The payment of principal of, premium, if any, interest and Liquidated Damages, if any, on the Securities are unconditionally guaranteed, jointly and severally, on a senior subordinated basis by the Subsidiary Guarantors. 7. Redemption. The Securities will be subject to redemption at any time after the Issue Date at the option of the Company, in whole but not in part, at the following redemption prices (expressed in percentages of principal amount thereof), plus accrued and unpaid interest and Liquidated Damages, if any, to the Redemption Date if redeemed during the 12 month period ending February 15 of each of the years set forth below: 5 12% Note (Exh. 4.4) Redemption Year Price -------- --------- Issue Date through 2001 101% 2002 102% 2003 104% 2004 102% 2005 101% Thereafter 100% Notice of a redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder to be redeemed at such Holder's last address as it appears in the Security Register. On and after the Redemption Date, interest ceases to accrue on Securities, unless the Company defaults in the payment of the Redemption Price. 7. Repurchase upon a Change in Control and Asset Sales. Upon the occurrence of (a) a Change of Control, the Company is obligated to make an offer to purchase all outstanding Securities at a purchase price of 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase or (b) certain Asset Sales, the Company may be obligated to make offers to purchase Securities with a portion of the Net Cash Proceeds of such Asset Sales at a purchase price of 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. 8. Denominations; Transfer; Exchange. The Securities are in registered form without coupons, in denominations of $1,000 and multiples of $1,000 in excess thereof. A Holder may register the transfer or exchange of Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. 9. Persons Deemed Owners. A Holder may be treated as the owner of a Security for all purposes. 10. Unclaimed Money. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the 6 12% Note (Exh. 4.4) Paying Agent will pay the money back to the Company at its request. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 11. Discharge Prior to Redemption or Maturity. If the Company irrevocably deposits, or causes to be deposited, with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Securities (a) to redemption or maturity, the Company will be discharged from the Indenture and the Securities, except in certain circumstances for certain sections thereof, and (b) to the Stated Maturity, the Company will be discharged from certain covenants set forth in the Indenture. 12. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency and make any change that does not materially adversely affect the rights of any Holder. 13. Restrictive Covenants. The Indenture contains certain covenants, including, without limitation, covenants with respect to the following matters: (i) Indebtedness; (ii) Restricted Payments; (iii) Transactions with Affiliates; (iv) Liens; (v) Change of Control; (vi) Asset Sales; (vii) Guarantees by Restricted Subsidiaries; (viii) Dividends and Other Payment Restrictions Affecting Subsidiaries; (ix) Sale and Leaseback Transactions; (x) Designation of Unrestricted Subsidiaries; (xi) Incurrence of Other Senior Indebtedness; and (xii) Additional Subsidiary Guarantees. Within 120 days after the end of each fiscal year and within 45 days after each fiscal quarter, the Company must report to the Trustee on compliance with the Indenture. 14. Successor Persons. When a successor person or other entity assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor person will be released from those obligations. 7 12% Note (Exh. 4.4) 15. Remedies for Events of Default. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities then outstanding may declare all the Securities to be immediately due and payable. If a bankruptcy or insolvency default with respect to the Company or any of its Significant Subsidiaries occurs and is continuing, the Securities automatically become immediately due and payable. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of at least a majority in principal amount of the Securities then outstanding may direct the Trustee in its exercise of any trust or power. 16. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may make loans to, accept deposits from, perform services for, and otherwise deal with, the Company and its Affiliates as if it were not the Trustee. 17. Authentication. This Security shall not be valid until the Trustee signs the certificate of authentication on the other side of this Security. 18. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to Icon Health & Fitness, Inc., 1500 South 1000 West, Logan, Utah 84321, Attention: President. 8 12% Note (Exh. 4.4) FOR VALUE RECEIVED the undersigned registered Holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - --------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please print or typewrite name and address including zip code of assignee) - -------------------------------------------------------------------------------- the within Security and all rights thereunder, hereby irrevocably - -------------------------------------------------------------------------------- constituting and appointing attorney to transfer such Security on the books of the Company with full power of substitution in the premises. In connection with any transfer of this Security occurring prior to the Resale Restriction Termination Date, the undersigned confirms that without utilizing any general solicitation or general advertising: Check One [ ](a) this Security is being transferred in compliance with the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder. or [ ](b) this Security is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Security and the Indenture. If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Security in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 3.7 of the Indenture shall have been satisfied. 9 12% Note (Exh. 4.4) Date: __________________ ------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. Signature Guarantee: ____________________________________________ Participant in a Recognized Signature Guaranty Medallion Program TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ________________ _________________________________ NOTICE: To be executed by an executive officer 10 12% Note (Exh. 4.4) OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 10.15 or Section 10.17 of the Indenture, check the Box: [ ]. If you wish to have a portion of this Security purchased by the Company pursuant to Section 10.15 or Section 10.17 of the Indenture, state the amount (in principal amount at maturity) below: $____________________. Date: ________________ Your Signature: _________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: _____________________________ Participant in a Recognized Signature Guaranty Medallion Program 12% Note (Exh. 4.4) 11 EX-10.1 9 EXHIBIT 10.1 Exhibit 10.1 EXECUTION COPY ------------------------------------------------------- EXCHANGE AND REGISTRATION RIGHTS AGREEMENT Dated as of September 27 , 1999 by and between ICON HEALTH & FITNESS, INC., The Subsidiary Guarantors Named Herein and The Tendering Holders of 13% Senior Subordinated Notes $45,000,000 12% NOTES DUE 2005 ------------------------------------------------------- TABLE OF CONTENTS 1. Definitions..............................................................1 2. Exchange Offer...........................................................4 3. Shelf Registration.......................................................6 4. Liquidated Damages.......................................................7 5. Registration Procedures..................................................8 6. Registration Expenses...................................................15 7. Indemnification.........................................................16 8. Rules 144 and 144A......................................................19 9. Miscellaneous...........................................................19 (a) No Inconsistent Agreements.......................................19 (b) Amendments and Waivers...........................................19 (c) Notices..........................................................19 (d) Successors and Assigns...........................................20 (e) Counterparts.....................................................20 (f) Headings.........................................................20 (g) Governing Law....................................................20 (h) Severability.....................................................21 (i) Third Party Beneficiaries........................................21 (j) Approval of Holders..............................................21 (k) Attorney's Fees..................................................21 (l) Further Assurances...............................................21 (i) EXCHANGE AND REGISTRATION RIGHTS AGREEMENT This Exchange and Registration Rights Agreement (the "Agreement") is dated as of September 27, 1999, by and between ICON Health & Fitness, Inc., a Delaware corporation (the "Company"), the Subsidiary Guarantors listed on Schedule I hereto (collectively, the "Subsidiary Guarantors"), and the holders of 13% Senior Subordinated Notes of the Company which have tendered such notes to the Company in connection with the exchange offer referred to below (such holders, the "Holders"). This Agreement is entered into in connection with the issuance by the Company to the Holders of up to $45,000,000 aggregate principal amount of 12% Notes due 2005 of the Company (the "Notes") in connection with an exchange offer described in that certain Exchange Offer and Consent Solicitation Statement dated July 30, 1999. In order to induce the Holders to participate in the exchange offer contemplated by the Exchange Offer and Consent Solicitation Statement, the Company and each Subsidiary Guarantor has agreed to provide the registration rights set forth in this Agreement for the benefit of the Holders and their direct and indirect transferees. The parties hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following meanings: Advice: Has the meaning provided in the last paragraph of Section 5 hereof. Agreement: Has the meaning provided in the first introductory paragraph hereto. Applicable Period: Has the meaning provided in Section 2(b) hereof. Company: Has the meaning provided in the first introductory paragraph hereto. Completion Date: The date on which the Notes are originally issued. Effectiveness Date: The 150th day after the Completion Date. Effectiveness Period: Has the meaning provided in Section 3(a) hereof. Event Date: Has the meaning provided in Section 4(b) hereof. Exchange Act: The Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. Exchange Notes: Has the meaning provided in Section 2(a) hereof. Exchange Offer: Has the meaning provided in Section 2(a) hereof. Exchange Registration Statement: Has the meaning provided in Section 2(a) hereof. Filing Date: The 75th day after the Completion Date. Holder: Any holder of a Registrable Note or Registrable Notes. Indemnified Person: Has the meaning provided in Section 7(c) hereof. Indemnifying Person: Has the meaning provided in Section 7(c) hereof. Indenture: The Indenture, dated as of September 27, 1999 between the Company, the Subsidiary Guarantors and IBJ Whitehall Bank 7 Trust Company, as trustee, pursuant to which the Notes are to be issued, as amended or supplemented from time to time in accordance with the terms thereof. Inspectors: Has the meaning provided in Section 5(m) hereof. Liquidated Damages: Has the meaning provided in Section 4(a) hereof. NASD: Has the meaning provided in Section 5(r) hereof. Notes: Has the meaning provided in the second introductory paragraph hereto. Participant: Has the meaning provided in Section 7(a) hereof. Participating Broker-Dealer: Has the meaning provided in Section 2(b) hereof. Persons: An individual, trustee, corporation, partnership, limited liability company, joint stock company, trust, unincorporated association, union, business association, firm or other legal entity. Prospectus: The prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, with respect to the terms of the offering of any portion of the Registrable Notes covered by such Registration Statement including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. Records: Has the meaning provided in Section 5(m) hereof. Registrable Notes: Each Note upon original issuance of the Notes and at all times subsequent thereto and each Exchange Note as to which Section 2d hereof is applicable upon original issuance and at all times subsequent thereto, until in the case of any such Note or Exchange Note, as the case may be, the earliest to occur of (i) a Registration Statement (other than, with respect to any Exchange Note as to which Section 2(d) hereof is applicable, the Exchange Registration Statement) covering such Note or Exchange Note, as the case may be, has been declared effective by the SEC and such Note (unless such Note was not tendered for -2- exchange by the Holder thereof pursuant to the Exchange Offer contemplated hereby) or Exchange Note, as the case may be, has been disposed of in accordance with such effective Registration Statement, (ii) such Note or Exchange Note, as the case may be, is, or may be, sold in compliance with Rule 144, or (iii) such Note or Exchange Note, as the case may be, ceases to be outstanding for purposes of the Indenture. Registration Statement: Any registration statement of the Company, including, but not limited to, the Exchange Registration Statement, that covers any of the Registrable Notes pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. Rule 144: Rule 144 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. Rule 144A: Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the SEC. Rule 415: Rule 415 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. Shelf Notice: Has the meaning provided in Section 2(c) hereof. Shelf Registration: Has the meaning provided in Section 3(a) hereof. Shelf Registration Statement: shall mean a "shelf" registration statement of the Company which covers all of the Registrable Notes required to be included therein pursuant to Section 2(c) on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. TIA: The Trust Indenture Act of 1939, as amended. Trustee(s): The trustee under the Indenture and, if existent, the trustee under any indenture governing the Exchange Notes. -3- 2. Exchange Offer (a) The Company and each Subsidiary Guarantor agree to file with the SEC no later than the Filing Date an offer to exchange (the "Exchange Offer") any and all of the Registrable Notes for a like aggregate principal amount of debt securities of the Company which are identical in all respects to the Notes (the "Exchange Notes") (which are entitled to the benefits of the Indenture or a trust indenture which is identical in all respects to the Indenture (other than such changes to the Indenture or any such identical trust indenture as are necessary to comply with any requirements of the SEC to effect or maintain the qualification thereof under the TIA) and which, in either case, has been qualified under the TIA), except that the Exchange Notes shall have been registered pursuant to an effective Registration Statement under the Securities Act and shall contain no restrictive legend thereon. The Exchange Offer shall be registered under the Securities Act on the appropriate form (the "Exchange Registration Statement") and shall comply with all applicable tender offer rules and regulations under the Exchange Act. The Company and each Subsidiary Guarantor agree to use its best efforts to (x) cause the Exchange Registration Statement to be declared effective under the Securities Act no later than the 150th day after the Completion Date; (y) keep the Exchange Offer open for at least 30 days (or longer if required by applicable law) after the date that notice of the Exchange Offer is mailed to the Holders; and (z) consummate the Exchange Offer on or prior to the 180th day following the Completion Date. If after such Exchange Registration Statement is declared effective by the SEC, the Exchange Offer or the issuance of the Exchange Notes thereunder is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Exchange Registration Statement shall be deemed not to have become effective for purposes of this Agreement until such stop order, injunction or other order or requirement is no longer in effect. Each Holder who participates in the Exchange Offer will be required to represent that any Exchange Notes received by it will be acquired in the ordinary course of its business, that at the time of the consummation of the Exchange Offer such Holder will have no arrangement or understanding with any Person to participate in the distribution of the Exchange Notes in violation of the provisions of the Securities Act, and that such Holder in not an "affiliate" of the Company within the meaning of the Securities Act. (b) Upon consummation of the Exchange Offer in accordance with this Section 2, the Company shall have no further obligation to register Registrable Notes (other than in respect of any Exchange Notes as to which clause 2(c)(iii) hereof applies) pursuant to Section 3 hereof. (c) The Company, in its sole discretion, shall include within the Prospectus contained in the Exchange Registration Statement a section entitled "Plan of Distribution", which shall contain a summary statement of the positions taken or policies made by the Staff of the SEC with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Notes received by such broker-dealer in the Exchange Offer (a "Participating Broker-Dealer"), whether such positions or policies have been publicly disseminated by the Staff of the SEC or such positions or policies represent the prevailing views of the Staff of the SEC. Such "Plan of Distribution" section shall also expressly permit the use of the Prospectus by all Persons subject to the prospectus delivery requirements of -4- the Securities Act, including all Participating Broker-Dealers, and include a statement describing the means by which Participating Broker-Dealers may resell the Exchange Notes. The Company and each Subsidiary Guarantor shall use its best efforts to keep the Exchange Registration Statement effective and to amend and supplement the Prospectus contained therein, in order to permit such Prospectus to be lawfully delivered by any Participating Broker-Dealer subject to the prospectus delivery requirements of the Securities Act for such period of time as is necessary to comply with applicable law in connection with any resale of the Exchange Notes; provided, however, that such period shall not exceed 90 days after the effectiveness of the Exchange Registration Statement (or such longer period if extended pursuant to the last paragraph of Section 5 hereof) (the "Applicable Period"). Interest on the Exchange Notes will accrue from the last interest payment date on which interest was paid on the Notes surrendered in exchange therefor or, if no interest has been paid on the Notes, from the Completion Date. In connection with the Exchange Offer, the Company shall: (1) mail to each Holder a copy of the Prospectus forming part of the Exchange Registration Statement, together with an appropriate letter of transmittal and related documents; (2) utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York; (3) permit Holders to withdraw tendered Notes at any time prior to the close of business, New York time, on the last business day on which the Exchange Offer shall remain open; and (4) otherwise comply in all material respects with all applicable laws, rules and regulations. As soon as practicable after the close of the Exchange Offer, the Company shall: (1) accept for exchange all Notes tendered and not validly withdrawn pursuant to the Exchange Offer; (2) deliver to the Trustee for cancellation all Notes so accepted for exchange; and (3) cause the Trustee to authenticate and deliver promptly to each Holder Exchange Notes, equal in principal amount to the Notes of such Holder so accepted for exchange. The Exchange Notes are to be issued under (i) the Indenture or (ii) an indenture identical in all respects to the Indenture, which in either event shall provide that the Exchange Notes shall not be subject to the transfer restrictions set forth in the Indenture. The Indenture or such indenture shall provide that the Exchange Notes and the Notes shall vote and consent together on all matters as to which they have the right to vote or consent as one class and that -5- none of the Exchange Notes or the Notes will have the right to vote or consent as a separate class on any matter. (d) If, (i) because of applicable law or interpretations of the Staff of the SEC, the Company is not permitted to effect an Exchange Offer, (ii) the Exchange Offer is not consummated within 180 days after the Completion Date or (iii) any Holder is not, upon the advice of counsel reasonably acceptable to the Company, eligible to participate in the Exchange Offer and such Holder notifies the Company in writing of such ineligibility, then the Company shall promptly deliver written notice thereof (the "Shelf Notice") to the Trustee and, in the case of clauses (i) and (ii) above, all Holders, and in the case of clause (iii) above, the affected Holder, shall file a Shelf Registration pursuant to Section 3 hereof. 3. Shelf Registration If a Shelf Notice is delivered as contemplated by Section 2(c) hereof, then: (a) Shelf Registration. The Company and each Subsidiary Guarantor shall as promptly as reasonably practicable file with the SEC a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Registrable Notes required to be included therein in accordance with Section 2(c) hereof (the "Shelf Registration"). If the Company shall not have yet filed an Exchange Registration Statement, the Company and each Subsidiary Guarantor shall use its respective best efforts to file with the SEC the Shelf Registration on or prior to the Filing Date. The Shelf Registration shall be on Form S-1 or S-3 or another appropriate form permitting registration of such Registrable Notes for resale by Holders in the manner or manners designated by them. The Company shall not permit any securities other than the Registrable Notes to be included in the Shelf Registration. The Company and each Subsidiary Guarantor shall use its respective best efforts to cause the Shelf Registration to be declared effective under the Securities Act by the later of the 120th day after the Shelf Request or the 180th day after the Completion Date and to keep the Shelf Registration continuously effective under the Securities Act until the date which is two years from the Completion Date, subject to extension pursuant to the last paragraph of Section 5 hereof, or such shorter period ending when all Registrable Notes covered by the Shelf Registration have been sold in the manner set forth and as contemplated in the Shelf Registration or when the Notes become eligible for resale without volume restrictions, pursuant to Rule 144 under the Securities Act (the "Effectiveness Period"). (b) Withdrawal of Stop Orders. If the Shelf Registration ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Company and each Subsidiary Guarantor shall use its respective best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof. (c) Supplements and Amendments. The Company and each Subsidiary Guarantor shall promptly supplement and amend the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if reasonably requested for such purpose by the Holders of a -6- majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement and to use its best efforts to cause any such amendment or supplement to become effective and such Shelf Registration Statement to become usable as soon as thereafter reasonably practicable. The Company and each Subsidiary Guarantor agree to furnish to the Holders copies of any such amendment or supplement promptly after its being used or filed with the SEC. 4. Liquidated Damages (a) The Company and each Subsidiary Guarantor agree that the Holders of Registrable Notes will suffer damages if the Company and each Subsidiary Guarantor fail to fulfill its obligations under Section 2 or Section 3 hereof and that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, the Company and each Subsidiary Guarantor agree to pay, as liquidated damages and as the sole and exclusive remedy therefor, additional interest on the Notes ("Liquidated Damages") under the circumstances and to the extent set forth below: (i) if the Exchange Registration Statement is not filed with the SEC within 75 days following the Completion Date, Liquidated Damages shall accrue on the Notes over and above the stated interest at a rate of 0.50% per annum for the first 90 days commencing on the 76th day after the Completion Date, such Liquidated Damages rate increasing by an additional 0.50% per annum at the beginning of each subsequent 90-day period; (ii) except in the case of an event described in Section 2(c)(i) hereof, if the Exchange Registration Statement is not declared effective within 150 days following the Completion Date, Liquidated Damages shall accrue on the Notes over and above the stated interest at a rate of 0.50% per annum for the first 90 days commencing on the 151st day after the Completion Date, such Liquidated Damages rate increasing by an additional 0.50% per annum at the beginning of each subsequent 90-day period; or (iii) if (A) the Company has not exchanged all Notes validly tendered in accordance with the terms of the Exchange Offer on or prior to 180 days after the Completion Date or (B) the Exchange Registration Statement ceases to be effective at any time prior to the time that the Exchange Offer is consummated or (C) a Shelf Registration has not been declared effective on or prior to 180 days after the Completion Date, then Liquidated Damages shall accrue on the Notes over and above the stated interest at a rate of 0.50% per annum for the first 90 days commencing on (x) the 181st day after the Completion Date with respect to the Notes validly tendered and not exchanged by the Company, in the case of (A) above, or (y) the day the Exchange Registration Statement ceases to be effective or usable for its intended purpose in the case of (B) above, or (z) the 181st day after the Completion Date, in the case of (C) above, such Liquidated Damages rate increasing by an additional 0.50% per annum at the beginning of each subsequent 90-day period; provided, however, that the Liquidated Damages rate on the Notes under clauses (i), (ii) or (iii) above, may not exceed in the aggregate 1.5% per annum; and provided further, that (1) upon the -7- filing of the Exchange Registration Statement (in the case of clause (i) above), (2) upon the effectiveness of the Exchange Registration Statement (in the case of (ii) above), or (3) upon the exchange of Exchange Notes for all Notes tendered (in the case of clause (iii)(A) above), (4) upon the effectiveness of the Exchange Registration Statement which had ceased to remain effective (in the case of clause (iii)(B) above) or (5) the effectiveness of the Shelf Registration (in the case of clause (iii)(C) above), Liquidated Damages on the Notes as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accrue. (b) The Company shall notify the Trustee within one business day after each and every date on which an event occurs in respect of which Liquidated Damages is required to be paid (an "Event Date"). The Company and each Subsidiary Guarantor shall pay the Liquidated Damages due on the transfer restricted Notes by depositing immediately available funds with the paying agent (which shall not be the Company for these purposes) for the transfer restricted Notes, in trust, for the benefit of the holders thereof, prior to 11:00 A.M. on the business day immediately preceding the next interest payment date specified by the Indenture (or such other indenture), sums sufficient to pay the Liquidated Damages accrued or accruing since the preceding interest payment date through such interest payment date. Any amounts of Liquidated Damages due pursuant to clauses (a)(i), (a)(ii) or (a)(iii) of this Section 4 will be payable to the Holders of affected Notes in cash semi-annually on each interest payment date specified by the Indenture (or such other indenture) to the record holders entitled to receive the interest payment to be made on such date, commencing with the first such date occurring after any such Liquidated Damages commences to accrue. The amount of Liquidated Damages will be determined by multiplying the applicable Liquidated Damages rate by the principal amount of the affected Registrable Notes of such Holders, multiplied by a fraction, the numerator of which is the number of days such Liquidated Damages rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed), and the denominator of which is 360. The Trustee under the Indenture or any indenture for the Exchange Notes shall be entitled, on behalf of the Holders of the Notes or Exchange Notes, to seek payment of Liquidated Damages. All of the Company's and Subsidiary Guarantors' obligations set forth in this Section 4(b) which are outstanding with respect to any Registrable Note at the time such note ceases to be a Registrable Note shall survive until such time as all such obligations with respect to such security have been satisfied in full (notwithstanding termination of the Agreement). The parties hereto agree that the Liquidated Damages provided for in this Section 2(d) constitute a reasonable estimate of the damages that may be incurred by Holders of Registrable Notes by reason of the failure of the Exchange Registration Statement or the Shelf Registration Statement to be filed or declared effective, as the case may be, in accordance with the provisions hereof. 5. Registration Procedures In connection with the filing of any Registration Statement pursuant to Sections 2 or 3 hereof, the Company and each Subsidiary Guarantor shall effect such registration(s) to permit the sale of the securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto, and within the applicable time periods specified in Sections 2 and 3 thereof, and in connection with any -8- Registration Statement filed by the Company and each Subsidiary Guarantor hereunder, the Company and each Subsidiary Guarantor shall: (a) Prepare and file with the SEC prior to the Filing Date a Registration Statement or Registration Statements or Prospectus, or any amendments or supplements thereto as prescribed by Sections 2 or 3 hereof, and use their best efforts to cause each such Registration Statement to become effective and remain effective as provided herein; provided, however, that, if (1) such filing is pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Company and each Subsidiary Guarantor shall, if requested in writing, furnish to and afford the Holders of the Registrable Notes covered by such Registration Statement or each such Participating Broker-Dealer, as the case may be, their counsel, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (in each case at least three business days prior to such filing). The Company and each Subsidiary Guarantor shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document under the immediately preceding sentence, if the Holders of a majority in aggregate principal amount of the Registrable Notes covered by such Registration Statement, or any such Participating Broker-Dealer, as the case may be, their counsel, shall object thereto in writing, which writing shall set forth a reasonable basis for such objection. (b) Prepare and file with the SEC such amendments and post-effective amendments to each Shelf Registration or Exchange Registration Statement, as the case may be, as may be necessary to keep such Registration Statement continuously effective for the Effectiveness Period or the Applicable Period or until consummation of the Exchange Offer, as the case may be; cause the related Prospectus to be supplemented by any Prospectus supplement required by applicable law, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act and the Exchange Act applicable to it with respect to the disposition of all securities covered by such Registration Statement as so amended or in such Prospectus as so supplemented and with respect to the subsequent resale of any securities being sold by a Participating Broker-Dealer covered by any such Prospectus; the Company and each Subsidiary Guarantor shall be deemed not to have used its respective best efforts to keep a Registration Statement effective during the Applicable Period if it voluntarily takes any action that would result in selling Holders of the Registrable Notes covered thereby or Participating Broker-Dealers seeking to sell Exchange Notes not being able to sell such Registrable Notes or such Exchange Notes during that period unless such action is required by applicable law or unless the Company complies with this Agreement, including without limitation, the provisions of paragraph 5(k) hereof and the last paragraph of this Section 5. (c) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to -9- sell Exchange Notes during the Applicable Period, notify the selling Holders of Registrable Notes, or each such Participating Broker-Dealer, as the case may be, and their counsel, promptly (but in any event within two business days), and confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective under the Securities Act (including in such notice a written statement that any Holder may, upon request, obtain, at the sole expense of the Company, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules, documents incorporated or deemed to be incorporated by reference and exhibits), (ii) of any request by the SEC or any other federal or state governmental authority for amendments or supplements to such Registration Statement or related Prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation of any proceedings for that purpose, (iv) if at any time when a Prospectus is required by the Securities Act to be delivered in connection with sales of the Registrable Notes or resales of Exchange Notes by Participating Broker-Dealers the representations and warranties of the Company contained in any agreement, contemplated by Section 5(n) hereof cease to be true and correct, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of a Registration Statement or any of the Registrable Notes or the Exchange Notes to be sold by any Participating Broker-Dealer for offer or sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, (vi) of the happening of any event, the existence of any condition or any information becoming known that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in or amendments or supplements to such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vii) of the determination by the Company that a post-effective amendment to a Registration Statement would be appropriate. (d) Use its best efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Registrable Notes or the Exchange Notes for sale in any jurisdiction, and, if any such order is issued, to use its best efforts to obtain the withdrawal of any such order at the earliest possible moment and provide prompt notice to each Holder and their counsel of the withdrawal of any such order or suspension. (e) If reasonably requested by the Holders of a majority of the aggregate principal amount of the Registrable Notes being sold, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Shelf Registration Statement, if required to be filed, such information in connection with any offering (other than an underwritten offering, which shall not be permitted) of Registrable Notes requested by any of them to be included therein and -10- (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such filing. (f) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, furnish to each selling Holder of Registrable Notes and to each such Participating Broker-Dealer who so requests and to counsel at the sole expense of the Company and each Subsidiary Guarantor, one conformed copy of the Registration Statement or Registration Statements and each post-effective amendment thereto, including financial statements and schedules, and, if requested, all documents incorporated or deemed to be incorporated therein by reference and all exhibits. (g) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, deliver to each selling Holder of Registrable Notes, or each such Participating Broker-Dealer, as the case may be, their respective counsel, at the sole expense of the Company and each Subsidiary Guarantor, as many copies of the Prospectus or Prospectuses (including each form of preliminary prospectus) and each amendment or supplement thereto and any documents incorporated by reference therein as such Persons may reasonably request; and, subject to the last paragraph of this Section 5, the Company and each Subsidiary Guarantor hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders of Registrable Notes or each such Participating Broker-Dealer, as the case-may be and dealers (if any), in connection with the offering and sale of the Registrable Notes covered by, or the sale by Participating Broker-Dealers of the Exchange Notes pursuant to, such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Notes or any delivery of a Prospectus contained in the Exchange Registration Statement by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, to use its best efforts to register or qualify such Registrable Notes (and to cooperate with selling Holders of Registrable Notes or each such Participating Broker-Dealer, as the case may be, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Notes) for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any selling Holder or Participating Broker-Dealer reasonably request in writing; provided, however, that where Exchange Notes held by Participating Broker-Dealers or Registrable Notes are offered other than through an underwritten offering, the Company and each Subsidiary Guarantor agree to cause its counsel to perform Blue Sky investigations and file registrations and qualifications required to be filed pursuant to this Section 5(g); keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of the Exchange Notes held by Participating Broker-Dealers or the Registrable Notes covered by the applicable Registration Statement; provided, however, that the Company shall not be required to -11- (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction where it is not then so subject. (i) If a Shelf Registration is filed pursuant to Section 3 hereof, cooperate with the selling Holders of Registrable Notes to facilitate the timely preparation and delivery of certificates representing Registrable Notes to be sold, which certificates shall not bear any restrictive legends and shall be in a form eligible for deposit with The Depository Trust Company; and enable such Registrable Notes to be in such denominations and registered in such names as the Holders may reasonably request. (j) Use its best efforts to cause the Registrable Notes covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders to dispose of such Registrable Notes, except as may be required solely as a consequence of the nature of a selling Holder's business, in which case the Company and each Subsidiary Guarantor will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals. (k) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, upon the occurrence of any event contemplated by paragraph 5(c)(ii), 5(c)(v) or 5(c)(vi) hereof, as promptly as practicable prepare and (subject to Section 5(a) hereof) file with the SEC, at the sole expense of the Company, a supplement or post-effective amendment to the Registration Statement or a supplement or amendment to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Notes being sold thereunder or to the purchasers of the Exchange Notes to whom such Prospectus will be delivered by a Participating Broker-Dealer, any such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and to notify the Holders to suspend use of such Registration Statement or Prospectus as promptly as practicable after such event; provided, that this Section 5(k) shall not be deemed to require the Company to disclose any information that, in the good faith opinion of the management of the Company, is not yet required to be disclosed and would not be in the best interests of the Company to disclose, so long as the Company complies with all applicable laws and government regulations and the last paragraph of this Section 5. (l) Prior to the effective date of the first Registration Statement relating to the Registrable Notes, (i) provide the Trustee with certificates for the Registrable Notes or Exchange Notes, as the case may be, in a form eligible for deposit with The Depository Trust Company and (ii) provide a CUSIP number for the Registrable Notes or Exchange Notes, as the case may be. -12- (m) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, make available for inspection by any selling Holder of such Registrable Notes being sold, or each such Participating Broker-Dealer, as the case may be, and any attorney, accountant or other agent retained by any such selling Holder or each such Participating Broker-Dealer, as the case may be (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and instruments of the Company and its direct and indirect subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Company and its direct and indirect subsidiaries to make available for inspection all information reasonably requested by any such Inspector in connection with such Registration Statement. Records which the Company determines, in good faith, to be confidential and any Records which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such Registration Statement, (ii) the release of such Records is required by law or a subpoena or other order from a court of competent jurisdiction or administrative order, (iii) disclosure of such information is, in the opinion of counsel (a copy of which shall be delivered to the Company) for any Inspector, necessary or advisable in connection with any action, claim, suit or proceeding, directly or indirectly, involving or potentially involving such Inspector and arising out of, based upon, relating to, or involving this Agreement, or any transactions contemplated hereby or arising hereunder, (iv) such information becomes available to any such person from a source other than the Company or any Subsidiary Guarantor and such source is not bound by a confidentiality agreement, or (v) the information in such Records has been made generally available to the public. Each such selling Holder of such Registrable Notes and each such Participating Broker-Dealer will be required to agree that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or any of its affiliates unless and until such information is generally available to the public. Each such selling Holder of such Registrable Notes and each such Participating Broker-Dealer will be required to further agree that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction or administrative order, give notice to the Company and allow the Company to undertake appropriate action to prevent disclosure of the Records deemed confidential at the Company' sole expense. (n) Provide an indenture trustee for the Registrable Notes or the Exchange Notes, as the case may be, and cause the Indenture or the trust indenture provided for in Section 2(a) hereof, as the case may be, to be qualified under the TIA not later than the effective date of the Exchange Offer or the first Registration Statement relating to the Registrable Notes; and in connection therewith, cooperate with the trustee under any such indenture and the Holders of the Registrable Notes, to effect such changes to such indenture as may be required for such indenture to be so qualified in accordance with the terms of the TIA; and execute, and use its best efforts to cause such trustee to execute, all documents as may be required to effect such changes, and all -13- other forms and documents required to be filed with the SEC to enable such indenture to be so qualified in a timely manner. (o) In the case of a Shelf Registration, cooperate with the selling Holders to facilitate the timely preparation and delivery of certificates representing Registrable Notes to be sold which shall bear no restrictive legends and enable such Registrable Notes to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as such Holders may reasonably request at least two business days prior to the closing of any sale of Registrable Notes. (p) Comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods. (q) If an Exchange Offer is to be consummated, upon delivery of the Registrable Notes by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Notes, the Company shall mark, or cause to be marked, on such Registrable Notes that such Registrable Notes are being canceled in exchange for the Exchange Notes; in no event shall such Registrable Notes be marked as paid or otherwise satisfied. (r) Cooperate with each seller of Registrable Notes covered by any Registration Statement participating in the disposition of such Registrable Notes and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"). (s) Use its best efforts to take all other steps necessary or advisable to effect the registration of the Registrable Notes covered by a Registration Statement contemplated hereby. The Company may require each seller of Registrable Notes as to which any Registration Statement is being effected to furnish to the Company such information regarding such seller and the distribution of such Registrable Notes as the Company may, from time to time, reasonably request. The Company may exclude from such Registration Statement the Registrable Notes of any seller who unreasonably fails to furnish such information within a reasonable time after receiving such request. Each seller as to which any Shelf Registration is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such seller not materially misleading. Each Holder of Registrable Notes and each Participating Broker-Dealer agrees by acquisition of such Registrable Notes or Exchange Notes to be sold by such Participating Broker- -14- Dealer, as the case may be, that, upon actual receipt of any notice from the Company of the happening of any event of the kind described in Section 5(c)(iii), 5(c)(v), 5(c)(vi), or 5(c)(vii) hereof, such Holder will forthwith discontinue disposition of such Registrable Notes or Exchange Notes, as the case may be, covered by such Registration Statement or Prospectus to be sold by such Holder or Participating Broker-Dealer, as the case may be, until such Holder's or Participating Broker-Dealer's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 5(j) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto. In the event the Company shall give any such notice, each of the Effectiveness Period and the Applicable Period shall be extended by the number of days during such periods from and including the date of the giving of such notice to and including the date when each seller of Registrable Notes covered by such Registration Statement or Exchange Notes to be sold by such Participating Broker-Dealer, as the case may be, shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 5(j) hereof or (y) the Advice. In the event the Company does not give any such notice within five business days, each Holder shall return such Registration Statement or Prospectus to the Company or destroy all copies of such Registration Statement or Prospectus; and if so requested by the Company, shall certify that all copies of the Registration Statement or Prospectus were destroyed. 6. Registration Expenses (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company or any Subsidiary Guarantor shall be borne by the Company and each Subsidiary Guarantor whether or not the Exchange Offer or a Shelf Registration is filed or becomes effective, including, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses of compliance with SEC, state securities or Blue Sky laws (including, without limitation, reasonable fees and disbursements of the Company's counsel in connection with Blue Sky qualifications of the Registrable Notes or Exchange Notes and determination of the eligibility of the Registrable Notes or Exchange Notes for investment under the laws of such jurisdictions where the holders of Registrable Notes reasonably request), (ii) printing expenses, including, without limitation, expenses of printing certificates for Registrable Notes or Exchange Notes in a form eligible for deposit with The Depository Trust Company and of printing prospectuses, (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) rating agency fees, if any, and any fees associated with making the Registrable Notes or Exchange Notes eligible for trading through The Depository Trust Company, (vi) Securities Act liability insurance, if the Company desires such insurance, (vii) fees and expenses of all other Persons retained by the Company, (viii) internal expenses of the Company (including, without limitation, all salaries and expenses of officers and employees of the Company performing legal or accounting duties), (ix) the expense of any annual audit, (x) the expenses relating to printing, word processing and distributing all Registration Statements, indentures and any other documents necessary in order to comply with this Agreement and, (xi) fees related to qualification of any indenture required hereunder under the TIA and the reasonable fees and disbursements of any trustee under such indenture and its counsel. -15- 7. Indemnification. (a) The Company and each Subsidiary Guarantor agree to jointly indemnify and hold harmless each Holder of Registrable Notes offered pursuant to this agreement, the affiliates, directors, officers, agents, representatives and employees of each such Person or its affiliates, and each other Person, if any, who controls any such Person or its affiliates within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (each, a "Participant") from and against any and all losses, claims, damages and liabilities (including, without limitation, the reasonable legal fees and other expenses actually incurred in connection with any suit, action or proceeding or any claim asserted) caused by, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement pursuant to which the offering of such Registrable Notes or Exchange Notes, as the case may be, is registered (or any amendment thereto) or related Prospectus (or any amendments or supplements thereto) or any related preliminary prospectus, or caused by, arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company and the Subsidiary Guarantors will not be required to indemnify a Participant if (i) such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Participant expressly for use therein or (ii) if such Participant sold to the person asserting the claim the Registrable Notes or Exchange Notes which are the subject of such claim and such untrue statement or omission or alleged untrue statement or omission was contained or made in any preliminary prospectus and corrected in the Prospectus or any amendment or supplement thereto and the Prospectus does not contain any other untrue statement or omission or alleged untrue statement or omission of a material fact that was the subject matter of the related proceeding and such Participant failed to deliver or provide a copy of the Prospectus (as amended or supplemented) to such Person with or prior to the confirmation of the sale of such Registrable Notes or Exchange Notes sold to such Person if required by applicable laws, unless such failure to deliver or provide a copy of the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5 of this Agreement. (b) Each Participant agrees, severally and not jointly, to indemnify and hold harmless the Company and the Subsidiary Guarantors, their respective directors and officers and each Person who controls the Company and the Subsidiary Guarantors within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company and the Subsidiary Guarantors to each Participant, but only (i) with reference to information furnished to the Company in writing by or on behalf of such Participant expressly for use in any Registration Statement or Prospectus, any amendment or supplement thereto, or any preliminary prospectus or (ii) with respect to any untrue statement or representation made by such Participant in writing to the Company. In no event shall the liability of any Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of Registrable Notes giving rise to such indemnifiable obligations. (c) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of -16- which indemnity may be sought pursuant to either of the two preceding paragraphs, such Person (the "Indemnified Person") shall promptly notify the Person against whom such indemnity may be sought (the "Indemnifying Person") in writing, and the Indemnifying Person, shall have the right to retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Person may reasonably designate in such proceeding and shall pay the reasonable fees and expenses actually incurred by such counsel related to such proceeding; provided, however, that the failure to so notify the Indemnifying Person shall not relieve it of any obligation or liability which it may have hereunder or otherwise (unless and only to the extent that such failure results in the loss or compromise of any material rights or defenses by the Indemnifying Person). In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed in writing to the contrary, (ii) the Indemnifying Person shall have failed within a reasonable period of time to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that, unless there exists a conflict among Indemnified Persons, the Indemnifying Person shall not, in connection with any one such proceeding or separate but substantially similar related proceeding in the same jurisdiction arising out of the same general allegations, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such reasonable fees and expenses shall be reimbursed promptly as they are incurred. Any such separate firm for the Participants and such control Persons of Participants shall be designated in writing by Participants who sold a majority in interest of Registrable Notes and Exchange Notes sold by all such Participants and any such separate firm for the Company, their directors, their officers and such control Persons of the Company shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its prior written consent, but if settled with such consent or if there be a final non-appealable judgment for the plaintiff for which the Indemnified Person is entitled to indemnification pursuant to this Agreement, the Indemnifying Person agrees to indemnify and hold harmless each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement or compromise of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party, and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement (A) includes an unconditional written release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding, (B) does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of any Indemnified Person and (C) does not impose any non-monetary relief applicable to the Indemnified Person. (d) If the indemnification provided for in Sections 7(a) and 7(b) hereof is for any reason unavailable to, or insufficient to hold harmless, an Indemnified Person in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and in order to provide -17- for just and equitable contribution, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect (i) the relative benefits received by the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other from the offering of the Notes or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or any Subsidiary Guarantor on the one hand or such Participant or such other Indemnified Person, as the case may be, on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Holders respective obligations to contribute pursuant to this paragraph are several in proportion to the respective number of Registrable Notes than have sold pursuant to a Registration Statement and not joint. (e) The parties agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Participants were treated as one entity for such purposes) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses actually incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, in no event shall a Participant be required to contribute any amount in excess of the amount by which proceeds received by such Participant from sales of Registrable Notes or Exchange Notes, as the case may be, exceeds the amount of any damages that such Participant has otherwise been required to pay or has paid by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (f) The indemnity and contribution agreements contained in this Section 7 will be in addition to any liability which the Indemnifying Persons may otherwise have to the Indemnified Persons referred to above. The provisions of this Section 7 shall survive so long as Registrable Notes remain outstanding, notwithstanding any transfer of the Registrable Notes by any Holder or any termination of this Agreement. (g) The indemnity and contribution provisions contained in this Section 7 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Holder or any person controlling any Holder, or by or on behalf of the Company, any Subsidiary Guarantor, any of their officers or directors or any person controlling the Company or the Subsidiary Guarantors, (iii) acceptance of any of the -18- Exchange Notes and (iv) the sale of any Registrable Notes pursuant to a Shelf Registration Statement. 8. Rules 144 and 144A. The Company and each Subsidiary Guarantor covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder of Registrable Notes, make publicly available annual reports and such information, documents and other reports of the type specified in Sections 13 and 15(d) of the Exchange Act within the time periods specified therein if it were requested to file such reports and information. The Company further covenants for so long as any Registrable Notes remain outstanding, to make available to any Holder or beneficial owner of Registrable Notes in connection with any sale thereof and any prospective purchaser of such Registrable Notes from such Holder or beneficial owner and to securities analysts the information required by Rule 144(d)(4) under the Securities Act in order to permit resales of such Registrable Notes pursuant to Rule 144 and Rule 144A. 9. Miscellaneous. (a) No Inconsistent Agreements. The Company and each Subsidiary Guarantor has not entered, as of the date hereof, and the Company and each Subsidiary Guarantor shall not, after the date of this Agreement, enter into any agreement with respect to any of its securities that is inconsistent with the rights granted to the Holders of Registrable Notes in this Agreement or otherwise conflicts with the provisions hereof. (b) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of the Holders of not less than a majority in aggregate principal amount of the then outstanding Registrable Notes; provided, however, that no amendment, modification, supplement, waiver or consents to any departure from the provisions of Section 7 hereof shall be effective as against any Holder of Registrable Notes unless consented to in writing by such Holder. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Registrable Notes whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of Registrable Notes may be given by Holders of at least a majority in aggregate principal amount of the Registrable Notes being sold by such Holders pursuant to such Registration Statement; provided, however, that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. (c) Notices. All notices and other communications (including, without limitation, any notices or other communications to the Trustee) provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, next-day air courier or facsimile: -19- 1. if to a Holder of the Registrable Notes or any Participating Broker-Dealer, at the most current address of such Holder or Participating Broker-Dealer, as the case may be, set forth on the records of the registrar under the Indenture. 2. if to the Company, as follows: ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Attention: Gary E. Stevenson, President with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, New York 10019 Attention: Michael J. Kelly, Esq. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; one business day after being timely delivered to a next-day air courier; and when receipt is acknowledged by the addressee, if sent by facsimile. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address and in the manner specified in such Indenture. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign holds Registrable Notes. (e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. -20- (h) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (i) Third Party Beneficiaries. Holders of Registrable Notes and Participating Broker-Dealers are intended third party beneficiaries of this Agreement and this Agreement may be enforced by such Persons. (j) Approval of Holders. Whenever the consent or approval of Holders of a specified percentage of Registrable Notes is required hereunder, Registrable Notes held by the Company or its affiliates (as such term is defined in Rule 405 under the Securities Act) (other than Holders that are deemed to be such affiliates solely by reason of their holdings of such Registrable Notes) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. (k) Attorney's Fees. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the prevailing party, as determined by the court, shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. (l) Further Assurances. Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things reasonably necessary, proper or advisable under applicable law, and execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and the other documents contemplated hereby and consummate and make effective the transactions contemplated hereby. -21- IN WITNESS WHEREOF, the parties have executed the Agreement as of the date first written above. Issuer: ICON HEALTH & FITNESS, INC. By:____________________________________ Name: Title: Subsidiary Guarantors: JUMPKING, INC. By:____________________________________ Name: Title: ICON INTERNATIONAL HOLDINGS, INC. By:____________________________________ Name: Title: UNIVERSAL TECHNICAL SERVICES, INC. By:____________________________________ Name: Title: 510152 N.B. LTD. By:____________________________________ Name: Title: -22- SCHEDULE I Subsidiary Guarantors - ------------------------------------------------------------------------------- Jumpking, Inc. c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 510152 N.B. LTD. c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Universal Technical Services, Inc. c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 ICON International Holdings, Inc. c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 EX-10.2 10 EXHIBIT 10.2 Exhibit 10.2 ================================================================================ CREDIT AGREEMENT Dated as of September 24, 1999 among ICON HEALTH & FITNESS, INC., as Borrower, THE OTHER CREDIT PARTIES SIGNATORY HERETO, as Credit Parties, THE LENDERS SIGNATORY HERETO FROM TIME TO TIME, as Lenders, GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and Lender, and FLEET NATIONAL BANK, as Syndication Agent and Lender ================================================================================ TABLE OF CONTENTS Page ---- 1. AMOUNT AND TERMS OF CREDIT................................................2 1.1. Credit Facilities.................................................2 1.2. Letters of Credit.................................................8 1.3. Prepayments.......................................................8 1.4. Use of Proceeds..................................................12 1.5. Interest and Applicable Margins..................................12 1.6. Eligible Accounts................................................16 1.7. Eligible Inventory...............................................19 1.8. Cash Management Systems..........................................20 1.9. Fees.............................................................21 1.10. Receipt of Payments.............................................21 1.11. Application and Allocation of Payments..........................22 1.12. Loan Account and Accounting.....................................23 1.13. Indemnity.......................................................24 1.14. Access..........................................................25 1.15. Taxes...........................................................26 1.16. Capital Adequacy; Increased Costs; Illegality...................26 1.17. Single Loan.....................................................28 2. CONDITIONS PRECEDENT.....................................................28 2.1. Conditions to the Initial Loans..................................28 2.2. Further Conditions to Each Loan..................................30 3. REPRESENTATIONS AND WARRANTIES...........................................31 3.1. Corporate Existence; Compliance with Law.........................31 3.2. Executive Offices, Collateral Locations, FEIN....................31 3.3. Corporate Power, Authorization, Enforceable Obligations..........32 3.4. Financial Statements and Projections.............................32 3.5. Material Adverse Effect..........................................33 3.6. Ownership of Property; Liens.....................................33 3.7. Labor Matters....................................................34 3.8. Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness.....................................................35 3.9. Government Regulation............................................35 3.10. Margin Regulations..............................................35 3.11. Taxes...........................................................35 3.12. ERISA and Canadian Pension and Benefit Plans....................36 3.13. No Litigation...................................................37 3.14. Brokers.........................................................37 3.15. Intellectual Property...........................................38 3.16. Full Disclosure.................................................38 3.17. Environmental Matters...........................................38 3.18. Insurance.......................................................39 i 3.19. Deposit and Disbursement Accounts...............................39 3.20. Government Contracts............................................39 3.21. Customer and Trade Relations....................................39 3.22. Agreements and Other Documents..................................40 3.23. Solvency........................................................40 3.24. Year 2000 Representations.......................................40 3.25. Recapitalization................................................40 3.26. Status of New Holdings..........................................41 3.27. Subordinated Debt...............................................41 4. FINANCIAL STATEMENTS AND INFORMATION.....................................41 4.1. Reports and Notices..............................................41 4.2. Communication with Accountants...................................41 5. AFFIRMATIVE COVENANTS....................................................42 5.1. Maintenance of Existence and Conduct of Business.................42 5.2. Payment of Charges...............................................42 5.3. Books and Records................................................43 5.4. Insurance; Damage to or Destruction of Collateral................43 5.5. Compliance with Laws.............................................44 5.6. Canadian Pension and Benefit Plans...............................45 5.7. Supplemental Disclosure..........................................45 5.8. Intellectual Property............................................46 5.9. Environmental Matters............................................46 5.10. Landlords' Agreements, Mortgagee Agreements and Bailee Letters..46 5.11. Interest Rate...................................................47 5.12. Further Assurances..............................................47 5.13. Term Loan C Tax Accrual Periods.................................47 5.14. Year 2000.......................................................48 6. NEGATIVE COVENANTS.......................................................48 6.1. Mergers, Subsidiaries, Etc.......................................48 6.2. Investments; Loans and Advances..................................48 6.3. Indebtedness.....................................................49 6.4. Employee Loans and Affiliate Transactions........................50 6.5. Capital Structure and Business...................................50 6.6. Guaranteed Indebtedness..........................................51 6.7. Liens............................................................51 6.8. Sale of Stock and Assets.........................................51 6.9. ERISA............................................................52 6.10. Financial Covenants.............................................52 6.11. Hazardous Materials.............................................52 6.12. Sale-Leasebacks.................................................52 6.13. Cancellation of Indebtedness....................................52 6.14. Restricted Payments.............................................52 6.15. Change of Corporate Name or Location; Change of Fiscal Year.....53 ii 6.16. No Impairment of Intercompany Transfers.........................54 6.17. No Speculative Transactions.....................................54 6.18. Leases; Real Estate Purchases...................................54 6.19. Changes Relating to Subordinated Debt and Other Agreements......54 6.20. Holdcos.........................................................54 7. TERM.....................................................................55 7.1. Termination......................................................55 7.2. Survival of Obligations Upon Termination of Financing Arrangements.....................................................55 8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES...................................55 8.1. Events of Default................................................55 8.2. Remedies.........................................................57 8.3. Priority of Payment..............................................58 8.4. Waivers by Credit Parties........................................59 8.5. Receivership.....................................................59 9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT......................60 9.1. Assignment and Participations....................................60 9.2. Appointment of Agent.............................................62 9.3. Agents' Reliance, Etc............................................63 9.4. Agents and Affiliates............................................63 9.5. Lender Credit Decision...........................................64 9.6. Indemnification..................................................64 9.7. Successor Agent..................................................64 9.8. Setoff and Sharing of Payments...................................65 9.9. Advances; Payments; Non-Funding Lenders; Information; Actions in Concert...............................................66 10. SUCCESSORS AND ASSIGNS..................................................68 10.1. Successors and Assigns..........................................68 11. MISCELLANEOUS...........................................................69 11.1. Complete Agreement; Modification of Agreement...................69 11.2. Amendments and Waivers..........................................69 11.3. Fees and Expenses...............................................71 11.4. No Waiver.......................................................73 11.5. Remedies........................................................73 11.6. Severability....................................................73 11.7. Conflict of Terms...............................................73 11.8. Confidentiality.................................................74 11.9. GOVERNING LAW...................................................74 11.10. Notices........................................................75 11.11. Section Titles.................................................75 11.12. Counterparts...................................................76 11.13. WAIVER OF JURY TRIAL...........................................76 iii 11.14. Press Releases; Etc............................................76 11.15. Reinstatement..................................................76 11.16. Advice of Counsel..............................................77 11.17. No Drafting Presumptions.......................................77 11.18. License........................................................77 iv INDEX OF APPENDICES Annex A (Recitals) - Definitions Annex B (Section 1.2) - Letters of Credit Annex C (Section 1.8) - Cash Management System Annex D (Section 2.1(a)) - Closing Checklist Annex E (Section 4.1(a)) - Financial Statements and Projections -- Reporting Annex F (Section 4.1(b)) - Collateral Reports Annex G (Section 6.10) - Financial Covenants Annex H (Section 9.9(a)) - Lenders' Wire Transfer Information Annex I (Section 11.10) - Notice AddressesAnnex J (from Annex A- Commitments definition) - Commitments as of Closing Date Annex K (from Annex A - Recapitalization Documents definition) - Recapitalization Documents Exhibit 1.1(a)(i) - Form of Notice of Revolving Credit Advance Exhibit 1.1(a)(ii) - Form of Revolving Note Exhibit 1.1(b) - Form of Term Note Exhibit 1.1(c)(ii) - Form of Swing Line Note Exhibit 1.1(d) - Form of IP Note Exhibit 1.5(e) - Form of Notice of Conversion/Continuation Exhibit 4.1(b) - Form of Borrowing Base Certificate Exhibit 9.1(a) - Form of Assignment Agreement Disclosure Schedule 1.1 - Agent's Representatives Disclosure Schedule 1.4 - Sources and Uses; Funds Flow Memorandum Disclosure Schedule 3.2 - Executive Offices, Collateral Locations, FEIN Disclosure Schedule 3.4(A) - Financial Statements Disclosure Schedule 3.4(B) - Pro Forma Disclosure Schedule 3.4(C) - Projections Disclosure Schedule 3.6 - Real Estate and Leases Disclosure Schedule 3.7 - Labor Matters Disclosure Schedule 3.8 - Ventures, Subsidiaries and Affiliates; Outstanding Stock Disclosure Schedule 3.11 - Tax Matters Disclosure Schedule 3.12 - ERISA Plans Disclosure Schedule 3.13 - Litigation Disclosure Schedule 3.15 - Intellectual Property Disclosure Schedule 3.17 - Hazardous Materials Disclosure Schedule 3.18 - Insurance Disclosure Schedule 3.19 - Deposit and Disbursement Accounts Disclosure Schedule 3.20 - Government Contracts Disclosure Schedule 3.21 - Relationships with Suppliers Disclosure Schedule 3.22 - Material Agreements Disclosure Schedule 5.1 - Trade Names v Disclosure Schedule 6.3 - Indebtedness Disclosure Schedule 6.4 - Transactions with Affiliates Disclosure Schedule 6.7 - Existing Liens vi This CREDIT AGREEMENT (this "Agreement"), dated as of September 24, 1999 among ICON HEALTH & FITNESS, INC., a Delaware corporation ("Borrower"); the other Credit Parties signatory hereto; GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (in its individual capacity, "GE Capital"), for itself, as Lender, and as Agent for Lenders, FLEET NATIONAL BANK, for itself, as Lender, and as Syndication Agent for Lenders, and the other Lenders signatory hereto from time to time. RECITALS WHEREAS, Borrower has requested that Lenders extend revolving and term credit facilities to Borrower of up to Three Hundred Million Dollars ($300,000,000) in the aggregate for the purpose of funding a portion of the costs of the Recapitalization and to provide (a) working capital financing for Borrower, (b) funds for other general corporate purposes of Borrower and (c) funds for certain fees and expenses in connection with the transactions contemplated hereby; and for these purposes, Lenders are willing to make certain loans and other extensions of credit to Borrower of up to such amount upon the terms and conditions set forth herein; and WHEREAS, Borrower has agreed to secure all of its obligations under the Loan Documents by granting to Agent, for the benefit of Agent and Lenders, a security interest in and lien upon all of its existing and after-acquired personal and real property; and WHEREAS, HF Holdings, Inc., a Delaware corporation ("New Holdings") is willing to guarantee all of the obligations of Borrower to Agent and Lenders under the Loan Documents and to pledge to Agent, for the benefit of Agent and Lenders, all of the Stock of Borrower to secure such guaranty; and WHEREAS, the Stock and assets of each direct and indirect domestic and Canadian Subsidiary of Borrower will be pledged as Collateral for the Loans and each such Subsidiary will guarantee payment thereof; and WHEREAS, capitalized terms used in this Agreement shall have the meanings ascribed to them in Annex A and, for purposes of this Agreement and the other Loan Documents, the rules of construction set forth in Annex A shall govern. All Annexes, Disclosure Schedules, Exhibits and other attachments (collectively, "Appendices") hereto, or expressly identified to this Agreement, are incorporated herein by reference, and taken together with this Agreement, shall constitute but a single agreement. These Recitals shall be construed as part of the Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, and for other good and valuable consideration, the parties hereto agree as follows: 1. AMOUNT AND TERMS OF CREDIT 1.1. Credit Facilities. (a) Revolving Credit Facility. (i) Subject to the terms and conditions hereof, each Revolving Lender agrees to make available to Borrower from time to time until the Commitment Termination Date its Pro Rata Share of advances (each, a "Revolving Credit Advance"). The Pro Rata Share of the Revolving Loan of any Revolving Lender shall not at any time exceed its separate Revolving Loan Commitment. The obligations of each Revolving Lender hereunder shall be several and not joint. The aggregate amount of Revolving Credit Advances outstanding shall not exceed at any time the lesser of (A) the Maximum Amount and (B) the Borrowing Base, in each case less the sum of the Letter of Credit Obligations and the Swing Line Loan outstanding at such time ("Borrowing Availability"). Borrowing Availability may be further reduced by Reserves imposed by Agent in its reasonable credit judgment. Until the Commitment Termination Date, Borrower may from time to time borrow, repay and reborrow under this Section 1.1(a). Each Revolving Credit Advance shall be made on notice by Borrower to one of the representatives of Agent identified in Schedule 1.1 at the address specified therein. Those notices must be given no later than (1) noon (New York time) on the Business Day of the proposed Revolving Credit Advance, in the case of an Index Rate Loan, or (2) noon (New York time) on the date which is three (3) Business Days prior to the proposed Revolving Credit Advance, in the case of a LIBOR Loan. Each such notice (a "Notice of Revolving Credit Advance") must be given in writing (by telecopy or overnight courier) substantially in the form of Exhibit 1.1(a)(i), and shall include the information required in such Exhibit and such other information as may be required by Agent. If Borrower desires to have the Revolving Credit Advances bear interest by reference to a LIBOR Rate, it must comply with Section 1.5(e). (ii) Except as provided in Section 1.12, Borrower shall execute and deliver to each Revolving Lender a note to evidence the Revolving Loan Commitment of that Revolving Lender. Each note shall be in the principal amount of the Revolving Loan Commitment of the applicable Revolving Lender, dated the Closing Date and substantially in the form of Exhibit 1.1(a)(ii) (each a "Revolving Note" and, collectively, the "Revolving Notes"). Each Revolving Note shall represent the obligation of Borrower to pay the amount of Revolving Lender's Revolving Loan Commitment or, if less, such Revolving Lender's Pro Rata Share of the aggregate unpaid principal amount of all Revolving Credit Advances to Borrower together with interest thereon as prescribed in Section 1.5. The entire unpaid balance of the Revolving Loan and all other non-contingent Obligations shall be immediately due and payable in full in immediately available funds on the Commitment Termination Date. (iii) Clean Down. Borrower shall cause the outstanding principal balance of the Swing Line Loan and Revolving Loan to be reduced to $25,000,000 or less 2 for a period of sixty (60) consecutive days or more, during the period of May 1st through August 31st of each year. (b) Term Loans. (i) Subject to the terms and conditions hereof, each Term Lender agrees to make term loans (individually, "Term Loan A," "Term Loan B" and "Term Loan C," and collectively, the "Term Loans") on the Closing Date to Borrower in the original principal amount of its Term Loan A Commitment, Term Loan B Commitment and/or Term Loan C Commitment, as applicable. The obligations of each Term Lender hereunder shall be several and not joint with respect to each Term Loan. The Term Loans shall be evidenced by promissory notes substantially in the form of Exhibit 1.1(b) (each a "Term Note" and collectively the "Term Notes"), and, except as provided in Section 1.12, Borrower shall execute and deliver each Term Note to the applicable Term Lender. Each Term Note shall represent the obligation of Borrower to pay the amount of the applicable Term Lender's Term Loan A Commitment, Term Loan B Commitment or Term Loan C Commitment, as applicable, together with interest thereon as prescribed in Section 1.5. (ii) Borrower shall repay the principal amount of Term Loan A in twenty (20) consecutive quarterly installments on the last day of February, May, August and November of each year, commencing November 30, 1999, as follows: Payment Installment Dates Amounts ------- ----------- November 30, 1999 $681,818 February 29, 2000 $681,818 May 31, 2000 $681,818 August 31, 2000 $681,818 November 30, 2000 $1,363,636 February 28, 2001 $1,363,636 May 31, 2001 $1,363,636 August 31, 2001 $1,363,636 November 30, 2001 $1,363,636 February 28, 2002 $1,363,636 May 31, 2002 $1,363,636 August 31, 2002 $1,363,636 November 30, 2002 $2,045,455 February 28, 2003 $2,045,455 May 31, 2003 $2,045,455 3 August 31, 2003 $2,045,455 November 30, 2003 $2,045,455 February 28, 2004 $2,045,455 May 31, 2004 $2,045,455 The final installment due on August 31, 2004 shall be in the amount of $2,045,455 or, if different, the remaining principal balance of Term Loan A. (iii) Borrower shall repay the principal amount of Term Loan B in twenty-one (21) consecutive quarterly installments on the last day of February, May, August and November of each year, commencing November 30, 1999, as follows: Payment Installment Dates Amounts ------- ----------- November 30, 1999 $275,000 February 29, 2000 $275,000 May 31, 2000 $275,000 August 31, 2000 $275,000 November 30, 2000 $275,000 February 28, 2001 $275,000 May 31, 2001 $275,000 August 31, 2001 $275,000 November 30, 2001 $275,000 February 28, 2002 $275,000 May 31, 2002 $275,000 August 31, 2002 $275,000 November 30, 2002 $275,000 February 28, 2003 $275,000 May 31, 2003 $275,000 August 31, 2003 $275,000 November 30, 2003 $275,000 February 28, 2004 $275,000 May 31, 2004 $275,000 August 31, 2004 $275,000 4 The final installment due on November 29, 2004 shall be in the amount of $74,500,000 or, if different, the remaining principal balance of Term Loan B. (iv) Borrower shall repay the principal amount of Term Loan C in twenty-two (22) consecutive quarterly installments on the first day of March, June, September and December of each year, commencing December 1, 1999, as follows: Payment Installment Dates Amounts ------- ----------- December 1, 1999 $100,000 March 1, 2000 $100,000 June 1, 2000 $100,000 September 1, 2000 $100,000 December 1, 2000 $100,000 March 1, 2001 $100,000 June 1, 2001 $100,000 September 1, 2001 $100,000 December 1, 2001 $100,000 March 1, 2002 $100,000 June 1, 2002 $100,000 September 1, 2002 $100,000 December 1, 2002 $100,000 March 1, 2003 $100,000 June 1, 2003 $100,000 September 1, 2003 $100,000 December 1, 2003 $100,000 March 1, 2004 $100,000 June 1, 2004 $100,000 September 1, 2004 $100,000 December 1, 2004 $100,000 The final installment due on March 1, 2005 shall be in the amount of $52,900,000 or, if different, the remaining principal balance of Term Loan C. 5 (v) Notwithstanding Section 1.1(b)(ii), (iii) and (iv), the aggregate outstanding principal balance of the Term Loans shall be due and payable in full in immediately available funds on the Commitment Termination Date, if not sooner paid in full. (vi) Each payment of principal with respect to the Term Loans shall be paid to Agent for the ratable benefit of each Term Lender, ratably in proportion to each such Term Lender's respective Term Loan A Commitment, Term Loan B Commitment or Term Loan C Commitment, as applicable. Amounts repaid with respect to any Term Loan may not be reborrowed. (c) Swing Line Facility. (i) Agent shall notify the Swing Line Lender upon Agent's receipt of any Notice of Revolving Credit Advance. Subject to the terms and conditions hereof, the Swing Line Lender may, in its discretion, make available from time to time until the Commitment Termination Date advances (each, a "Swing Line Advance") in accordance with any such notice. The aggregate amount of Swing Line Advances outstanding shall not exceed at any time the lesser of (A) the Swing Line Commitment and (B) the lesser of the Maximum Amount and the Borrowing Base, in each case, less the outstanding balance of the Revolving Loan at such time ("Swing Line Availability"). Until the Commitment Termination Date, Borrower may from time to time borrow, repay and reborrow under this Section 1.1(c). Each Swing Line Advance shall be made pursuant to a Notice of Revolving Credit advance delivered by Borrower to Agent in accordance with Section 1.1(a). Notwithstanding any other provision of this Agreement or the other Loan Documents, the Swing Line Loan shall constitute an Index Rate Loan. Unless the Swing Line Lender has received at least one Business Day's prior written notice from Requisite Revolving Lenders instructing it not to make a Swing Line Advance, the Swing Line Lender shall, notwithstanding the failure of any condition precedent set forth in Sections 2.2(a)-(c), be entitled to fund that Swing Line Advance, and to have each Revolving Lender make Revolving Credit Advances in accordance with Section 1.1(c)(iii) or purchase participating interests in accordance with Section 1.1(c)(iv). Those notices from Requisite Revolving Lenders must be given no later than noon (New York time) on the Business Day preceding the proposed Swing Line Advance. (ii) Borrower shall execute and deliver to the Swing Line Lender a promissory note to evidence the Swing Line Commitment. Such note shall be in the principal amount of the Swing Line Commitment of the Swing Line Lender, dated the Closing Date and substantially in the form of Exhibit 1.1(c)(ii) (the "Swing Line Note"). The Swing Line Note shall represent the obligation of Borrower to pay the amount of the Swing Line Commitment or, if less, the aggregate unpaid principal amount of all Swing Line Advances made to Borrower together with interest thereon as prescribed in Section 1.5. The entire unpaid balance of the Swing Line Loan and all other noncontingent Obligations shall be immediately due and payable in full in immediately available funds on the Commitment Termination Date if not sooner paid in full. 6 (iii) The Swing Line Lender, at any time and from time to time in its sole and absolute discretion but no less frequently than once weekly shall on behalf of Borrower (and Borrower hereby irrevocably authorizes the Swing Line Lender to so act on its behalf) request each Revolving Lender (including the Swing Line Lender) to make a Revolving Credit Advance to Borrower (which shall be an Index Rate Loan) in an amount equal to that Revolving Lender's Pro Rata Share of the principal amount of the Swing Line Loan (the "Refunded Swing Line Loan") outstanding on the date such notice is given. Unless any of the events described in Sections 8.1(h) or 8.1(i) has occurred (in which event the procedures of Section 1.1(c)(iv) shall apply) and regardless of whether the conditions precedent set forth in this Agreement to the making of a Revolving Credit Advance are then satisfied, each Revolving Lender shall disburse directly to Agent, its Pro Rata Share of a Revolving Credit Advance on behalf of the Swing Line Lender, prior to 2:00 p.m. (New York time), in immediately available funds on the Business Day next succeeding the date that notice is given. The proceeds of those Revolving Credit Advances shall be immediately paid to the Swing Line Lender and applied to repay the Refunded Swing Line Loan. (iv) If, prior to refunding a Swing Line Loan with a Revolving Credit Advance pursuant to Section 1.1(c)(iii), one of the events described in Sections 8.1(h) or 8.1(i) has occurred, then, subject to the provisions of Section 1.1(c)(v) below, each Revolving Lender shall, on the date such Revolving Credit Advance was to have been made for the benefit of Borrower, purchase from the Swing Line Lender an undivided participation interest in the Swing Line Loan in an amount equal to its Pro Rata Share of such Swing Line Loan. Upon request, each Revolving Lender shall promptly transfer to the Swing Line Lender, in immediately available funds, the amount of its participation interest. (v) Each Revolving Lender's obligation to make Revolving Credit Advances in accordance with Section 1.1(c)(iii) and to purchase participation interests in accordance with Section 1.1(c)(iv) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right that such Revolving Lender may have against the Swing Line Lender, Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of any Default or Event of Default; (C) any inability of Borrower to satisfy the conditions precedent to borrowing set forth in this Agreement on the date upon which such participation interest is to be purchased or (D) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If any Revolving Lender does not make available to Agent or the Swing Line Lender, as applicable, the amount required pursuant to Sections 1.1(c)(iii) or 1.1(c)(iv), as the case may be, the Swing Line Lender shall be entitled to recover such amount on demand from such Revolving Lender, together with interest thereon for each day from the date of non-payment until such amount is paid in full at the Federal Funds Rate for the first two Business Days and at the Index Rate thereafter. (d) IP Loan. 7 (i) Subject to the terms and conditions hereof, each IP Lender agrees to make a loan (the "IP Loan") on the Closing Date to Borrower in the amount of its IP Loan Commitment. The obligations of each IP Lender thereunder shall be several and not joint. The IP Loan shall be evidenced by promissory notes in the form of Exhibit 1.1(d) (each an "IP Note" and, collectively, the "IP Notes") and Borrower shall deliver an IP Note to each IP Lender. The IP Note shall represent the obligation of Borrower to pay the amount of the applicable IP Loan Commitment, together with interest thereon as prescribed in Section 1.5. (ii) Borrower shall repay the principal amount of the IP Loan in nineteen (19) consecutive quarterly installments of $750,000 each on the last day of February, May, August and November of each year, commencing November 30, 1999 with a final installment of $750,000 or, if different, the remaining principal balance of the IP Loan, due on August 31, 2004. (iii) Notwithstanding Section 1.1(d)(ii), the aggregate outstanding principal balance of the IP Loan shall be due and payable in full in immediately available funds on the Commitment Termination Date, if not sooner paid in full. (iv) Each payment of principal with respect to the IP Loan shall be paid to Agent for the ratable benefit of each IP Lender, in proportion to such IP Lender's Pro Rata Share of the IP Commitment. Amounts repaid with respect to the IP Loan may not be reborrowed. (e) Reliance on Notices. Agent shall be entitled to rely upon, and shall be fully protected in relying upon, any Notice of Revolving Credit Advance, Notice of Conversion/Continuation or similar notice believed by Agent to be genuine. Agent may assume that each Person executing and delivering any notice in accordance herewith was duly authorized, unless the responsible individual acting thereon for Agent has actual knowledge to the contrary. 1.2. Letters of Credit. Subject to and in accordance with the terms and conditions contained herein and in Annex B, Borrower shall have the right to request, and Revolving Lenders agree to incur, or purchase participations in, Letter of Credit Obligations in respect of Borrower. 1.3. Prepayments. (a) Voluntary Prepayments. (i) Borrower may at any time on at least five (5) days' prior written notice to Agent (a) voluntarily prepay all or part of Term Loan A, Term Loan B and the IP Loan and/or (b) voluntarily prepay all or part of the Revolving Loan and terminate (but not reduce) the Revolving Loan Commitment; provided that any such prepayments shall be in a minimum amount of $5,000,000 and integral multiples of $250,000 in excess of such amount. Upon such termination of the Revolving Loan Commitment, all Loans and 8 other Obligations shall be immediately due and payable in full and all Letter of Credit Obligations shall be cash collateralized or otherwise satisfied in accordance with Annex B hereto. Any voluntary prepayment must be accompanied by payment of the Fee required by Section 1.9(c), if any, plus the payment of any LIBOR funding breakage costs in accordance with Section 1.13(b). Upon any such prepayment and termination of the Revolving Loan Commitment, Borrower's right to request Revolving Credit Advances, or request that Letter of Credit Obligations be incurred on its behalf, or request Swing Line Advances, shall simultaneously be terminated. (ii) Voluntary prepayments pursuant to clause (a)(i) shall be applied to payment of the Obligations in accordance with Section 1.3(c). (b) Mandatory Prepayments. (i) If at any time the outstanding balance of the Revolving Loan exceeds the lesser of (A) the Maximum Amount and (B) the Borrowing Base, in each case, less the outstanding Swing Line Loan at such time, Borrower shall immediately repay the aggregate outstanding Revolving Credit Advances to the extent required to eliminate such excess. If any such excess remains after repayment in full of the aggregate outstanding Revolving Credit Advances, Borrower shall provide cash collateral for the Letter of Credit Obligations in the manner set forth in Annex B to the extent required to eliminate such excess. (ii) Immediately upon receipt by any Credit Party of proceeds of any asset disposition, which, together with other asset dispositions in any Fiscal Year result in proceeds in excess of $200,000 in the aggregate during such Fiscal Year (including condemnation proceeds, but excluding proceeds of asset dispositions permitted by Sections 6.8(a), 6.8(c) and 6.8(d)) or any sale of Stock of any Subsidiary of any Credit Party, Borrower shall prepay the Loans in an amount equal to such proceeds in excess of $200,000 during such Fiscal Year, net of (A) commissions and other reasonable and customary transaction costs, fees and expenses properly attributable to such transaction and payable by Borrower in connection therewith (in each case, paid to non-Affiliates), (B) transfer taxes payable by such Credit Party in connection therewith, (C) amounts payable to holders of senior Liens (to the extent such Liens constitute Permitted Encumbrances hereunder), if any, and (D) an appropriate reserve for income taxes in accordance with GAAP in connection therewith. Any such prepayment shall be applied in accordance with Section 1.3(c). (iii) If New Holdings or Borrower or any other Credit Party issues Stock (other than an issuance of additional Stock of New Holdings to employees of Borrower upon the exercise of stock options or otherwise), no later than the Business Day following the date of receipt of the proceeds thereof, Borrower shall prepay the Loans in an amount equal to all such proceeds, net of underwriting discounts and commissions and other reasonable costs paid to non-Affiliates in connection therewith. Any such prepayment shall be applied in accordance with Section 1.3(c). 9 (iv) Until the Termination Date, Borrower shall prepay the Obligations on the date that is ten (10) days after the earlier of (A) the date on which Borrower's annual audited Financial Statements for the immediately preceding Fiscal Year are delivered pursuant to Annex E or (B) the date on which such annual audited Financial Statements were required to be delivered pursuant to Annex E, in an amount equal to fifty percent (50%) of Excess Cash Flow for the immediately preceding Fiscal Year. Any prepayments from Excess Cash Flow paid pursuant to this clause (iv) shall be applied in accordance with Section 1.3(c). Each such prepayment shall be accompanied by a certificate signed by Borrower's chief financial officer certifying the manner in which Excess Cash Flow and the resulting prepayment were calculated, which certificate shall be in form and substance satisfactory to Agent. (c) Application of Certain Prepayments. (i) Any prepayments made by Borrower pursuant to clauses (a)(i), (b)(iii), and (b)(iv) above shall be applied as follows: first, to Fees and reimbursable expenses of Agents then due and payable pursuant to any of the Loan Documents; second, to interest then due and payable on Term Loan A, Term Loan B and the IP Loan, pro rata; third, to prepay the scheduled principal installments of Term Loan A, Term Loan B and the IP Loan, pro rata, in inverse order of maturity, until Term Loan A, Term Loan B and the IP Loan shall have been prepaid in full; fourth, to interest then due and payable on the Swing Line Loan; fifth, to the principal balance of the Swing Line Loan until the same has been repaid in full; sixth, to interest then due and payable on the Revolving Credit Advances; seventh, to the outstanding principal balance of Revolving Credit Advances until the same has been paid in full; eighth, to any Letter of Credit Obligations, to provide cash collateral therefor in the manner set forth in Annex B, until all such Letter of Credit Obligations have been fully cash collateralized in the manner set forth in Annex B; ninth, to interest then due and payable on Term Loan C; and tenth to prepay the scheduled principal installments of Term Loan C in inverse order of maturity. Neither the Revolving Loan Commitment nor the Swing Line Commitment shall be permanently reduced by the amount of any such prepayments. If any holder of a Term Loan A Commitment declines receipt of its Pro Rata Share of any mandatory prepayment, that portion of the prepayment shall be reallocated, pro rata, to the other Term Loan A Commitments. Similarly, if any holder of a Term Loan B Commitment declines receipt of its Pro Rata Share of any mandatory prepayment, that portion of the prepayment shall be reallocated, pro rata, to the other Term Loan B Commitments, and if any holder of an IP Loan Commitment declines receipt of its Pro Rata Share of any mandatory prepayment, that portion of the prepayment shall be reallocated pro rata to the other IP Loan Commitments. If all of the holders of Term Loan A Commitments, Term Loan B Commitments and the IP Loan Commitments decline receipt of their Pro Rata Shares of any mandatory prepayment, that mandatory prepayment shall be applied in payment of the Obligations in a manner acceptable to all Lenders. (ii) Any prepayments made by Borrower pursuant to clause (b)(ii) above shall be applied as follows: first, to Fees and reimbursable expenses of Agents then due and payable pursuant to any of the Loan Documents; second, to interest then due and 10 payable on Term Loans A and B, pro rata; third, to prepay the scheduled principal installments of Term Loan A and Term Loan B, pro rata, in inverse order of maturity, until Term Loan A and Term Loan B shall have been prepaid in full; fourth, to interest then due and payable on the Swing Line Loan; fifth, to the principal balance of the Swing Line Loan until the same has been repaid in full; sixth, to interest then due and payable on the Revolving Credit Advances; seventh, to the outstanding principal balance of Revolving Credit Advances until the same has been paid in full; eighth, to any Letter of Credit Obligations, to provide cash collateral therefor in the manner set forth in Annex B, until all such Letter of Credit Obligations have been fully cash collateralized in the manner set forth in Annex B; ninth, to interest then due and payable on the IP Loan; tenth, to prepay scheduled installments on the IP Loan in inverse order of maturity; eleventh, to interest then due and payable on Term Loan C; and twelfth to prepay the scheduled principal installments of Term Loan C in inverse order of maturity. Neither the Revolving Loan Commitment nor the Swing Line Commitment shall be permanently reduced by the amount of any such prepayments. If any holder of a Term Loan A Commitment declines receipt of its Pro Rata Share of any mandatory prepayment, that portion of the prepayment shall be reallocated, pro rata, to the other Term Loan A Commitments. Similarly, if any holder of a Term Loan B Commitment declines receipt of its Pro Rata Share of any mandatory prepayment, that portion of the prepayment shall be reallocated, pro rata, to the other Term Loan B Commitments. If all of the holders of Term Loan A Commitments and Term Loan B Commitments decline receipt of their Pro Rata Shares of any mandatory prepayment, that mandatory prepayment shall be applied in payment of the Obligations in a manner acceptable to all Lenders. (d) Application of Prepayments from Insurance Proceeds. Prepayments from insurance proceeds received by Agent in accordance with Section 5.4(c) shall be applied as follows: insurance proceeds from casualties or losses to cash or Inventory shall be applied first, to the Swing Line Loans and, second, to the Revolving Credit Advances; insurance proceeds from casualties or losses to Equipment, Fixtures and Real Estate shall be applied to scheduled principal installments of Term Loan A and Term Loan B, pro rata, in inverse order of maturity. Neither the Revolving Loan Commitment nor the Swing Line Loan Commitment shall be permanently reduced by the amount of any such prepayments. If the precise amount of insurance proceeds allocable to Inventory as compared to Equipment, Fixtures and Real Estate are not otherwise determined, the allocation and application of those proceeds shall be determined by Agent, subject to the approval of Requisite Lenders. (e) Sales of Accounts and Inventory. Proceeds of sales of assets permitted under Sections 6.8(a), 6.8(c) and 6.8(d) shall be applied to the Revolving Loan without reduction of the Revolving Loan Commitment. (f) Voluntary Prepayments of Term Loan C. Term Loan C may be prepaid in whole or in part but only with proceeds of Permitted Subordinated Debt. (g) No Implied Consent. Nothing in this Section 1.3 shall be construed to constitute Agent's or any Lender's consent to any transaction that is not permitted by other provisions of this Agreement or the other Loan Documents. 11 1.4. Use of Proceeds. Borrower shall utilize the proceeds of the Term Loans, the IP Loan, the Revolving Loan and the Swing Line Loan solely for the Recapitalization (and to pay any related transaction expenses), and for the financing of Borrower's ordinary working capital and general corporate needs. Disclosure Schedule (1.4) contains a description of Borrower's sources and uses of funds received and disbursed on the Closing Date, including Loans and Letter of Credit Obligations to be made or incurred on that date, and a funds flow memorandum detailing how funds from each source are to be transferred to particular uses. 1.5. Interest and Applicable Margins. (a) (i) Borrower shall pay interest in cash to Agent, for the ratable benefit of Lenders in accordance with the various Loans being made by each Lender, in arrears on each applicable Interest Payment Date, at the following rates: (A) with respect to the Revolving Credit Advances, the Index Rate plus the Applicable Revolver Index Margin per annum or, at the election of Borrower, the applicable LIBOR Rate plus the Applicable Revolver LIBOR Margin per annum, based on the aggregate Revolving Credit Advances outstanding from time to time; (B) with respect to the Term Loans, the Index Rate plus the Applicable Term Loan A Index Margin, Applicable Term Loan B Index Margin or Applicable Term Loan C Index Margin, as applicable, or, at the election of Borrower, the applicable LIBOR Rate plus the Applicable Term Loan A LIBOR Margin, Applicable Term Loan B LIBOR Margin or Applicable Term Loan C LIBOR Margin, as applicable, per annum; (C) with respect to the Swing Line Loan, the Index Rate plus the Applicable Revolver Index Margin per annum and (D) with respect to the IP Loan, the Index Rate plus the Applicable IP Loan Index Margin. As of the Closing Date, the Applicable Margins are as follows: Applicable Revolver Index Margin 1.50% Applicable Revolver LIBOR Margin 3.00% Applicable Term Loan A Index Margin 1.50% Applicable Term Loan A LIBOR Margin 3.00% Applicable Term Loan B Index Margin 2.00% Applicable Term Loan B LIBOR Margin 3.50% Applicable Term Loan C Index Margin 5.50% Applicable Term Loan C LIBOR Margin 7.00% Applicable IP Loan Index Margin 3.00% Applicable L/C Margin 2.00% 12 Applicable Unused Line Fee Margin 0.50% (ii) The Applicable Margins will be adjusted (up or down) prospectively on a quarterly basis as determined by Borrower's consolidated financial performance, commencing with the first day of the first calendar month that occurs more than five (5) days after delivery of Borrower's quarterly Financial Statements to Lenders for each Fiscal Quarter commencing with the Fiscal Quarter ending February 29, 2000; provided however, that the Applicable Term Loan C Index Margin, Applicable Term Loan C LIBOR Margin and Applicable IP Loan Index Margin set forth above shall remain in effect for so long as Term Loan C and the IP Loan, respectively, are outstanding. Adjustments in Applicable Margins will be determined by reference to the following grids: ----------------------------------------------------- Level of If Leverage Ratio is: Applicable Margins: --------------------- ------------------- ----------------------------------------------------- < 3.25 Level I ----------------------------------------------------- < 3.75, but >= 3.25 Level II ----------------------------------------------------- < 4.25, but >= 3.75 Level III ----------------------------------------------------- < 4.75, but >= 4.25 Level IV ----------------------------------------------------- < 5.50, but >= 4.75 Level V ----------------------------------------------------- >= 5.50 Level VI ----------------------------------------------------- - ------------------------------------------------------------------------------- Applicable Margins ------------------ Level I Level II Level III Level IV Level V Level VI - ------------------------------------------------------------------------------- Applicable Revolver Index Margin 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% - ------------------------------------------------------------------------------- Applicable Revolver LIBOR Margin 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% - ------------------------------------------------------------------------------- Applicable Term Loan A Index Margin 1.00% 1.00% 1.00% 1.25% 1.50% 1.75% - ------------------------------------------------------------------------------- Applicable Term Loan A LIBOR Margin 2.50% 2.50% 2.50% 2.75% 3.00% 3.25% - ------------------------------------------------------------------------------- Applicable Term Loan B Index Margin 1.75% 1.75% 1.75% 1.75% 2.00% 2.25% - ------------------------------------------------------------------------------- Applicable Term Loan B LIBOR Margin 3.25% 3.25% 3.25% 3.25% 3.50% 3.75% - ------------------------------------------------------------------------------- Applicable L/C Margin 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% - ------------------------------------------------------------------------------- Applicable Unused Line Fee Margin 0.375% 0.375% 0.50% 0.50% 0.50% 0.50% - ------------------------------------------------------------------------------- 13 All adjustments in the Applicable Margins after February 29, 2000 shall be implemented quarterly on a prospective basis, for each calendar month commencing at least five (5) days after the date of delivery to Lenders of the quarterly unaudited or annual audited (as applicable) Financial Statements evidencing the need for an adjustment. Concurrently with the delivery of those Financial Statements, Borrower shall deliver to Agent and Lenders a certificate, signed by its chief financial officer, setting forth in reasonable detail the basis for the continuance of, or any change in, the Applicable Margins. Failure to timely deliver such Financial Statements shall, in addition to any other remedy provided for in this Agreement, result in an increase in the Applicable Margins to the highest level set forth in the foregoing grid, until the first day of the first calendar month following the delivery of those Financial Statements demonstrating that such an increase is not required. If a Default or an Event of Default has occurred and is continuing at the time any reduction in the Applicable Margins is to be implemented, that reduction shall be deferred until the first day of the first calendar month following the date on which such Default or Event of Default is waived or cured. (iii) In addition to the interest payable in cash on Term Loan C pursuant to Section 1.5(a)(i) above, interest shall accrue on the outstanding principal balance of Term Loan C ("PIK Interest"), for the ratable benefit of Term Lenders with Term Loan C Commitments, at a rate of five percent (5%) per annum capitalized quarterly on the first day of March, June, September and December of each year, beginning on December 1, 1999. PIK Interest accruing pursuant to this Section 1.5(a)(iii) shall not be paid in cash, but shall be capitalized and added to the aggregate outstanding principal amount of Term Loan C, effective as of each applicable quarterly PIK Interest capitalization date. Subject to Sections 1.11 and 8.3, PIK Interest shall be due and payable in cash upon the earlier to occur of (A) March 1, 2005 and (B) the refinancing of Term Loan C. In addition, if on a PIK Interest Catch-Up Date, there exists any Excess PIK Interest, such Excess PIK Interest, if any, shall then be due and payable in cash. (b) If any payment on any Loan becomes due and payable on a day other than a Business Day, the maturity thereof will be extended to the next succeeding Business Day (except as set forth in the definition of LIBOR Period) and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. (c) All computations of Fees calculated on a per annum basis and interest shall be made by Agent on the basis of a 360-day year, in each case for the actual number of days occurring in the period for which such interest and Fees are payable. The Index Rate shall be determined each day based upon the Index Rate as in effect each day. Each determination by Agent of an interest rate and Fees hereunder shall be conclusive, absent manifest error. (d) So long as an Event of Default has occurred and is continuing under Section 8.1(a), (h) or (i), or so long as any other Event of Default has occurred and is continuing and at the election of Agent (or upon the written request of Requisite Lenders) confirmed by written notice from Agent to Borrower, the interest rates applicable to the Loans and the Letter of Credit Fees shall be increased by two percent (2%) per annum above the rates of interest or the rate of such Fees otherwise applicable hereunder ("Default Rate"), and all outstanding Obligations shall bear interest at the Default Rate applicable to such Obligations. Interest and 14 Letter of Credit Fees at the Default Rate shall accrue from the initial date of such Event of Default until that Event of Default is cured or waived and shall be payable upon demand. (e) Subject to the conditions precedent set forth in Section 2.2, Borrower shall have the option to (i) request that any Revolving Credit Advance be made as a LIBOR Loan, (ii) convert at any time all or any part of outstanding Loans (other than the Swing Line Loan and the IP Loan) from Index Rate Loans to LIBOR Loans, (iii) convert any LIBOR Loan to an Index Rate Loan, subject to payment of LIBOR breakage costs in accordance with Section 1.13(b) if such conversion is made prior to the expiration of the LIBOR Period applicable thereto, or (iv) continue all or any portion of any Loan (other than the Swing Line Loan) as a LIBOR Loan upon the expiration of the applicable LIBOR Period and the succeeding LIBOR Period of that continued Loan shall commence on the last day of the LIBOR Period of the Loan to be continued. Any Loan or group of Loans having the same proposed LIBOR Period to be made or continued as, or converted into, a LIBOR Loan must be in a minimum amount of $5,000,000 and integral multiples of $500,000 in excess of such amount. Any such election must be made by noon (New York time) on the third (3rd) Business Day prior to (1) the date of any proposed Advance which is to bear interest at the LIBOR Rate, (2) the end of each LIBOR Period with respect to any LIBOR Loans to be continued as such, or (3) the date on which Borrower wishes to convert any Index Rate Loan to a LIBOR Loan for a LIBOR Period designated by Borrower in such election. If no election is received with respect to a LIBOR Loan by noon (New York time) on the third (3rd) Business Day prior to the end of the LIBOR Period with respect thereto (or if a Default or an Event of Default has occurred and is continuing or the additional conditions precedent set forth in Section 2.2 shall not have been satisfied), that LIBOR Loan shall be converted to an Index Rate Loan at the end of its LIBOR Period. Borrower must make such election by notice to Agent in writing, by telecopy or overnight courier. In the case of any conversion or continuation, such election must be made pursuant to a written notice (a "Notice of Conversion/Continuation") in the form of Exhibit 1.5(e). No Loan may be made as or converted into a LIBOR Loan until the earlier of (i) 45 days after the Closing Date or (ii) completion of primary syndication as determined by Agents and no portion of Term Loan C may be converted to a LIBOR Loan after February 28, 2004. (f) Notwithstanding anything to the contrary set forth in this Section 1.5, if a court of competent jurisdiction determines in a final order that the rate of interest payable hereunder exceeds the highest rate of interest permissible under law (the "Maximum Lawful Rate"), then so long as the Maximum Lawful Rate would be so exceeded, the rate of interest payable hereunder shall be equal to the Maximum Lawful Rate; provided, however, that if at any time thereafter the rate of interest payable hereunder is less than the Maximum Lawful Rate, Borrower shall continue to pay interest hereunder at the Maximum Lawful Rate until such time as the total interest received by Agent, on behalf of Lenders, is equal to the total interest that would have been received had the interest rate payable hereunder been (but for the operation of this paragraph) the interest rate payable since the Closing Date as otherwise provided in this Agreement. Thereafter, interest hereunder shall be paid at the rate(s) of interest and in the manner provided in Sections 1.5(a) through (e), unless and until the rate of interest again exceeds the Maximum Lawful Rate, and at that time this paragraph shall again apply. In no event shall the total interest received by any Lender pursuant to the terms hereof exceed the amount that such Lender could lawfully have received had the interest due hereunder been calculated for the full 15 term hereof at the Maximum Lawful Rate. If the Maximum Lawful Rate is calculated pursuant to this paragraph, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in the year in which such calculation is made. If, notwithstanding the provisions of this Section 1.5(f), a court of competent jurisdiction shall finally determine that a Lender has received interest hereunder in excess of the Maximum Lawful Rate, Agent shall, to the extent permitted by applicable law, promptly apply such excess in the order specified in Section 1.11 and thereafter shall refund any excess to Borrower or as a court of competent jurisdiction may otherwise order. 1.6. Eligible Accounts. All of the Accounts owned by Borrower or its domestic or Canadian Subsidiaries and reflected in the most recent Borrowing Base Certificate delivered by Borrower to Agent shall be "Eligible Accounts" for purposes of this Agreement, except any Account to which any of the exclusionary criteria set forth below applies. Agent shall have the right to establish, modify or eliminate Reserves against Eligible Accounts from time to time in its reasonable credit judgment. In addition, Agent reserves the right, at any time and from time to time after the Closing Date, to adjust any of the criteria set forth below, to establish new criteria and to adjust advance rates with respect to Eligible Accounts, in its reasonable credit judgment, subject to the approval of Requisite Revolving Lenders in the case of adjustments or new criteria or changes in advance rates which have the effect of making more credit available. Eligible Accounts shall not include any Account of Borrower or its domestic or Canadian Subsidiaries: (a) that does not arise from the sale of goods or the performance of services in the ordinary course of its business; (b) (i) upon which the right to receive payment is not absolute or is contingent upon the fulfillment of any condition whatsoever or (ii) as to which Borrower or one of its domestic or Canadian Subsidiaries is not able to bring suit or otherwise enforce their remedies against the Account Debtor through judicial process, or (iii) if the Account represents a progress billing consisting of an invoice for goods sold or used or services rendered pursuant to a contract under which the Account Debtor's obligation to pay that invoice is subject to Borrower's or one of its domestic or Canadian Subsidiary's completion of further performance under such contract or is subject to the equitable lien of a surety bond issuer; (c) any Account against which any defense, counterclaim, setoff or dispute is asserted, but such Account shall only be ineligible to the extent of any such defense, counterclaim, setoff or dispute; (d) that is not a true and correct statement of bona fide indebtedness incurred in the amount of the Account for merchandise sold to or services rendered and accepted by the applicable Account Debtor; (e) with respect to which an invoice, acceptable to Agent in form and substance, has not been sent to the applicable Account Debtor; 16 (f) that (i) is not owned by Borrower or one of its domestic or Canadian Subsidiaries or (ii) is subject to any right, claim, security interest or other interest of any other Person, other than first priority Liens in favor of Agent, on behalf of itself and Lenders or in favor of Agent and Lenders, as applicable, and Prior Claims that are unregistered and that secure amounts that are not yet due and payable; (g) that arises from a sale to any director, officer, other employee or Affiliate of any Credit Party, or to any entity that has any common officer or director with any Credit Party (other than a portfolio company of one of the Bain Entities or Credit Suisse First Boston or its Affiliates); (h) that is the obligation of an Account Debtor that is the United States government or a political subdivision thereof, or department, agency or instrumentality thereof, or that is the Canadian government (Her Majesty in Right of Canada) or a political subdivision thereof, or department, agency or instrumentality thereof, unless Agent, in its sole discretion, has agreed to the contrary in writing, the Account is assignable by way of security and Borrower, if necessary or desirable, has complied with the Federal Assignment of Claims Act of 1940, with respect to such obligation, or, the applicable Canadian Subsidiary of Borrower, if necessary or desirable, has complied with the Financial Administration Act (Canada) or any applicable provincial or territorial statute or municipal ordinance of similar purpose and effect, with respect to such obligation, as applicable; (i) that is the obligation of an Account Debtor located in a foreign country other than Canada (excluding the province of Newfoundland, the Northwest Territories and the territory of Nunavut) and in Agent's discretion, Accounts owing to Regency in New Zealand and Forza in the United Kingdom, in an aggregate amount not to exceed $1,200,000 in the aggregate, if notice and other perfection requirements are met, unless payment thereof is assured by a letter of credit assigned and delivered to Agent, satisfactory to Agent as to form, amount and issuer; (j) to the extent Borrower or any Subsidiary thereof is liable for goods sold or services rendered by the applicable Account Debtor to Borrower or any Subsidiary thereof but only to the extent of the potential offset; (k) that arises with respect to goods that are delivered on a bill-and-hold, cash-on-delivery basis or placed on consignment, guaranteed sale or other terms by reason of which the payment by the Account Debtor is or may be conditional; (l) that is in default; provided, that, without limiting the generality of the foregoing, an Account shall be deemed in default upon the occurrence of any of the following: (i) the Account is not paid within the earlier of: 60 days following its due date or 120 days following its original invoice date (provided that Agent may extend such 120 day limitation to 150 days as to Accounts owing by certain creditworthy Account Debtors as determined by Agent in its reasonable credit judgment); 17 (ii) the Account Debtor obligated upon such Account suspends business, makes a general assignment for the benefit of creditors or fails to pay its debts generally as they come due; or (iii) a petition is filed by or against any Account Debtor obligated upon such Account under any bankruptcy law or any other federal, state or foreign (including any provincial), receivership, insolvency relief or other law or laws for the relief of debtors, except for Eligible Service Merchandise Accounts; (m) that is the obligation of an Account Debtor if fifty percent (50%) or more of the dollar amount of all Accounts owing by that Account Debtor are ineligible under the other criteria set forth in this Section 1.6; (n) as to which Agent's Lien thereon, on behalf of itself and Lenders, or Agent's and Lenders' Liens thereon, as applicable, is not a first priority perfected Lien; (o) to the extent such Account is evidenced by a judgment, Instrument or Chattel Paper; (p) to the extent such Account exceeds any credit limit established by Agent, in its reasonable credit judgment, following prior notice of such limit by Agent to Borrower; (q) that is payable in any currency other than Canadian Dollars or Dollars or, if permitted, British pounds or New Zealand dollars; (r) that is otherwise unacceptable to Agent in its reasonable credit judgment; (s) Accounts owing to Universal Technical Services; or (t) Accounts owing by consumers, if two or more payments with respect thereto remain unpaid for more than thirty (30) days or to the extent that the aggregate of those consumer Accounts exceed $10,000,000. Borrower agrees that Accounts as to which payments have been received by Borrower are no longer Eligible Accounts regardless of whether such payments have been applied to the Revolving Loan. Borrower agrees that the following Reserves constitute an appropriate exercise of Agent's credit judgment (i) a co-op advertising Reserve, (ii) a direct response Accounts Reserve, (iii) an unearned financing charge Reserve; and (iv) a credit memo accrual Reserve. 1.7. Eligible Inventory. All of the Inventory owned by Borrower and its domestic or Canadian Subsidiaries and reflected in the most recent Borrowing Base Certificate delivered by Borrower to Agent shall be "Eligible Inventory" for purposes of this Agreement, except any Inventory to which any of the exclusionary criteria set forth below applies. Agent shall have the right to establish, modify, or eliminate Reserves against Eligible Inventory from time to time in its reasonable credit judgment. In addition, Agent reserves the right, at any time and from time to time after the Closing Date, to adjust any of the criteria set forth below, to 18 establish new criteria and to adjust advance rates with respect to Eligible Inventory in its reasonable credit judgment, subject to the approval of Requisite Revolving Lenders in the case of adjustments or new criteria or changes in advance rates which have the effect of making more credit available. Eligible Inventory shall not include any Inventory of Borrower or its domestic or Canadian Subsidiaries that: (a) is not owned by Borrower or one of its domestic or Canadian Subsidiaries free and clear of all Liens and rights of any other Person (including the rights of a purchaser that has made progress payments and the rights of a surety that has issued a bond to assure Borrower's or one of its domestic or Canadian Subsidiary's performance with respect to that Inventory and the rights of unpaid suppliers (other than another Credit Party) under Section 81.1 of the Bankruptcy and Insolvency Act (Canada)), except the Liens in favor of Agent, on behalf of itself and Lenders, or, in favor of Agent and Lenders, as applicable, and Prior Claims (excluding the rights of unpaid suppliers (other than another Credit Party) under Section 81.1 of the Bankruptcy and Insolvency Act (Canada)), subject to Permitted Encumbrances described in clauses (a) and (e) of the definition thereof; (b) is (i) not located on premises owned, leased or rented by such Borrower and set forth in Disclosure Schedule 3.2 or is (ii) stored at a leased location or with a bailee, warehouseman or similar Person, unless Agent has given its prior consent thereto and unless (x) a satisfactory bailee letter or landlord waiver has been delivered to Agent, or (y) Reserves satisfactory to Agent have been established with respect thereto, or is (iii) located at any site if the aggregate book value of Inventory at any such location is less than $50,000 or a lesser minimum amount determined by Agent in its reasonable credit judgment; (c) is placed on consignment or (unless Agent is fully perfected in its sole and absolute discretion) is in transit; (d) is covered by a negotiable document of title, unless such document has been delivered to Agent with all necessary endorsements, free and clear of all Liens except those in favor of Agent and Lenders; (e) in Agent's reasonable determination, is discontinued Inventory, excess, obsolete, unsalable, shopworn, seconds, damaged or unfit for sale; (f) consists of display or other promotional items or packing or shipping materials, manufacturing supplies, work-in-process Inventory or replacement parts for Equipment; (g) consists of goods which have been returned by the buyer unless the same have been inspected by Borrower with satisfactory results and returned to finished goods; (h) is not of a type held for sale in the ordinary course of Borrower's business; (i) is not subject to a first priority Lien in favor of Agent on behalf of itself and Lenders or in favor of Agent and Lenders, as applicable, subject to Permitted Encumbrances in accordance with clauses (a) and (e) of the definition thereof; 19 (j) consists of any costs associated with "freight-in" charges; (k) consists of Hazardous Materials or goods that can be transported or sold only with licenses that are not readily available; (l) is not covered by casualty insurance acceptable to Agent; (m) does not meet all standards imposed by Governmental Authorities; (n) is subject to any agreement which restricts Agent's ability to sell or dispose of such Inventory; (o) bears a Reebok trademark unless Agent determines that such Inventory can be quickly and cost-effectively converted to "Pro Form" or other Borrower branded Inventory and sold by Agent without restrictions; or (p) is otherwise unacceptable to Agent in its reasonable credit judgment. Borrower agrees that a reserve against Borrowing Availability attributable to Eligible Inventory equal to sales taxes payable upon the sale of such Inventory and a Reserve in the amount of intercompany profit attributable to sales of Inventory among Borrower and its Subsidiaries are reasonable exercises of Agent's credit judgment. 1.8. Cash Management Systems. On or prior to the date that is ninety (90) days following the Closing Date, as to Borrower and its domestic subsidiaries, Borrower will establish and will maintain until the Termination Date, the cash management systems described in Annex C (the "Cash Management Systems"). Prior to the date that is ninety (90) days following the Closing Date, as to Borrower and its domestic subsidiaries, Borrower will maintain its existing cash management systems with Bank One, NA (formerly The First National Bank of Chicago). As to Borrower's Canadian Subsidiaries, on or prior to the Closing Date, Borrower will establish and will maintain until the Termination Date, the Cash Management Systems. 1.9. Fees. (a) Borrower shall pay to GE Capital and Fleet, individually, the Fees specified in that certain fee letter dated as of June 11, 1999 among Borrower, GE Capital and Fleet (the "Fee Letter"), at the times specified for payment therein. (b) As additional compensation for the Revolving Lenders, Borrower shall pay to Agent, for the ratable benefit of such Lenders, in arrears, on the first Business Day of each month prior to the Commitment Termination Date and on the Commitment Termination Date, a fee for Borrower's non-use of available funds in an amount equal to the Applicable Unused Line Fee Margin per annum (calculated on the basis of a 360 day year for actual days elapsed) multiplied by the "Average Unused Daily Balance," consisting of the difference between (x) the Maximum Amount and (y) the average for the period of the daily closing balances of the Revolving Loan and the Swing Line Loan outstanding during the period for which the such Fee is due. In addition, on the first Business Day of each calendar quarter prior to the Commitment Termination Date and on the Commitment Termination Date, Borrower shall pay to Agent for 20 the ratable benefit of the Revolving Lenders an additional fee equal to one-quarter percent (0.25%) per annum multiplied by the Average Unused Daily Balance for the immediately preceding calendar quarter if the Average Unused Daily Balance for such quarter exceeded Sixty Million Dollars ($60,000,000). (c) If Borrower prepays all or any portion of the Term Loans or the IP Loan or prepays the Revolving Loan and terminates the Revolving Loan Commitment, whether voluntarily or involuntarily and whether before or after acceleration of the Obligations, Borrower shall pay to Agent, for the benefit of Lenders as liquidated damages and compensation for the costs of being prepared to make funds available hereunder (i) an amount equal to the Revolving Loan Commitment (in case of a prepayment in full) and the principal amount being prepaid on Term Loan A multiplied by one percent (1%) upon a prepayment during the first eighteen (18) months following the Closing Date, (ii) an amount equal to the principal amount being prepaid on Term Loan B, Term Loan C and the IP Loan multiplied by two percent (2%) for a prepayment during the first twelve (12) months following the Closing Date and (iii) an amount equal to the principal amount being prepaid on Term Loan B, Term Loan C and the IP Loan multiplied by one percent (1%) for a prepayment during the second twelve months following the Closing Date. Notwithstanding the foregoing, no prepayment fee shall be payable by Borrower upon a mandatory prepayment made pursuant to Sections 1.3(b), 1.3(d) or 1.16(c); provided that in the case of prepayments made pursuant to Sections 1.3(b)(ii) or (b)(iii), the transaction giving rise to the applicable prepayment is expressly permitted under Section 6. (d) Borrower shall pay to Agent, for the ratable benefit of Revolving Lenders, the Letter of Credit Fee as provided in Annex B. 1.10. Receipt of Payments. Borrower shall make each payment under this Agreement not later than 1:00 p.m. (New York time) on the day when due in immediately available funds in Dollars to the Collection Account. For purposes of computing interest and Fees and determining Borrowing Availability or Net Borrowing Availability as of any date, all payments shall be deemed received on the Business Day of receipt of immediately available funds therefor in the Collection Account prior to 1:00 p.m. New York time. Payments received after 1:00 p.m. New York time on any Business Day shall be deemed to have been received on the following Business Day. If Agent receives any payment from or on behalf of any Credit Party in a currency other than the currency in which an Obligation payable is denominated, Agent may convert the payment (including the monetary proceeds of realization upon any Collateral and any funds then held in a cash collateral account) into the Equivalent Amount of the currency of the relevant Obligation as determined on the Business Day immediately preceding the date of actual payment. The Obligations shall be satisfied only to the extent of the amount actually received by Agent upon such conversion. 1.11. Application and Allocation of Payments. (a) So long as no Event of Default under Section 8.1(a) has occurred and is continuing, (i) payments consisting of proceeds of Accounts received in the ordinary course of business shall be applied, first, to the Swing Line Loan and, second, to the Revolving Loan; (ii) payments matching specific scheduled payments then due shall be applied to those scheduled 21 payments; (iii) voluntary prepayments shall be applied as determined by Borrower, subject to the provisions of Section 1.3(a) and 1.3(f); and (iv) mandatory prepayments shall be applied as set forth in Sections 1.3(c) and 1.3(d). All payments and prepayments applied to a particular Loan shall be applied ratably to the portion thereof held by each Lender as determined by its Pro Rata Share, except as provided in Section 1.3(c). As to all payments received at a time when an Event of Default under Section 8.1(a) has occurred and is continuing or following the Commitment Termination Date, Borrower hereby irrevocably waives the right to direct the application of any and all payments received from or on behalf of Borrower, and Borrower hereby irrevocably agrees that all such payments shall be applied against the Obligations as set forth below notwithstanding any previous entry by Agent in the Loan Account or any other books and records. In the absence of a specific determination to the contrary by all Lenders, such payments shall be applied to amounts then due and payable in the following order: (1) to Fees and Agents' expenses reimbursable hereunder; (2) to interest on the Swing Line Loan; (3) to principal payments on the Swing Line Loan; (4) to interest on the Revolving Loan, Term Loan A, Term Loan B and the IP Loan, ratably in proportion to the interest accrued as to each such Loan; (5) to principal payments on the Revolving Loan, Term Loan A, Term Loan B and the IP Loan and to provide cash collateral for Letter of Credit Obligations in the manner described in Annex B, ratably to the aggregate, combined principal balance of such Loans and outstanding Letter of Credit Obligations; (6) to all other Obligations (other than principal and interest on Term Loan C), including expenses of Lenders to the extent reimbursable under Section 11.3; (7) to interest on Term Loan C; and (8) to the principal of Term Loan C. Notwithstanding the preceding sentence, if such payments constitute proceeds of Collateral received following acceleration of the Obligations or the Commitment Termination Date, proceeds of Collateral (other than IP Collateral) shall be applied in the following order: (1) to Fees and Agents' expenses reimbursable hereunder; (2) to interest on the Swing Line Loan; (3) to principal payments on the Swing Line Loan; (4) to interest on the Revolving Loan, Term Loan A and Term Loan B, ratably in proportion to the interest accrued as to each such Loan; (5) to principal payments on the Revolving Loan, Term Loan A and Term Loan B and to provide cash collateral for Letter of Credit Obligations in the manner described in Annex B, ratably to the aggregate, combined principal balance of such Loans and outstanding Letter of Credit Obligations; (6) to interest on the IP Loan; (7) to principal of the IP Loan; (8) to all other Obligations (other than principal and interest on Term Loan C), including expenses of Lenders to the extent reimbursable under Section 11.3; (9) to interest on Term Loan C; and (10) to principal of Term Loan C. Further, notwithstanding the preceding two sentences, if such payments constitute proceeds of IP Collateral received following acceleration of the Obligations or the Commitment Termination Date, such proceeds of IP Collateral shall be applied in the following order: (1) to Agents' expenses reimbursable hereunder; (2) to interest on the IP Loan; (3) to principal of the IP Loan; (4) to interest on the Swing Line Loan; (5) to principal payments on the Swing Line Loan; (6) to Fees and to interest on the Revolving Loan, Term Loan A and Term Loan B, ratably in proportion to the interest accrued as to each such Loan; (7) to principal payments on the Revolving Loan, Term Loan A and Term Loan B and to provide cash collateral for Letter of Credit Obligations in the manner described in Annex B, ratably to the aggregate, combined principal balance of such Loans and outstanding Letter of Credit Obligations; (8) to all other Obligations (other than principal and interest on Term Loan C), including expenses of Lenders to 22 the extent reimbursable under Section 11.3; (9) to interest on Term Loan C; and (10) to principal of Term Loan C. (b) Subject to Section 8.3, Agent is authorized to, and may in its discretion, charge to the Revolving Loan balance on behalf of Borrower and cause to be paid all Fees, expenses, Charges, costs (including insurance premiums in accordance with Section 5.4(a)) and interest and principal, other than principal of the Revolving Loan, owing by Borrower under this Agreement or any of the other Loan Documents if and to the extent Borrower fails to pay promptly any such amounts as and when due, even if such charges would cause the aggregate balance of the Revolving Loan and the Swing Line Loan to exceed Borrowing Availability. At Agent's option and to the extent permitted by law, any charges so made shall constitute part of the Revolving Loan hereunder. 1.12. Loan Account and Accounting. Agent shall maintain a loan account (the "Loan Account") on its books to record: all Advances, the IP Loan and the Term Loans, all payments made by Borrower, and all other debits and credits as provided in this Agreement with respect to the Loans or any other Obligations. All entries in the Loan Account shall be made in accordance with Agent's customary accounting practices as in effect from time to time. The balance in the Loan Account, as recorded on Agent's most recent printout or other written statement, shall, absent manifest error, be presumptive evidence of the amounts due and owing to Agent and Lenders by Borrower; provided that any failure to so record or any error in so recording shall not limit or otherwise affect Borrower's duty to pay the Obligations. Agent shall render to Borrower a monthly accounting of transactions with respect to the Loans setting forth the balance of the Loan Account. Unless Borrower notifies Agent in writing of any objection to any such accounting (specifically describing the basis for such objection), within thirty (30) days after Borrower's receipt thereof, each and every such accounting shall, absent manifest error, be deemed final, binding and conclusive on Borrower in all respects as to all matters reflected therein. Only those items expressly objected to in such notice shall be deemed to be disputed by Borrower. Notwithstanding any provision herein contained to the contrary, any Lender may elect (which election may be revoked) to dispense with the issuance of Notes to that Lender and may rely on the Loan Account as evidence of the amount of Obligations from time to time owing to it. 1.13. Indemnity. (a) Each Credit Party that is a signatory hereto shall jointly and severally indemnify and hold harmless (except ICON of Canada which shall only severally indemnify and hold harmless to the extent permitted by the corporate statute under which it is incorporated) each of Agent, Lenders and their respective Affiliates, and each such Person's respective officers, directors, employees, attorneys, agents and representatives (each, an "Indemnified Person"), from and against any and all suits, actions, proceedings, claims, damages, losses, liabilities and expenses (including reasonable attorneys' fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) that may be instituted or asserted against or incurred by any such Indemnified Person as the result of credit having been extended, suspended or terminated under this Agreement and the other Loan Documents and the administration of such credit, and in connection with or arising out of the transactions contemplated hereunder and thereunder and any actions or failures to act in connection therewith, including any and all 23 Environmental Liabilities and legal costs and expenses arising out of or incurred in connection with disputes between or among any parties to any of the Loan Documents (collectively, "Indemnified Liabilities"); provided, that no such Credit Party shall be liable for any indemnification to an Indemnified Person to the extent that any such suit, action, proceeding, claim, damage, loss, liability or expense results from that Indemnified Person's gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY LOAN DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER ANY LOAN DOCUMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER. (b) To induce Lenders to provide the LIBOR Rate option on the terms provided herein, if (i) any LIBOR Loans are repaid in whole or in part prior to the last day of any applicable LIBOR Period (whether that repayment is made pursuant to any provision of this Agreement or any other Loan Document or occurs as a result of acceleration, by operation of law or otherwise); (ii) Borrower shall default in making any borrowing of, conversion into or continuation of LIBOR Loans after Borrower has given notice requesting the same in accordance herewith; or (iii) Borrower shall fail to make any prepayment of a LIBOR Loan after Borrower has given a notice thereof in accordance herewith, then Borrower shall indemnify and hold harmless each Lender from and against all losses, costs and expenses resulting from or arising from any of the foregoing. Such indemnification shall include any loss (including loss of margin) or expense arising from the reemployment of funds obtained by it or from fees payable to terminate deposits from which such funds were obtained. For the purpose of calculating amounts payable to a Lender under this subsection, each Lender shall be deemed to have actually funded its relevant LIBOR Loan through the purchase of a deposit bearing interest at the LIBOR Rate in an amount equal to the amount of that LIBOR Loan and having a maturity comparable to the relevant LIBOR Period; provided, that each Lender may fund each of its LIBOR Loans in any manner it sees fit, and the foregoing assumption shall be utilized only for the calculation of amounts payable under this subsection. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. As promptly as practicable under the circumstances, each Lender shall provide Borrower with its written calculation of all amounts payable pursuant to this Section 1.13(b), and such calculation shall be binding on the parties hereto unless Borrower shall object in writing within ten (10) Business Days of receipt thereof, specifying the basis for such objection in detail. 1.14. Access. Each Credit Party that is a party hereto shall, during normal business hours, from time to time upon three (3) Business Days' prior notice as frequently as either Agent reasonably determines to be appropriate: (a) provide Agents and any of their officers, employees and agents access to its properties, facilities, advisors and employees (including officers) of each Credit Party and to the Collateral, (b) permit Agents, and any of their officers, employees and agents, to inspect, audit and make extracts from any Credit Party's books and records, and (c) permit Agents, and their officers, employees and agents, to inspect, review, evaluate and make test verifications and counts of the Accounts, Inventory and other Collateral 24 of any Credit Party. If a Default or Event of Default has occurred and is continuing or if access is necessary to preserve or protect the Collateral as determined by either Agent, each such Credit Party shall provide such access to each Agent and to each Lender at all times and without advance notice. Furthermore, so long as any Event of Default has occurred and is continuing, each Credit Party shall provide each Agent and each Lender with access to its suppliers and customers. Each Credit Party shall make available to each Agent and its counsel, as promptly as is possible under the circumstances, originals or copies of all books and records that Agent may request. Each Credit Party shall deliver any document or instrument necessary for each Agent, as it may from time to time request, to obtain records from any service bureau or other Person that maintains records for such Credit Party, and shall maintain duplicate records or supporting documentation on media, including computer tapes and discs owned by such Credit Party. Agents will give Lenders at least ten (10) days' prior written notice of regularly scheduled audits. Representatives of other Lenders may accompany Agents' representatives on regularly scheduled audits at no charge to Borrower. Without limiting the generality of the foregoing, Agents will conduct field audits of Borrower and its domestic and Canadian Subsidiaries within 180 days following the Closing Date and within one year following the Closing Date. 1.15. Taxes. (a) Any and all payments by Borrower hereunder or under the Notes shall be made, in accordance with this Section 1.15, free and clear of and without deduction for any and all present or future Taxes. If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under the Notes, (i) the sum payable shall be increased as much as shall be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 1.15) Agent or Lenders, as applicable, receive an amount equal to the sum they would have received had no such deductions been made, (ii) Borrower shall make such deductions, and (iii) Borrower shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. Within thirty (30) days after the date of any payment of Taxes, Borrower shall furnish to Agent the original or a certified copy of a receipt evidencing payment thereof; provided that should any Lender actually receive a tax credit or refund in the future with respect to (and as a result of) any Taxes paid by Borrower as required by this Section 1.15, and Lender reasonably determines that such credit or refund relates to Borrower, then such Lender shall return the amount of such credit or refund (net of any taxes thereon) to Borrower. (b) Each Credit Party that is a signatory hereto shall indemnify and, within ten (10) days of demand therefor, pay Agent and each Lender for the full amount of Taxes (including any Taxes imposed by any jurisdiction on amounts payable under this Section 1.15) paid by Agent or such Lender, as appropriate, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted; provided that should any Lender actually receive a tax credit or refund in the future with respect to (and as a result of) any Taxes paid by Borrower as required by this Section 1.15, and Lender reasonably determines that such credit or refund relates to Borrower, then such Lender shall return the amount of such credit or refund (net of any taxes thereon) to Borrower. 25 (c) Each Lender organized under the laws of a jurisdiction outside the United States (a "Foreign Lender") as to which payments to be made under this Agreement or under the Notes are exempt from United States withholding tax under an applicable statute or tax treaty shall provide to Borrower and Agent a properly completed and executed IRS Form W-8ECI or Form W-8BEN or other applicable form, certificate or document prescribed by the IRS or the United States certifying as to such Foreign Lender's entitlement to such exemption (a "Certificate of Exemption"). Any foreign Person that seeks to become a Lender under this Agreement shall provide a Certificate of Exemption to Borrower and Agent prior to becoming a Lender hereunder. No foreign Person may become a Lender hereunder if such Person fails to deliver a Certificate of Exemption. 1.16. Capital Adequacy; Increased Costs; Illegality. (a) If any Lender shall have determined that any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by any Lender with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law), in each case, adopted after the Closing Date, from any central bank or other Governmental Authority increases or would have the effect of increasing the amount of capital, reserves or other funds required to be maintained by such Lender and thereby reducing the rate of return on such Lender's capital as a consequence of its obligations hereunder, then Borrower shall from time to time upon demand by such Lender (with a copy of such demand to Agent) pay to Agent, for the account of such Lender, additional amounts sufficient to compensate such Lender for such reduction; provided, however, that Borrower shall have no obligation to make any such payment if such Lender fails to demand payment thereof within 180 days after such Lender becomes aware of an event giving rise to such a payment. A certificate as to the amount of that reduction and showing the basis of the computation thereof submitted by such Lender to Borrower and to Agent shall, absent manifest error, be final, conclusive and binding for all purposes. (b) If, due to either (i) the introduction of or any change in any law or regulation (or any change in the interpretation thereof) or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), in each case adopted after the Closing Date, there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining any Loan, then Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to Agent), pay to Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost; provided, however, that Borrower shall have no obligation to make any such payment if such Lender fails to demand payment thereof within 180 days after such Lender becomes aware of an event giving rise to such payment. A certificate as to the amount of such increased cost, submitted to Borrower and to Agent by such Lender, shall be conclusive and binding on Borrower for all purposes, absent manifest error. Each Lender agrees that, as promptly as practicable after it becomes aware of any circumstances referred to above which would result in any such increased cost, the affected Lender shall, to the extent not inconsistent with such Lender's internal policies of general application, use reasonable 26 commercial efforts to minimize costs and expenses incurred by it and payable to it by Borrower pursuant to this Section 1.16(b). (c) Notwithstanding anything to the contrary contained herein, if the introduction of or any change in any law or regulation (or any change in the interpretation thereof) shall make it unlawful, or any central bank or other Governmental Authority shall assert that it is unlawful, for any Lender to agree to make or to make or to continue to fund or maintain any LIBOR Loan, then, unless that Lender is able to make or to continue to fund or to maintain such LIBOR Loan at another branch or office of that Lender without, in that Lender's opinion, adversely affecting it or its Loans or the income obtained therefrom, on notice thereof and demand therefor by such Lender to Borrower through Agent, (i) the obligation of such Lender to agree to make or to make or to continue to fund or maintain LIBOR Loans shall terminate and (ii) Borrower shall forthwith prepay in full all outstanding LIBOR Loans owing to such Lender, together with interest accrued thereon, unless Borrower, within five (5) Business Days after the delivery of such notice and demand, converts all LIBOR Loans into Index Rate Loans. (d) Replacement of Lender in Respect of Increased Costs. Within fifteen (15) days after receipt by Borrower of written notice and demand from any Lender (an "Affected Lender") for payment of additional amounts or increased costs as provided in Sections 1.15(a), 1.16(a) or 1.16(b), Borrower may, at its option, notify Agent and such Affected Lender of its intention to replace the Affected Lender. So long as no Default or Event of Default has occurred and is continuing, Borrower, with the consent of Agent, may obtain, at Borrower's expense, a replacement Lender ("Replacement Lender") for the Affected Lender, which Replacement Lender must be satisfactory to Agent. If Borrower obtains a Replacement Lender within ninety (90) days following notice of its intention to do so, the Affected Lender must sell and assign its Loans and Commitments to such Replacement Lender for an amount equal to the principal balance of all Loans held by the Affected Lender and all accrued interest and Fees with respect thereto through the date of such sale, provided that Borrower shall have reimbursed such Affected Lender for the additional amounts or increased costs that it is entitled to receive under this Agreement through the date of such sale and assignment. Notwithstanding the foregoing, Borrower shall not have the right to obtain a Replacement Lender if the Affected Lender rescinds its demand for increased costs or additional amounts within fifteen (15) days following its receipt of Borrower's notice of intention to replace such Affected Lender. Furthermore, if Borrower gives a notice of intention to replace and does not so replace such Affected Lender within ninety (90) days thereafter, Borrower's rights under this Section 1.16(d) shall terminate and Borrower shall promptly pay all increased costs or additional amounts demanded by such Affected Lender pursuant to Sections 1.15(a), 1.16(a) and 1.16(b). 1.17. Single Loan. Subject to Sections 1.11 and 8.3 hereof, all Loans to Borrower and all of the other Obligations of Borrower arising under this Agreement and the other Loan Documents shall constitute one general obligation of Borrower secured, until the Termination Date, by all of the Collateral. 27 2. CONDITIONS PRECEDENT 2.1. Conditions to the Initial Loans. No Lender shall be obligated to make any Loan or incur any Letter of Credit Obligations on the Closing Date, or to take, fulfill, or perform any other action hereunder, until the following conditions have been satisfied or provided for in a manner satisfactory to Agent, or waived in writing by Agents and Requisite Lenders: (a) Credit Agreement; Loan Documents. This Agreement or counterparts hereof shall have been duly executed by, and delivered to, Borrower, each other Credit Party, Agents and Lenders; and Agent shall have received such documents, instruments, agreements and legal opinions as Agent shall reasonably request in connection with the transactions contemplated by this Agreement and the other Loan Documents, including all those listed in the Closing Checklist attached hereto as Annex D, each in form and substance satisfactory to Agent. (b) Repayment of Prior Lenders' Obligations; Satisfaction of Outstanding L/Cs. (i) Agents shall have received a fully executed original of a pay-off letter satisfactory to Agent confirming that all of the Prior Lenders' Obligations will be repaid in full from the proceeds of the Term Loans, the IP Loan and the initial Revolving Credit Advance and all Liens upon any of the property of Borrower or any of its Subsidiaries in favor of Prior Lenders shall be terminated by Prior Lenders immediately upon such payment; and (ii) all letters of credit issued or guaranteed by Prior Lenders shall have been cash collateralized, supported by a guaranty of Agent or supported by a Letter of Credit issued pursuant to Annex B, as mutually agreed upon by Agent, Borrower and Prior Lenders. (c) Approvals. Agents shall have received (i) satisfactory evidence that the Credit Parties have obtained all required consents and approvals of all Persons including all requisite Governmental Authorities, to the execution, delivery and performance of this Agreement and the other Loan Documents and the consummation of the Related Transactions or (ii) an officer's certificate in form and substance satisfactory to Agent affirming that no such consents or approvals are required. (d) Opening Availability/Indebtedness. The Borrowing Base supporting the initial Revolving Credit Advance and the initial Letter of Credit Obligations incurred and the amount of the Reserves to be established on the Closing Date shall be sufficient in value, as determined by Agent, to provide Borrower with Net Borrowing Availability, after giving effect to the initial Revolving Credit Advance, the incurrence of any initial Letter of Credit Obligations and the consummation of the Related Transactions (on a pro forma basis, with trade payables, expenses and liabilities being paid in the ordinary course of business and without acceleration of sales) of at least Twenty-Five Million Dollars ($25,000,000). Total Indebtedness of the Borrower on a consolidated basis on the Closing Date, after giving effect to the Related Transactions, shall not exceed Two Hundred Seventy Million Dollars ($270,000,000). (e) Payment of Fees. Borrower shall have paid the Fees required to be paid on the Closing Date in the respective amounts specified in Section 1.9 (including the Fees specified 28 in the Fee Letter), and shall have reimbursed Agents for all fees, costs and expenses of closing presented as of the Closing Date. (f) Capital Structure; Other Indebtedness. The capital structure of each Credit Party and the tax consequences of the Recapitalization shall be acceptable to Agents in their sole discretion. New Holdings will not have any Indebtedness or Guaranteed Indebtedness after giving effect to the Recapitalization and the other Related Transactions, except that New Holdings shall have entered into the New Holdings Guaranty and the CS First Boston Debt. (g) Consummation of Related Transactions. Agents shall have received fully executed copies of the Recapitalization Documents and each of the other Related Transactions Documents, each of which shall be in form and substance satisfactory to Agents and their counsel. The Recapitalization and the other Related Transactions shall have been consummated in accordance with the terms of the Recapitalization Documents and the other Related Transactions Documents. Borrower shall not have waived or amended any provision of any Recapitalization Document delivered to Agents without the consent of Agents and Requisite Lenders. (h) Rating Agency. Term Loan A and Term Loan B shall have been rated by Moody's Investor Services, Inc.; such rating shall be satisfactory to Agents and shall be in full force and effect as of the Closing Date. (i) Fees Closing Costs. The aggregate fees and closing costs (excluding compensation to management) incurred in connection with the Loans advanced hereunder and the Recapitalization shall not have exceeded $17,500,000. (j) Tenders. All of the 15% Senior Second Discount Notes due 2004 of Holdings, at least 95% of the 14% Senior Discount Notes due 2006 of Intermediate Holdings and at least 98.5% in principal amount of the 13% Senior Subordinated Notes due 2002 of Borrower shall have consented to the Exchange Offer and exchanged their respective notes as provided therein. (k) No Filing. No petition shall have been filed by or proceeding commenced against any of the Old Holdcos or Borrower under the Bankruptcy Code. 2.2. Further Conditions to Each Loan. Except as otherwise expressly provided herein, no Lender shall be obligated to fund any Advance, convert or continue any Loan as a LIBOR Loan or incur any Letter of Credit Obligation, if, as of the date thereof: (a) any representation or warranty by any Credit Party contained herein or in any of the other Loan Document is untrue or incorrect as of such date, except to the extent that such representation or warranty expressly relates to an earlier date and except for changes therein expressly permitted or expressly contemplated by this Agreement, and Agent or Requisite Revolving Lenders have determined not to make such Advance, convert or continue any Loan as LIBOR Loan or incur such Letter of Credit Obligation as a result of the fact that such warranty or representation is untrue or incorrect; 29 (b) any event or circumstance having a Material Adverse Effect has occurred since the date hereof as determined by the Requisite Revolving Lenders, and Agent or Requisite Revolving Lenders have determined not to make such Advance, convert or continue any Loan as a LIBOR Loan or incur such Letter of Credit Obligation as a result of the fact that such event or circumstance has occurred; (c) any Default or Event of Default has occurred and is continuing or would result after giving effect to any Advance or the incurrence of any Letter of Credit Obligation, and Agent or Requisite Revolving Lenders shall have determined not to make any Advance, convert or continue any Loan as a LIBOR Loan or incur any Letter of Credit Obligation as a result of that Default or Event of Default; or (d) after giving effect to any Advance (or the incurrence of any Letter of Credit Obligations), the outstanding principal amount of the Revolving Loan would exceed the lesser of the Borrowing Base and the Maximum Amount, in each case, less the then outstanding principal amount of the Swing Line Loan. The request and acceptance by Borrower of the proceeds of any Loan, the incurrence of any Letter of Credit Obligations or the conversion or continuation of any Loan into, or as, a LIBOR Loan, as the case may be, shall be deemed to constitute, as of the date of such request, acceptance or incurrence, (i) a representation and warranty by Borrower that the conditions in this Section 2.2 have been satisfied and (ii) a reaffirmation by Borrower of the granting and continuance of Agent's Liens, on behalf of itself and Lenders, pursuant to the Collateral Documents. 3. REPRESENTATIONS AND WARRANTIES To induce Lenders to make the Loans and to incur Letter of Credit Obligations, the Credit Parties executing this Agreement, jointly and severally, make the following representations and warranties to Agents and each Lender, effective as of the Closing Date, with respect to all Credit Parties, each and all of which shall survive the execution and delivery of this Agreement: 3.1. Corporate Existence; Compliance with Law. Each Credit Party (a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; (b) is duly qualified to conduct business and is in good standing in each other jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except where effects of the failure to be so qualified would be immaterial; (c) has the requisite corporate power and authority and the legal right to own, pledge, mortgage or otherwise encumber and operate its properties, to lease the property it operates under lease and to conduct its business as now, heretofore and proposed to be conducted; (d) subject to specific representations regarding Environmental Laws, has all material licenses, permits, consents or approvals from or by, and has made all filings with, and has given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct; (e) is in compliance with its charter and bylaws; and (f) subject to specific representations set forth herein regarding ERISA, Environmental Laws, tax and other laws, is in compliance with all applicable provisions of law, except where the failure to comply, 30 individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 3.2. Executive Offices, Collateral Locations, FEIN. As of the Closing Date, the current location of each Credit Party's chief executive office, domicile (within the meaning of the Quebec Civil Code) and the warehouses and premises at which any Collateral is located are set forth in Disclosure Schedule (3.2). In addition, Disclosure Schedule (3.2) lists the federal employer identification number of each Credit Party. 3.3. Corporate Power, Authorization, Enforceable Obligations. The execution, delivery and performance by each Credit Party of the Loan Documents to which it is a party and the creation of all Liens provided for therein: (a) are within such Person's corporate power; (b) have been duly authorized by all necessary or proper corporate and shareholder action; (c) do not contravene any provision of such Person's charter or bylaws; (d) do not violate any law or regulation, or any order or decree of any court or Governmental Authority; (e) do not conflict with or result in the breach or termination of, constitute a default under or accelerate or permit the acceleration of any performance required by, any indenture, mortgage or deed of trust, or material lease, agreement or other instrument to which such Person is a party or by which such Person or any of its property is bound; (f) do not result in the creation or imposition of any Lien upon any of the property of such Person other than those in favor of Agent, on behalf of itself and Lenders, pursuant to the Loan Documents; and (g) do not require the consent or approval of any Governmental Authority or any other Person, except those referred to in Section 2.1(c), all of which will have been duly obtained, made or complied with prior to the Closing Date. On or prior to the Closing Date, each of the Loan Documents shall have been duly executed and delivered by each Credit Party that is a party thereto and each such Loan Document shall then constitute a legal, valid and binding obligation of such Credit Party enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights and remedies of creditors generally. 3.4. Financial Statements and Projections. Except for the Projections, all Financial Statements concerning Borrower and its Subsidiaries that are referred to below have been prepared in accordance with GAAP consistently applied throughout the periods covered (except as disclosed therein and except, with respect to unaudited Financial Statements, for the absence of footnotes and normal year-end audit adjustments) and present fairly in all material respects the financial position of the Persons covered thereby as at the dates thereof and the results of their operations and cash flows for the periods then ended. (a) The following Financial Statements attached hereto as Disclosure Schedule (3.4(a)) will have been delivered as of the Closing Date: (i) The audited consolidated and consolidating balance sheets at May 31, 1999 and the related statements of income and cash flows of Borrower and its Subsidiaries for the Fiscal Year then ended, certified by PriceWaterhouseCoopers, LLP. 31 (ii) The unaudited balance sheet(s) and the related statement(s) of income and cash flows of Borrower and its Subsidiaries for all interim monthly periods ending at least thirty (30) days prior to the Closing Date. (iii) an analysis by PriceWaterhouseCoopers confirming that Borrower had EBITDA of at least $55,000,000 for Fiscal Year 1999 (excluding losses associated with Accounts due from Service Merchandise, Inc.). (b) Pro Forma. The Pro Forma attached hereto as Disclosure Schedule (3.4(b)) was prepared by Borrower giving pro forma effect to the Related Transactions, was based on the unaudited consolidated and consolidating balance sheets of Borrower and its Subsidiaries dated May 31, 1999, and was prepared in accordance with GAAP, with only such adjustments thereto as would be required in accordance with GAAP. (c) Projections. The Projections attached hereto as Disclosure Schedule (3.4(c)) have been prepared by Borrower in light of the past operations of its businesses, and reflect projections for the five year period beginning on June 1, 1999 on a month-by-month basis for the first year and on a year-by-year basis thereafter. The Projections are based upon estimates and assumptions stated therein, all of which Borrower believes to be reasonable and fair in light of current conditions and current facts known to Borrower and, as of the Closing Date, reflect Borrower's good faith and reasonable estimates of the future financial performance of Borrower and of the other information projected therein for the period set forth therein (it being understood that such Projections are not warranties of future performance). 3.5. Material Adverse Effect. Between February 28, 1999 and the Closing Date, excluding the effect of the write-off of Accounts owing by Service Merchandise, Inc. and excluding defaults under credit arrangements refinanced pursuant to the Related Transactions, (a) no Credit Party has incurred any obligations, contingent or noncontingent liabilities, liabilities for Charges, long-term leases or unusual forward or long-term commitments that are not reflected in the Pro Forma and that, alone or in the aggregate, could reasonably be expected to have a Material Adverse Effect, (b) no contract, lease or other agreement or instrument has been entered into by any Credit Party or has become binding upon any Credit Party's assets and no law or regulation applicable to any Credit Party has been adopted that has had or could reasonably be expected to have a Material Adverse Effect, and (c) no Credit Party is in default and to the best of Borrower's knowledge no third party is in default under any material contract, lease or other agreement or instrument, that alone or in the aggregate could reasonably be expected to have a Material Adverse Effect. Excluding the effect of the write-off of Accounts owing by Service Merchandise, Inc., between February 28, 1999 and the Closing Date no event has occurred, that alone or together with other events, could reasonably be expected to have a Material Adverse Effect. 3.6. Ownership of Property; Liens. As of the Closing Date, the real estate ("Real Estate") listed in Disclosure Schedule (3.6) constitutes all of the real property owned, leased, subleased, or used by any Credit Party. Each Credit Party owns good and marketable fee simple title to all of its owned Real Estate, and valid and marketable leasehold interests in all of its leased Real Estate, all as described on Disclosure Schedule (3.6), and copies 32 of all such leases or a summary of terms thereof satisfactory to Agent have been delivered to Agent. Disclosure Schedule (3.6) further describes any Real Estate with respect to which any Credit Party is a lessor, sublessor or assignor as of the Closing Date. Each Credit Party also has good and marketable title to, or valid leasehold interests in, all of its personal property and assets. As of the Closing Date, none of the properties and assets of any Credit Party are subject to any Liens other than Permitted Encumbrances, and there are no facts, circumstances or conditions known to any Credit Party that may result in any Liens (including Liens arising under Environmental Laws) other than Permitted Encumbrances. Each Credit Party has received all deeds, assignments, waivers, consents, nondisturbance and attornment or similar agreements, bills of sale and other documents, and has duly effected all recordings, filings and other actions necessary to establish, protect and perfect such Credit Party's right, title and interest in and to all such Real Estate and other properties and assets. Disclosure Schedule (3.6) also describes as of the Closing Date any purchase options, rights of first refusal or other similar contractual rights pertaining to any Real Estate. As of the Closing Date, no portion of any Credit Party's Real Estate has suffered any material damage by fire or other casualty loss that has not heretofore been repaired and restored in all material respects to its original condition or otherwise remedied. As of the Closing Date, all material permits required to have been issued or appropriate to enable the Real Estate to be lawfully occupied and used for all of the purposes for which it is currently occupied and used have been lawfully issued and are in full force and effect. 3.7. Labor Matters. As of the Closing Date (a) no strikes or other material labor disputes against any Credit Party are pending or, to any Credit Party's knowledge, threatened; (b) hours worked by and payment made to employees of each Credit Party comply with the Fair Labor Standards Act and each other federal, state, local or foreign law applicable to such matters; (c) all payments due from any Credit Party for employee health and welfare insurance have been paid or accrued as a liability on the books of such Credit Party; (d) except as set forth in Disclosure Schedule (3.7), no Credit Party is a party to or bound by any collective bargaining agreement, management agreement, consulting agreement, employment agreement, bonus, stock option, or stock appreciation plan or agreement (and true and complete copies of any agreements described on Disclosure Schedule (3.7) have been delivered to Agent); (e) there is no organizing activity involving any Credit Party pending or, to any Credit Party's knowledge, threatened by any labor union or group of employees; (f) there are no representation proceedings pending or, to any Credit Party's knowledge, threatened with the National Labor Relations Board or any other labor relations board, and no labor organization or group of employees of any Credit Party has made a pending demand for recognition; and (g) except as set forth in Disclosure Schedule (3.7), there are no complaints or charges against any Credit Party pending or, to the knowledge of any Credit Party, threatened to be filed with any Governmental Authority or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment by any Credit Party of any individual. 3.8. Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness. Except as set forth in Disclosure Schedule (3.8), no Credit Party has any Subsidiaries, is engaged in any joint venture or partnership with any other Person, or is an Affiliate of any other Person. All of the issued and outstanding Stock of each Credit Party is owned by each of the Stockholders and in the amounts set forth in Disclosure Schedule (3.8). There are no outstanding rights to purchase, options, warrants or similar rights or agreements 33 pursuant to which any Credit Party may be required to repurchase or redeem any of its Stock or other equity securities or any Stock or other equity securities of its Subsidiaries. No Subsidiary of New Holdings is subject to any agreement or arrangement obligating it to issue or sell any of its Stock. All outstanding Indebtedness of each Credit Party as of the Closing Date is described in Section 6.3 (including Disclosure Schedule (6.3)). New Holdings has no assets (except Stock of Borrower) and no Indebtedness or Guaranteed Indebtedness (except the Obligations and the CS First Boston Debt). 3.9. Government Regulation. No Credit Party is an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940. No Credit Party is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, or any other domestic or foreign federal, state or provincial statute that restricts or limits its ability to incur Indebtedness or to perform its obligations hereunder. The making of the Loans by Lenders to Borrower, the incurrence of the Letter of Credit Obligations on behalf of Borrower, the application of the proceeds thereof and repayment thereof and the consummation of the Related Transactions will not violate any provision of any such statute or any rule, regulation or order issued by the Securities and Exchange Commission. 3.10. Margin Regulations. No Credit Party is engaged, nor will it engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" as such terms are defined in Regulation U of the Federal Reserve Board as now and from time to time hereafter in effect (such securities being referred to herein as "Margin Stock"). No Credit Party owns any Margin Stock, and none of the proceeds of the Loans or other extensions of credit under this Agreement will be used, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock, for the purpose of reducing or retiring any Indebtedness that was originally incurred to purchase or carry any Margin Stock or for any other purpose that might cause any of the Loans or other extensions of credit under this Agreement to be considered a "purpose credit" within the meaning of Regulations T, U or X of the Federal Reserve Board. No Credit Party will take or permit to be taken any action that might cause any Loan Document to violate any regulation of the Federal Reserve Board. 3.11. Taxes. All tax returns, reports and statements, including information returns, required by any Governmental Authority to be filed by any Credit Party have been filed with the appropriate Governmental Authority and all Charges have been paid prior to the date on which any fine or penalty may be added thereto for nonpayment thereof (or any such fine, penalty, interest, late charge or loss has been paid), excluding Charges or other amounts being contested in accordance with Section 5.2(b). Proper and accurate amounts have been withheld by each Credit Party from its respective employees for all periods in full and complete compliance with all applicable federal, state, local and foreign laws and such withholdings have been timely paid to the respective Governmental Authorities. Disclosure Schedule (3.11) sets forth as of the Closing Date those taxable years for which any Credit Party's tax returns are currently being audited by the IRS or any other applicable Governmental Authority and any assessments or threatened assessments in connection with such audit, or otherwise currently outstanding. Except as described in Disclosure Schedule (3.11), no Credit Party has executed or 34 filed with the IRS or any other Governmental Authority any agreement or other document extending, or having the effect of extending, the period for assessment or collection of any Charges. None of the Credit Parties and their respective predecessors are liable for any Charges: (a) under any agreement (including any tax sharing agreements) or (b) to each Credit Party's knowledge, as a transferee. As of the Closing Date, no Credit Party has agreed or been requested to make any adjustment under IRC Section 481(a), by reason of a change in accounting method or otherwise, which would have a Material Adverse Effect. 3.12. ERISA and Canadian Pension and Benefit Plans. (a) Disclosure Schedule (3.12) lists as of the Closing Date all Plans and separately identifies all Pension Plans, including Title IV Plans, Multiemployer Plans, ESOPs and Welfare Plans, including all Retiree Welfare Plans. Copies of all such listed Plans, together with a copy of the latest form 5500 for each such Plan, have been delivered to Agent. Except with respect to Multiemployer Plans, each Qualified Plan has been determined by the IRS to qualify under Section 401 of the IRC, and the trusts created thereunder have been determined to be exempt from tax under the provisions of Section 501 of the IRC, and nothing has occurred that would cause the loss of such qualification or tax-exempt status. Each Plan is in compliance in all material respects with the applicable provisions of ERISA and the IRC, including the timely filing of IRS/DOL 5500-series form reports required under the IRC or ERISA. No Credit Party or ERISA Affiliate has failed to make any contribution or pay any amount due as required by either Section 412 of the IRC or Section 302 of ERISA or the terms of any such Plan. No Credit Party or ERISA Affiliate has engaged in a "prohibited transaction," as defined in Section 4975 of the IRC, in connection with any Plan, that would subject any Credit Party to a material tax on prohibited transactions imposed by Section 4975 of the IRC. (b) Except as set forth in Disclosure Schedule (3.12): (i) no Title IV Plan has any Unfunded Pension Liability; (ii) no ERISA Event or event described in Section 4062(e) of ERISA with respect to any Title IV Plan has occurred or is reasonably expected to occur; (iii) there are no pending, or to the knowledge of any Credit Party, threatened claims (other than claims for benefits in the normal course), sanctions, actions or lawsuits, asserted or instituted against any Plan or any Person as fiduciary or sponsor of any Plan; (iv) no Credit Party or ERISA Affiliate has incurred or reasonably expects to incur any liability as a result of a complete or partial withdrawal from a Multiemployer Plan; (v) within the last five years no Title IV Plan of any Credit Party or ERISA Affiliate has been terminated nor has any such Plan with Unfunded Pension Liabilities been transferred outside of the "controlled group" (within the meaning of Section 4001(a)(14) of ERISA) of any Credit Party or ERISA Affiliate; (vi) except in the case of any ESOP, Stock of all Credit Parties and their ERISA Affiliates makes up, in the aggregate, no more than 10% of fair market value of the assets of any Plan; and (vii) no liability under any Title IV Plan has been satisfied with the purchase of a contract from an insurance company that is not rated AAA by the Standard & Poor's Corporation or the equivalent by another nationally recognized rating agency. (c) Disclosure Schedule (3.12) lists all Canadian Benefit Plans (other than, for greater certainty, universal plans created by and to which any Credit Party is obligated to contribute by statute) and Canadian Pension Plans adopted by each Credit Party. The Canadian 35 Pension Plans are duly registered under the ITA and all other applicable laws which require registration and no event has occurred which is reasonably likely to cause the loss of such registered status. All material obligations of each Credit Party (including fiduciary, funding, investment and administration obligations) required to be performed in connection with the Canadian Pension Plans and the funding agreements therefor have been performed in a timely fashion. There have been no improper withdrawals or applications of the assets of the Canadian Pension Plans or the Canadian Benefit Plans. There are no outstanding disputes concerning the assets of the Canadian Pension Plans or the Canadian Benefit Plans. Each of the Canadian Pension Plans is fully funded on a solvency basis (using actuarial methods and assumptions which are consistent with the valuations last filed with the applicable Governmental Authorities and which are consistent with generally accepted actuarial principles). 3.13. No Litigation. No action, claim, lawsuit, demand, investigation or proceeding is now pending or, to the knowledge of any Credit Party, threatened against any Credit Party, before any Governmental Authority or before any arbitrator or panel of arbitrators (collectively, "Litigation"), (a) that challenges any Credit Party's right or power to enter into or perform any of its obligations under the Loan Documents to which it is a party, or the validity or enforceability of any Loan Document or any action taken thereunder, or (b) that has a reasonable risk of being determined adversely to any Credit Party and that, if so determined, could have a Material Adverse Effect. Except as set forth on Disclosure Schedule (3.13), as of the Closing Date there is no Litigation pending or threatened that seeks damages in excess of $100,000 or injunctive relief against, or alleges criminal misconduct of any Credit Party. 3.14. Brokers. No broker or finder acting on behalf of any Credit Party or Affiliate thereof brought about the obtaining, making or closing of the Loans or the Related Transactions, and no Credit Party or Affiliate thereof has any obligation to any Person in respect of any finder's or brokerage fees in connection therewith. 3.15. Intellectual Property. As of the Closing Date, each Credit Party owns or has rights to use all Intellectual Property necessary to continue to conduct its business as now or heretofore conducted by it or proposed to be conducted by it, and each Patent, Design, Trademark, Copyright and License is listed, together with application or registration numbers, as applicable, in Disclosure Schedule (3.15). To the best of its knowledge, each Credit Party conducts its business and affairs without infringement of or interference with any Intellectual Property of any other Person. Except as set forth in Disclosure Schedule (3.15), no Credit Party is aware of any infringement claim by any other Person with respect to any Intellectual Property. 3.16. Full Disclosure. None of the information contained in this Agreement, any of the other Loan Documents, any Projections, Financial Statements or Collateral Reports or other reports from time to time delivered hereunder or any written statement furnished by or on behalf of any Credit Party to Agent or any Lender pursuant to the terms of this Agreement, when taken as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. The Liens granted to Agent, on behalf of itself and Lenders, pursuant to the Collateral Documents will at all times be fully perfected first priority Liens in and to the Collateral 36 described therein, subject, as to priority, only to Permitted Encumbrances with respect to the Collateral other than Accounts. 3.17. Environmental Matters. (a) Except as set forth in Disclosure Schedule (3.17), as of the Closing Date: (i) the Real Estate is free of contamination from any Hazardous Material except for such contamination that would not adversely impact the value or marketability of such Real Estate and that would not result in Environmental Liabilities that could reasonably be expected to exceed $50,000; (ii) no Credit Party has caused or suffered to occur any Release of Hazardous Materials on, at, in, under, above, to, from or about any of its Real Estate; (iii) the Credit Parties are and have been in compliance with all Environmental Laws, except for such noncompliance that would not result in Environmental Liabilities which could reasonably be expected to exceed $50,000; (iv) the Credit Parties have obtained, and are in compliance with, all Environmental Permits required by Environmental Laws for the operations of their respective businesses as presently conducted or as proposed to be conducted, except where the failure to so obtain or comply with such Environmental Permits would not result in Environmental Liabilities that could reasonably be expected to exceed $50,000, and all such Environmental Permits are valid, uncontested and in good standing; (v) no Credit Party is involved in operations or knows of any facts, circumstances or conditions, including any Releases of Hazardous Materials, that are likely to result in any Environmental Liabilities of such Credit Party which could reasonably be expected to exceed $50,000, and no Credit Party has permitted any current or former tenant or occupant of the Real Estate to engage in any such operations; (vi) there is no Litigation arising under or related to any Environmental Laws, Environmental Permits or Hazardous Material that seeks damages, penalties, fines, costs or expenses in excess of $50,000 or injunctive relief, or that alleges criminal misconduct by any Credit Party; (vii) no notice has been received by any Credit Party identifying it as a "potentially responsible party" or requesting information under CERCLA or analogous state statutes, and to the knowledge of the Credit Parties, there are no facts, circumstances or conditions that may result in any Credit Party being identified as a "potentially responsible party" under CERCLA or analogous state statutes; and (viii) the Credit Parties have provided to Agent copies of all existing environmental reports, reviews and audits and all written information pertaining to actual or potential Environmental Liabilities, in each case relating to any Credit Party. (b) Each Credit Party hereby acknowledges and agrees that Agent (i) is not now, and has not ever been, in control of any of the Real Estate or any Credit Party's affairs, and (ii) does not have the capacity through the provisions of the Loan Documents or otherwise to influence any Credit Party's conduct with respect to the ownership, operation or management of any of its Real Estate or compliance with Environmental Laws or Environmental Permits. 3.18. Insurance. Disclosure Schedule (3.18) lists all insurance policies of any nature maintained, as of the Closing Date, for current occurrences by each Credit Party, as well as a summary of the terms of each such policy. 3.19. Deposit and Disbursement Accounts. Disclosure Schedule (3.19) lists all banks and other financial institutions at which any Credit Party maintains deposit or other 37 accounts as of the Closing Date, including any Disbursement Accounts, and such Schedule correctly identifies the name, address and telephone number of each depository, the name in which the account is held, a description of the purpose of the account, and the complete account number therefor. 3.20. Government Contracts. Except as set forth in Disclosure Schedule (3.20), as of the Closing Date, no Credit Party is a party to any contract or agreement with any Governmental Authority and no Credit Party's Accounts are subject to the Federal Assignment of Claims Act (31 U.S.C. Section 3727), the Financial Administration Act (Canada) or any similar state, provincial or local law. 3.21. Customer and Trade Relations. As of the Closing Date, except as set forth on Disclosure Schedule 3.21 attached hereto, there exists no actual or, to the knowledge of any Credit Party, threatened termination or cancellation of, or any material adverse modification or change in, the business relationship of any Credit Party with any customer or group of customers whose purchases during the preceding twelve (12) months caused them to be ranked among the ten largest customers of such Credit Party; or the business relationship of any Credit Party with any supplier material to its operations. 3.22. Agreements and Other Documents. As of the Closing Date, each Credit Party has provided to Agent or its counsel, on behalf of Lenders, accurate and complete copies (or summaries) of all of the following agreements or documents to which it is subject and each of which is listed in Disclosure Schedule (3.22): supply agreements and purchase agreements not terminable by such Credit Party within sixty (60) days following written notice issued by such Credit Party and involving transactions in excess of $1,000,000 per annum; leases of Equipment having a remaining term of one year or longer and requiring aggregate rental and other payments in excess of $500,000 per annum; licenses and permits held by the Credit Parties, the absence of which could be reasonably likely to have a Material Adverse Effect; instruments and documents evidencing Indebtedness of such Credit Party and any Lien granted by such Credit Party with respect thereto; and instruments and agreements evidencing the issuance of any equity securities, warrants, rights or options to purchase equity securities of such Credit Party. 3.23. Solvency. Both before and after giving effect to (a) the Loans and Letter of Credit Obligations to be made or incurred on the Closing Date or such other date as Loans and Letter of Credit Obligations requested hereunder are made or incurred, (b) the disbursement of the proceeds of such Loans pursuant to the instructions of Borrower, (c) the Recapitalization and the consummation of the other Related Transactions and (d) the payment and accrual of all transaction costs in connection with the foregoing, each Credit Party is and will be Solvent. 38 3.24. Year 2000 Representations. Each Credit Party has completed a Year 2000 Assessment and a Year 2000 Corrective Plan, copies of which have been delivered to Agent; each Credit Party has completed all Year 2000 Corrective Actions and completed Year 2000 Implementation Testing, except for Year 2000 Corrective Actions and Year 2000 Implementation Testing with respect to Healthrider retail stores. 3.25. Recapitalization. As of the Closing Date, Borrower has delivered to Agent a complete and correct copy of the Recapitalization Documents (including all schedules, exhibits, amendments, supplements, modifications, assignments and all other documents delivered pursuant thereto or in connection therewith). No Credit Party and no other Person party thereto is in default in the performance or compliance with any provisions thereof. The Recapitalization Documents comply with, and the Recapitalization has been consummated in accordance with, all applicable laws. The Recapitalization Documents are in full force and effect as of the Closing Date and have not been terminated, rescinded or withdrawn. All requisite approvals by Governmental Authorities having jurisdiction over any Credit Party and other Persons referenced therein, with respect to the transactions contemplated by the Recapitalization Documents, have been obtained, and no such approvals impose any conditions to the consummation of the transactions contemplated by the Recapitalization Documents or to the conduct by any Credit Party of its business thereafter. 3.26. Status of New Holdings. Prior to the Closing Date, New Holdings will not have engaged in any business or incurred any Indebtedness or any other liabilities (except in connection with its corporate formation, the Related Transactions Documents and this Agreement). 3.27. Subordinated Debt. As of the Closing Date, Borrower has delivered to Agent a complete and correct copy of the Subordinated Notes Documents (including all schedules, exhibits, amendments, supplements, modifications, assignments and all other documents delivered pursuant thereto or in connection therewith). Borrower has the corporate power and authority to incur the Indebtedness evidenced by the Subordinated Notes. The subordination provisions of the Subordinated Notes Documents are enforceable against the holders of the Subordinated Notes by Agent and Lenders. All Obligations, including the Letter of Credit Obligations, constitute senior Indebtedness entitled to the benefits of the subordination provisions contained in the Subordinated Notes Documents. The principal of and interest on the Notes, all Letter of Credit Obligations and all other Obligations will constitute "senior debt" as that or any similar term is or may be used in any other instrument evidencing or applicable to any other Subordinated Debt. The Subordinated Notes mature at least six (6) months after the final maturity date of Term Loan C. Borrower acknowledges that Agent and each Lender are entering into this Agreement and are extending the Commitments in reliance upon the subordination provisions of the Subordinated Notes Documents and this Section 3.27. 39 4. FINANCIAL STATEMENTS AND INFORMATION 4.1. Reports and Notices. (a) Each Credit Party executing this Agreement hereby agrees that from and after the Closing Date and until the Termination Date, it shall deliver to Agents or to Agents and Lenders, as required, the Financial Statements, notices, Projections and other information at the times, to the Persons and in the manner set forth in Annex E. (b) Each Credit Party executing this Agreement hereby agrees that from and after the Closing Date and until the Termination Date, it shall deliver to Agents or to Agents and Lenders, as required, the various Collateral Reports (including Borrowing Base Certificates in the form of Exhibit 4.1(b)) at the times, to the Persons and in the manner set forth in Annex F. 4.2. Communication with Accountants. Each Credit Party executing this Agreement authorizes Agents and, so long as a Default or Event of Default has occurred and is continuing, each Lender, to communicate directly with its independent certified public accountants, including PriceWaterhouseCoopers, LLP and authorizes and at Agents' request shall instruct those accountants and advisors to disclose and make available to Agents and each Lender any and all Financial Statements and other supporting financial documents, schedules and information relating to any Credit Party (including copies of any issued management letters) with respect to the business, financial condition and other affairs of any Credit Party. 5. AFFIRMATIVE COVENANTS Each Credit Party executing this Agreement jointly and severally agrees as to all Credit Parties, except ICON of Canada, which severally agrees only as to itself, that from and after the date hereof and until the Termination Date: 5.1. Maintenance of Existence and Conduct of Business. Each Credit Party shall: do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and its rights and franchises; continue to conduct its business substantially as now conducted or as otherwise permitted hereunder; at all times maintain, preserve and protect all of its assets and properties used or useful in the conduct of its business, and keep the same in good repair, working order and condition in all material respects (taking into consideration ordinary wear and tear) and from time to time make, or cause to be made, all necessary or appropriate repairs, replacements and improvements thereto consistent with industry practices; and transact business only in such corporate and trade names as are set forth in Disclosure Schedule (5.1). 5.2. Payment of Charges. (a) Subject to Section 5.2(b), each Credit Party shall pay and discharge or cause to be paid and discharged promptly all Charges payable by it, including (i) Charges imposed upon it, its income and profits, or any of its property (real, personal or mixed) and all Charges with respect to tax, social security and unemployment withholding with respect to its employees, and (ii) lawful claims for labor, materials, supplies and services or otherwise, and 40 (iii) all storage or rental charges payable to warehousemen and bailees, in each case, before any thereof shall become past due. (b) Each Credit Party may in good faith contest, by appropriate proceedings, the validity or amount of any Charges or claims described in Section 5.2(a); provided, that (i) adequate reserves with respect to such Charges are maintained on the books of such Credit Party, in accordance with GAAP; (ii) no Lien shall arise to secure payment of such Charges (other than payments to bailees) that is superior to any of the Liens securing payment of the Obligations and such contest is maintained and prosecuted with diligence and operates to suspend collection or enforcement of such Charges, (iii) none of the Collateral becomes subject to forfeiture or loss as a result of such contest, (iv) such Credit Party shall promptly pay or discharge such contested Charges or claims and all additional charges, interest, penalties and expenses, if any, and shall deliver to Agent evidence acceptable to Agent of such compliance, payment or discharge, if such contest is terminated or discontinued adversely to such Credit Party or the conditions set forth in this Section 5.2(b) are no longer met, and (v) Agent has not advised Borrower in writing that Agent reasonably believes that nonpayment or nondischarge thereof could have or result in a Material Adverse Effect. 5.3. Books and Records. Each Credit Party shall keep adequate books and records with respect to its business activities in which proper entries, reflecting all financial transactions, are made in accordance with GAAP and on a basis consistent with the Financial Statements attached as Disclosure Schedule (3.4(a)). 5.4. Insurance; Damage to or Destruction of Collateral. (a) The Credit Parties shall, at their sole cost and expense, maintain the policies of insurance described on Disclosure Schedule (3.18) as in effect on the date hereof or otherwise in form and amounts and with insurers acceptable to Agent, including property insurance at replacement values and flood insurance for all properties located in a flood plain (to the extent of available coverage from the National Flood Insurance Program). If any Credit Party at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay all premiums relating thereto, Agent may at any time or times thereafter obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto that Agent deems advisable. Agent shall have no obligation to obtain insurance for any Credit Party or pay any premiums therefor. By doing so, Agent shall not be deemed to have waived any Default or Event of Default arising from any Credit Party's failure to maintain such insurance or pay any premiums therefor. All sums so disbursed, including attorneys' fees, court costs and other charges related thereto, shall be payable on demand by Borrower to Agent and shall be additional Obligations hereunder secured by the Collateral. (b) Agent reserves the right at any time upon any change in any Credit Party's risk profile (including any change in the product mix maintained by any Credit Party or any laws affecting the potential liability of such Credit Party) to require additional forms and limits of insurance to, in Agent's opinion, adequately protect both Agent's and Lenders' interests in all or any portion of the Collateral and to ensure that each Credit Party is protected by insurance in amounts and with coverage customary for its industry. If requested by Agent, each Credit Party 41 shall deliver to Agent from time to time a report of a reputable insurance broker, satisfactory to Agent, with respect to its insurance policies. (c) Borrower shall deliver to Agent, in form and substance satisfactory to Agent, endorsements to (i) all "All Risk" and business interruption insurance naming Agent, on behalf of itself and Lenders, as loss payee, or, in the case of insurance covering assets located in the Province of Quebec, naming Agent and Lenders as loss payees, and, in the case of "All Risk" insurance covering Canada, containing the Canadian standard mortgage clause, and (ii) all general liability and other liability policies naming Agent, on behalf of itself and Lenders, as additional insured, or, in the case of insurance covering assets located in the Province of Quebec, naming Agent and Lenders as additional insureds. Borrower irrevocably makes, constitutes and appoints Agent (and all officers, employees or agents designated by Agent), so long as any Default or Event of Default has occurred and is continuing or the anticipated insurance proceeds exceed $10,000,000, as Borrower's true and lawful agent and attorney-in-fact for the purpose of making, settling and adjusting claims under such "All Risk" policies of insurance, endorsing the name of Borrower on any check or other item of payment for the proceeds of such "All Risk" policies of insurance and for making all determinations and decisions with respect to such "All Risk" policies of insurance. Agent shall have no duty to exercise any rights or powers granted to it pursuant to the foregoing power-of-attorney. Borrower shall promptly notify Agent of any loss, damage, or destruction to the Collateral in the amount of $250,000 or more, whether or not covered by insurance. After deducting from such proceeds the expenses, if any, incurred by Agent in the collection or handling thereof, Agent shall apply such proceeds to the reduction of the Obligations in accordance with Section 1.3(d), or permit or require Borrower to use such money, or any part thereof, to replace, repair, restore or rebuild the Collateral in a diligent and expeditious manner with materials and workmanship of substantially the same quality as existed before the loss, damage or destruction. Notwithstanding the foregoing, if the casualty giving rise to such insurance proceeds could not reasonably be expected to have a Material Adverse Effect and such insurance proceeds do not exceed $10,000,000 in the aggregate, Agent shall permit Borrower to replace, restore, repair or rebuild the property; provided that if Borrower has not completed or entered into binding agreements to complete such replacement, restoration, repair or rebuilding within 180 days of such casualty, Agent shall apply such insurance proceeds to prepay the Obligations in accordance with Section 1.3(d). All insurance proceeds that are to be made available to Borrower to replace, repair, restore or rebuild the Collateral shall be applied by Agent to reduce the outstanding principal balance of the Revolving Loan (which application shall not result in a permanent reduction of the Revolving Loan Commitment) and upon such application, Agent shall establish a Reserve against the Borrowing Base in an amount equal to the amount of such proceeds so applied. All insurance proceeds made available to any Credit Party that is not a Borrower to replace, repair, restore or rebuild Collateral shall be deposited in a cash collateral account. Thereafter, such funds shall be made available to Borrower to provide funds to replace, repair, restore or rebuild the Collateral as follows: (i) Borrower shall request that a Revolving Credit Advance or release from the cash collateral account be made to Borrower in the amount requested to be released; (ii) so long as the conditions set forth in Section 2.2 have been met, Revolving Lenders shall make such Revolving Credit Advance or Agent shall release funds from the cash collateral account; and (iii) in the case of insurance proceeds applied against the Revolving Loan, the Reserve established with respect to such insurance proceeds shall be 42 reduced by the amount of such Revolving Credit Advance. To the extent not used to replace, repair, restore or rebuild the Collateral, such insurance proceeds shall be applied in accordance with Section 1.3(d). 5.5. Compliance with Laws. Each Credit Party shall comply with all federal, state, local and foreign laws and regulations applicable to it, including those relating to ERISA and labor matters and Environmental Laws and Environmental Permits, except to the extent that the failure to comply, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 5.6. Canadian Pension and Benefit Plans. (a) For each existing Canadian Pension Plan, each Credit Party shall ensure that such plan retains its registered status under and is administered in a timely manner in all material respects in accordance with the applicable pension plan text, funding agreement, the ITA and all other applicable laws. (b) For each Canadian Pension Plan hereafter adopted by any Credit Party which is required to be registered under the ITA or any other applicable laws, that Credit Party shall use its best efforts to seek and receive confirmation in writing from the applicable Governmental Authorities to the effect that such plan is unconditionally registered under the ITA and such other applicable laws. (c) For each existing and hereafter adopted Canadian Pension Plan and Canadian Benefit Plan, each Credit Party shall in a timely fashion perform in all material respects all obligations (including fiduciary, funding, investment and administration obligations) required to be performed in connection with such plan and the funding media therefor. (d) Each Credit Party shall deliver to Agent if requested by Agent, promptly after the filing thereof by any Credit Party with any applicable Governmental Authority, copies of each annual and other return, report or valuation with respect to each Canadian Pension Plan; promptly after receipt thereof, a copy of any direction, order, notice, ruling or opinion that any Credit Party may receive from any applicable Governmental Authority with respect to any Canadian Pension Plan; and notification within 30 days of any increases having a cost to such Credit Party in excess of C$100,000 per annum, in the benefits of any existing Canadian Pension Plan or Canadian Benefit Plan, or the establishment of any new Canadian Pension Plan or Canadian Benefit Plan, or the commencement of contributions to any such plan to which any Credit Party was not previously contributing. 5.7. Supplemental Disclosure. From time to time as may be requested by Agent (which request will not be made more frequently than once each year absent the occurrence and continuance of a Default or an Event of Default), the Credit Parties shall supplement each Disclosure Schedule hereto, or any representation herein or in any other Loan Document, with respect to any matter hereafter arising that, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such Disclosure Schedule or as an exception to such representation or that is necessary to correct any information 43 in such Disclosure Schedule or representation which has been rendered inaccurate thereby (and, in the case of any supplements to any Disclosure Schedule, such Disclosure Schedule shall be appropriately marked to show the changes made therein); provided that (a) no such supplement to any such Disclosure Schedule or representation shall be or be deemed a waiver of any Default or Event of Default resulting from the matters disclosed therein, except as consented to by Agent and Requisite Lenders in writing; and (b) no supplement shall be required or permitted as to representations and warranties that relate solely to the Closing Date. 5.8. Intellectual Property. Each Credit Party will conduct its business and affairs without infringement of or interference with any Intellectual Property of any other Person in any material respect. 5.9. Environmental Matters. Each Credit Party shall and shall cause each Person within its control to: (a) conduct its operations and keep and maintain its Real Estate in compliance with all Environmental Laws and Environmental Permits other than noncompliance that could not reasonably be expected to have a Material Adverse Effect; (b) implement any and all investigation, remediation, removal and response actions that are appropriate or necessary to maintain the value and marketability of the Real Estate in all material respects or to otherwise comply with Environmental Laws and Environmental Permits pertaining to the presence, generation, treatment, storage, use, disposal, transportation or Release of any Hazardous Material on, at, in, under, above, to, from or about any of its Real Estate; (c) notify Agent promptly after such Credit Party becomes aware of any violation of Environmental Laws or Environmental Permits or any Release on, at, in, under, above, to, from or about any Real Estate that is reasonably likely to result in Environmental Liabilities in excess of $50,000; and (d) promptly forward to Agent a copy of any order, notice, request for information or any communication or report received by such Credit Party in connection with any such violation or Release or any other matter relating to any Environmental Laws or Environmental Permits that could reasonably be expected to result in Environmental Liabilities in excess of $50,000, in each case whether or not the Environmental Protection Agency or any Governmental Authority has taken or threatened any action in connection with any such violation, Release or other matter. If Agent at any time has a reasonable basis to believe that there may be a violation of any Environmental Laws or Environmental Permits by any Credit Party or any Environmental Liability arising thereunder, or a Release of Hazardous Materials on, at, in, under, above, to, from or about any of its Real Estate, that, in each case, could reasonably be expected to have a Material Adverse Effect, then each Credit Party shall, upon Agent's written request (i) cause the performance of such environmental audits including subsurface sampling of soil and groundwater, and preparation of such environmental reports, at Borrower's expense, as Agent may from time to time reasonably request, which shall be conducted by reputable environmental consulting firms reasonably acceptable to Agent and shall be in form and substance acceptable to Agent, and (ii) permit Agent or its representatives to have access to all Real Estate for the purpose of conducting such environmental audits and testing as Agent deems appropriate, including subsurface sampling of soil and groundwater. Borrower shall reimburse Agent for the costs of such audits and tests and the same will constitute a part of the Obligations secured hereunder. 44 5.10. Landlords' Agreements, Mortgagee Agreements and Bailee Letters. Each Credit Party shall use reasonable commercial efforts to obtain a landlord's agreement, mortgagee agreement or bailee letter, as applicable, from the lessor of each leased property, mortgagee of owned property or bailee with respect to any warehouse, processor or converter facility or other location where Collateral is stored or located, which agreement or letter shall contain a waiver or subordination of all Liens or claims that the landlord, mortgagee or bailee may assert against the Collateral at that location, and shall otherwise be satisfactory in form and substance to Agent. With respect to such locations or warehouse space leased or owned as of the Closing Date and thereafter, if Agent has not received a landlord or mortgagee agreement or bailee letter within thirty (30) days following the Closing Date (or, if later, as of the date such location is acquired or leased), Borrower's Eligible Inventory at that location shall, in Agent's discretion, be excluded from the Borrowing Base or be subject to such Reserves as may be established by Agent in its reasonable credit judgment. After the Closing Date, no real property or warehouse space shall be leased by any Credit Party and no Inventory shall be shipped to a processor, converter or consignee under arrangements established after the Closing Date without the prior written consent of Agent (which consent, in Agent's discretion, may be conditioned upon the exclusion from the Borrowing Base of Eligible Inventory at that location or the establishment of Reserves acceptable to Agent) or, unless and until a satisfactory landlord agreement or bailee letter, as appropriate, shall first have been obtained with respect to such location. Each Credit Party shall timely and fully pay and perform its obligations under all leases and other agreements with respect to each leased location or public warehouse where any Collateral is or may be located. If any Credit Party proposes to acquire a fee ownership interest in Real Estate after the Closing Date, it shall first provide to Agent a mortgage or deed of trust, environmental audits, mortgage title insurance commitment, survey, and if required by Agent supplemental casualty insurance and flood insurance all in form and substance, satisfactory to Agent. 5.11. Interest Rate. Within thirty (30) days after the Closing Date, Borrower shall enter into and maintain interest rate cap, swap or collar agreements, or other agreements or arrangements designed to provide protection against fluctuations in interest rates, which shall be on terms and with counter parties acceptable to Agent, and pursuant to which Borrower is protected against increases in interest rates from and after the date of such contracts as to a notional amount of not less than Ninety Million Dollars ($90,000,000) for a period of at least three (3) years. 5.12. Further Assurances. Each Credit Party executing this Agreement agrees that it shall and shall cause each other Credit Party to, at such Credit Party's expense and upon request of Agent, duly execute and deliver, or cause to be duly executed and delivered, to Agent such further instruments and do and cause to be done such further acts as may be necessary or proper in the reasonable opinion of Agent to carry out more effectively the provisions and purposes of this Agreement or any other Loan Document. 5.13. Term Loan C Tax Accrual Periods. Borrower and New Holdings agree that, for federal income tax purposes, they will select "accrual periods" (as defined in section 1272(a)(5) of the IRC and Treasury Regulation section 1.1272-1(b)(1)(ii)) with respect to 45 Term Loan C such that the last day of each accrual period will coincide with an Interest Payment Date or a date on which principal is paid with respect to Term Loan C. 5.14. Year 2000. On or prior to November 15, 1999, (i) Borrower shall install hardware and software and complete Year 2000 Corrective Actions and Year 2000 Implementation Testing with respect to Healthrider retail stores and (ii) Credit Parties shall eliminate all Year 2000 Problems, except where the failure to eliminate the same could not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate. 6. NEGATIVE COVENANTS Each Credit Party executing this Agreement jointly and severally agrees as to all Credit Parties, except ICON of Canada, which severally agrees only as to itself, that, without the prior written consent of Agent and the Requisite Lenders, from and after the date hereof until the Termination Date: 6.1. Mergers, Subsidiaries, Etc. No Credit Party shall directly or indirectly, by operation of law or otherwise, (a) form or acquire any Subsidiary, or (b) merge with, consolidate with, acquire all or substantially all of the assets or Stock of, or otherwise combine with or acquire, any Person. 6.2. Investments; Loans and Advances. No Credit Party shall make or permit to exist any investment in, or make, accrue or permit to exist loans or advances of money to, any Person, through the direct or indirect lending of money, holding of securities or otherwise, except that: (a) Borrower may hold investments comprised of notes payable, or stock or other securities issued by Account Debtors to Borrower pursuant to negotiated agreements with respect to settlement of such Account Debtor's Accounts in the ordinary course of business; (b) each Credit Party may maintain its existing investments in its Subsidiaries as of the Closing Date; (c) Borrower may make intercompany loans to JumpKing and ICON New Brunswick (which may only be reloaned to ICON of Canada) or ICON of Canada in accordance with Section 6.3; (d) Borrower may invest not more than $15,000,000 in the equity of ICON of Canada on the Closing Date; (e) Borrower may invest up to $25,000 per year in International Holdings; and (f) so long as no Default or Event of Default has occurred and is continuing and there is no outstanding Revolving Loan balance, Borrower may make investments, subject to Control Letters in favor of Agent for the benefit of Lenders, in (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof maturing within one year from the date of acquisition thereof, (ii) commercial paper maturing no more than one year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc., (iii) certificates of deposit maturing no more than one year from the date of creation thereof issued by commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits of not less than $300,000,000 and having a senior unsecured rating of "A" or better by a nationally recognized rating agency (an "A Rated Bank"), (iv) time deposits maturing no more than 30 days from the date of creation thereof with A Rated Banks and (v) mutual funds that invest solely in one or more of the investments 46 described in clauses (i) through (iv) above; (g) investments in European Subsidiaries not to exceed $100,000 in the aggregate; (h) Borrower may make loans expressly permitted in this Section 6; and (i) other investments not exceeding $100,000 in the aggregate at any time outstanding. 6.3. Indebtedness. (a) No Credit Party shall create, incur, assume or permit to exist any Indebtedness, except (without duplication) (i) Indebtedness secured by purchase money security interests and Capital Leases permitted in Section 6.7(c), (ii) the Loans and the other Obligations, (iii) existing Indebtedness as of the Closing Date described in Disclosure Schedule (6.3) and refinancings thereof or amendments or modifications thereof that do not have the effect of increasing the principal amount thereof or changing the amortization thereof (other than to extend the same) and that are otherwise on terms and conditions no less favorable to any Credit Party, Agent or any Lender, as determined by Agent in its reasonable discretion, than the terms of the Indebtedness being refinanced, amended or modified, (iv) Indebtedness specifically permitted under Section 6.17, (v) other unsecured Indebtedness not to exceed $100,000 in the aggregate; (vi) Indebtedness consisting of intercompany loans and advances made by Borrower to JumpKing, ICON New Brunswick (for the sole purpose of reloaning the proceeds thereof to ICON of Canada) and ICON of Canada; provided, that: (A) JumpKing, ICON New Brunswick or ICON of Canada shall have executed and delivered to Borrower, on the Closing Date, demand notes (the "Intercompany Notes") to evidence any such intercompany Indebtedness owing by JumpKing, ICON New Brunswick or ICON of Canada to Borrower, which Intercompany Notes shall be in form and substance satisfactory to Agent and shall be pledged and delivered to Agent pursuant to the applicable Pledge Agreement or Security Agreement as additional collateral security for the Obligations; (B) Borrower shall record all intercompany transactions on its books and records in a manner reasonably satisfactory to Agent; (C) the obligations of JumpKing, ICON New Brunswick and ICON of Canada under such Intercompany Notes shall be subordinated to the Obligations of JumpKing, ICON New Brunswick and ICON of Canada as a Guarantor in a manner satisfactory to Agents; and (D) Borrower shall have Net Borrowing Availability of not less than $15,000,000 after giving effect to any such intercompany loan; (vii) so long as no Event of Default has occurred and is continuing, Permitted Subordinated Debt; (viii) Subordinated Debt issued to terminated employees in accordance with Section 6.14(g); and (ix) the CS First Boston Debt incurred by New Holdings. (b) No Credit Party shall, directly or indirectly, voluntarily purchase, redeem, defease or prepay any principal of, premium, if any, interest or other amount payable in respect of any Indebtedness prior to its due date or maturity, other than (i) the Obligations (other than Term Loan C), (ii) Indebtedness secured by a Permitted Encumbrance if the asset securing such Indebtedness has been sold or otherwise disposed of in accordance with Section 6.8(b) and (iii) so long as no Event of Default has occurred and is continuing, the Subordinated Notes and Term Loan C with the proceeds of Permitted Subordinated Debt; and provided that the CS First Boston Debt may be converted into equity of New Holdings. 47 6.4. Employee Loans and Affiliate Transactions. (a) Except as otherwise expressly permitted in this Section 6 with respect to Affiliates and equity investments in New Holdings pursuant to the Recapitalization Documents, no Credit Party shall enter into or be a party to any transaction with any other Credit Party or any Affiliate thereof except in the ordinary course of and pursuant to the reasonable requirements of such Credit Party's business and upon fair and reasonable terms that are no less favorable to such Credit Party than would be obtained in a comparable arm's length transaction with a Person not an Affiliate of such Credit Party and in compliance with the restrictions on granting financial assistance under applicable laws. In addition, if any such transaction or series of related transactions involves payments by a Credit Party in excess of $250,000 in the aggregate, the terms of these transactions must be disclosed in advance to Agent and Lenders. All such transactions existing as of the Closing Date are described in Disclosure Schedule 6.4, excluding potential indemnification obligations to Affiliates of Borrower pursuant to the Recapitalization Documents. (b) No Credit Party shall enter into any lending or borrowing transaction with any employees of any Credit Party, except (i) loans to its respective employees on an arm's-length basis in the ordinary course of business consistent with past practices for travel expenses, relocation costs and similar purposes up to a maximum of $1,200,000 in the aggregate at any one time outstanding and loans to management employees described in Disclosure Schedule 6.4. (c) Except for bonus payments on the Closing Date, as described on Disclosure Schedule 6.4, the Credit Parties shall not pay compensation as salaries or otherwise in excess of $1,000,000 in the aggregate per year to Scott Watterson and Gary Stevenson, subject to annual increases approved by a disinterested majority of Borrower's Board of Directors, plus bonuses in accordance with the formula set forth in Section 4 of the Employment Agreements as in effect on the Closing Date, plus, subject to Section 6.14, management fees to Scott Watterson and Gary Stevenson of $67,000 in the aggregate per year. 6.5. Capital Structure and Business. No Credit Party shall (a) make any changes in any of its business objectives, purposes or operations that could in any way adversely affect the repayment of the Loans or any of the other Obligations or could reasonably be expected to have or result in a Material Adverse Effect, (b) make any change in its capital structure as described in Disclosure Schedule (3.8), including the issuance of any shares of Stock, warrants or other securities convertible into Stock or any revision of the terms of its outstanding Stock; provided that New Holdings may make a Public Offering of its common Stock so long as (i) the proceeds thereof are applied in prepayment of the Obligations as required by Section 1.3(b)(iii), and (ii) no Change of Control occurs after giving effect thereto, or (c) amend its charter or bylaws in a manner that would adversely affect Agent or Lenders or such Credit Party's duty or ability to repay the Obligations. No Credit Party shall engage in any business other than the businesses currently engaged in by it. 6.6. Guaranteed Indebtedness. No Credit Party shall create, incur, assume or permit to exist any Guaranteed Indebtedness except (a) by endorsement of instruments 48 or items of payment for deposit to the general account of any Credit Party, and (b) for Guaranteed Indebtedness incurred for the benefit of any other Credit Party if the primary obligation is expressly permitted by this Agreement and (c) a guaranty by Borrower of the obligations of F.G. Aviation, Inc. in an amount not to exceed $2,100,000. 6.7. Liens. No Credit Party shall create, incur, assume or permit to exist any Lien on or with respect to its Accounts or any of its other properties or assets (whether now owned or hereafter acquired) except for (a) Permitted Encumbrances; (b) Liens in existence on the date hereof and listed on Disclosure Schedule (6.7); (c) Liens created after the date hereof by conditional sale or other title retention agreements (including Capital Leases) or in connection with purchase money Indebtedness with respect to Equipment and Fixtures acquired by any Credit Party in the ordinary course of business, involving the incurrence of an aggregate amount of purchase money Indebtedness and Capital Lease Obligations of not more than $6,000,000 outstanding at any one time for all such Liens (provided that such Liens attach only to the assets subject to such purchase money debt and such Indebtedness is incurred within twenty (20) days following such purchase and does not exceed 100% of the purchase price of the subject assets); and (d) other Liens securing, other Indebtedness not exceeding $100,000 in the aggregate at any time outstanding, so long as such Liens do not attach to any Accounts or Inventory. In addition, no Credit Party shall become a party to any agreement, note, indenture or instrument, or take any other action, that would prohibit the creation of a Lien on any of its properties or other assets in favor of Agent, on behalf of itself and Lenders, as additional collateral for the Obligations, except operating leases, purchase money installment contracts, Capital Leases or Licenses which prohibit Liens upon the assets that are subject thereto. 6.8. Sale of Stock and Assets. No Credit Party shall sell, transfer, convey, assign or otherwise dispose of any of its properties or other assets, including the Stock of any of its Subsidiaries (whether in a public or a private offering or otherwise) or any of its Accounts, other than (a) the sale of Inventory in the ordinary course of business, (b) the sale, transfer, conveyance or other disposition for cash by a Credit Party of (i) Equipment or Fixtures that are obsolete or no longer used or useful in such Credit Party's business and having a value not exceeding $500,000 in the aggregate in any Fiscal Year and (ii) other Equipment and Fixtures having a value not exceeding $1,000,000 in the aggregate in any Fiscal Year, (c) non-recourse sales of consumer Accounts on terms approved in advance in writing by Agents and (d) non-recourse sales of Accounts owing by Account Debtors that are in bankruptcy, or whose Accounts are excluded from Eligible Accounts for reasons related to the Account Debtor's creditworthiness, on terms approved in advance in writing by Agents. Without limiting the generality of the foregoing, no Credit Party will sell any of its Patents or Trademarks or license any of its Patents or Trademarks to third parties under licenses that (i) restrict the ability of the Credit Party (or Agent) to sell the subject Patent or Trademark or (ii) diminish or impair the value of the subject Patent or Trademark as a salable asset of the applicable Credit Party. With respect to any disposition of assets or other properties permitted pursuant to clause (b) above, Agent agrees on reasonable prior written notice to release its Lien on such assets or other properties in order to permit the applicable Credit Party to effect such disposition and shall execute and deliver to Borrower, at Borrower's expense, appropriate UCC-3 termination statements and other releases as reasonably requested by Borrower. 49 6.9. ERISA. No Credit Party shall, or shall cause or permit any ERISA Affiliate to, cause or permit to occur an event that could result in the imposition of a Lien under Section 412 of the IRC or Section 302 or 4068 of ERISA or cause or permit to occur an ERISA Event to the extent such ERISA Event could reasonably be expected to have a Material Adverse Effect. 6.10. Financial Covenants. Borrower shall not breach or fail to comply with any of the Financial Covenants. 6.11. Hazardous Materials. No Credit Party shall cause or permit a Release of any Hazardous Material on, at, in, under, above, to, from or about any of the Real Estate where such Release would (a) violate in any respect, or form the basis for any Environmental Liabilities under, any Environmental Laws or Environmental Permits or (b) otherwise adversely impact the value or marketability of any of the Real Estate or any of the Collateral, other than such violations or Environmental Liabilities that could not reasonably be expected to have a Material Adverse Effect. 6.12. Sale-Leasebacks. No Credit Party shall engage in any sale-leaseback, synthetic lease or similar transaction involving any of its assets. 6.13. Cancellation of Indebtedness. No Credit Party shall cancel any claim or debt owing to it, except for reasonable consideration negotiated on an arm's-length basis and in the ordinary course of its business consistent with past practices. 6.14. Restricted Payments. No Credit Party shall make any Restricted Payment, except (a) intercompany loans and advances between Borrower and JumpKing or between Borrower and ICON New Brunswick or ICON of Canada, as the case may be, to the extent permitted by Section 6.3, (b) dividends and distributions by Subsidiaries of Borrower paid directly or indirectly to Borrower, (c) employee loans permitted under Section 6.4(b) above, (d) payments of principal and interest of Intercompany Notes issued in accordance with Section 6.3; (e) scheduled payments of interest with respect to Subordinated Notes and scheduled payments of interest and principal with respect to the Residual 13% Subordinated Notes, provided, that (i) no Event of Default under Section 8.1(a) has occurred and is continuing and no Payment Blockage Period (as defined in the Subordinated Notes Documents) is in effect at the time any payment otherwise permitted under clause (e) is to be made, (ii) the timing of the payments referred to in clause (e) shall be set at dates that are satisfactory to Agents; (f) payments of management fees pursuant to the Management Agreements, not to exceed $800,000 in the aggregate in any Fiscal Year to all of Bain Capital, Inc., Credit Suisse First Boston, Scott Watterson, Gary Stevenson and the Affiliates of any of the foregoing and arrearages under the management agreement between Bain Capital, Inc. and Borrower dated November 17, 1994 (the "Old Management Agreement"); provided, however, that (1) no such management fees shall be paid so long as any Event of Default has occurred and is continuing (payments accrued during such period may be paid when the subject Events of Default have been cured or waived) and (2) the management fees payable with respect to Fiscal Year 2000 and arrearages under the Old Management Agreement shall be payable in one installment of $600,000 in the aggregate plus $585,000 in arrearages payable to Bain Capital, Inc. under the Old Management Agreement on 50 April 30, 2000 and one installment of $200,000 in the aggregate on July 31, 2000 and management fees payable with respect to subsequent Fiscal Years shall be payable in four equal quarterly installments sixty (60) days after the end of each Fiscal Quarter, (g) payments to New Holdings necessary to enable New Holdings: (1) to satisfy its federal, state and local income tax obligations that are the result of net consolidated income of Borrower and its Subsidiaries being attributed to New Holdings; (2) to pay the fees and expenses necessary to maintain New Holdings' corporate existence and good standing; (3) to pay accounting fees attributable to Borrower and its Subsidiaries; and (4) payments to buy back the New Holdings' stock of any employee who has died or whose employment with Borrower or its Subsidiaries has otherwise terminated, such repurchase payments not to exceed $500,000 in the aggregate in any Fiscal Year in cash payments or otherwise by the issuance of Subordinated Debt, (h) bonuses and other payments (including the forgiveness of Indebtedness) to Affiliates of Borrower as set forth on Disclosure Schedule (6.4) hereto, and (i) conversion of the CS First Boston Debt into equity of New Holdings.. 6.15. Change of Corporate Name or Location; Change of Fiscal Year. No Credit Party shall (a) change its corporate name, or (b) change its chief executive office, domicile (within the meaning of the Quebec Civil Code), principal place of business, corporate offices or warehouses or locations at which Collateral is held or stored, or the location of its records concerning the Collateral, in each case without at least thirty (30) days prior written notice to Agent and after Agent's written acknowledgment that any reasonable action requested by Agent in connection therewith, including to continue the perfection of any Liens in favor of Agent, on behalf of Agent and Lenders, or, in favor of Agent and Lenders, as applicable, in any Collateral, has been completed or taken, and provided that any such new location shall be in the continental United States of America or Canada. Without limiting the generality of the foregoing, no Credit Party shall change its name, identity or corporate structure in any manner that might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of Section 9-402(7) of the Code or any other then applicable provision of the Code, or materially misleading within the meaning of any other applicable law, except upon prior written notice to Agent and Lenders and after Agent's written acknowledgment that any reasonable action requested by Agent in connection therewith, including to continue the perfection of any Liens in favor of Agent, on behalf of Agent and Lenders, in any Collateral, has been completed or taken. No Credit Party shall change its Fiscal Year. 6.16. No Impairment of Intercompany Transfers. No Credit Party shall directly or indirectly enter into or become bound by any agreement, instrument, indenture or other obligation (other than this Agreement and the other Loan Documents) that could directly or indirectly restrict, prohibit or require the consent of any Person with respect to the payment of dividends or distributions or the making or repayment of intercompany loans by a Subsidiary of Borrower to Borrower. 6.17. No Speculative Transactions. No Credit Party shall engage in any transaction involving commodity options, futures contracts or similar transactions, except solely to hedge against fluctuations in the prices of commodities owned or purchased by it and the values of foreign currencies receivable or payable by it and interest swaps, caps or collars. 51 6.18. Leases; Real Estate Purchases. No Credit Party shall enter into any operating lease for Equipment, if the aggregate of all such operating lease payments payable in any year for all Credit Parties on a consolidated basis would exceed $5,000,000. No Credit Party shall purchase fee simple ownership interest in Real Estate. 6.19. Changes Relating to Subordinated Debt and Other Agreements. No Credit Party shall change or amend the terms of the Subordinated Notes Documents or any other Subordinated Debt (or any indenture or agreement in connection therewith), the Recapitalization Documents, documents governing or evidencing the CS First Boston Debt, the Management Agreements, the Employment Agreements, or the Stockholders Agreement, except changes or amendments that do not adversely affect the rights or interests of Lenders, as determined by Agents in advance in writing. 6.20. Holdcos. New Holdings shall not engage in any trade or business, or own any assets (other than Stock of Borrower) or incur any Indebtedness or Guaranteed Indebtedness (other than the Obligations and the CS First Boston Debt). ICON New Brunswick shall not engage in any trade or business, or own any assets (other than a Borrower Account) or incur any Indebtedness or Guaranteed Indebtedness (other than a guaranty of the Obligations). International Holdings shall not engage in any trade or business or incur any Indebtedness or Guaranteed Indebtedness (other than a guaranty of the Obligations) or own any assets (other than the Stock of ICON Health & Fitness, Ltd., ICON OS, Inc., ICON of Canada and ICON New Brunswick. The Old Holdcos shall not engage in any trade or business or incur any Indebtedness or Guaranteed Indebtedness, except that Intermediate Holdings may remain obligated for up to $7,000,000 of its 14% Senior Discount Notes due 2006. The Old Holdcos will not own any assets, except that Ultimate Holdings may own all of the Stock of Intermediate Holdings; Intermediate Holdings may own all of the Stock of Holdings and Holdings may own .01% of the Stock of New Holdings. 7. TERM 7.1. Termination. The financing arrangements contemplated hereby shall be in effect until the Commitment Termination Date, and the Loans and all other Obligations shall be automatically due and payable in full on such date. 7.2. Survival of Obligations Upon Termination of Financing Arrangements. Except as otherwise expressly provided for in the Loan Documents, no termination or cancellation (regardless of cause or procedure) of any financing arrangement under this Agreement shall in any way affect or impair the obligations, duties and liabilities of the Credit Parties or the rights of Agent and Lenders relating to any unpaid portion of the Loans or any other Obligations, due or not due, liquidated, contingent or unliquidated or any transaction or event occurring prior to such termination, or any transaction or event, the performance of which is required after the Commitment Termination Date. Except as otherwise expressly provided herein or in any other Loan Document, all undertakings, agreements, covenants, warranties and representations of or binding upon the Credit Parties, and all rights of Agent and each Lender, all as contained in the Loan Documents, shall not terminate or expire, but rather shall survive any such termination or cancellation and shall continue in full force and effect until 52 the Termination Date; provided, that the provisions of Section 11, the payment obligations under Sections 1.15 and 1.16, and the indemnities contained in the Loan Documents shall survive the Termination Date. 8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES 8.1. Events of Default. The occurrence of any one or more of the following events (regardless of the reason therefor) shall constitute an "Event of Default" hereunder: (a) Borrower (i) fails to make any payment of principal of, or interest on, or Fees owing in respect of, the Loans or any of the other Obligations when due and payable, or (ii) fails to pay or reimburse Agents or Lenders for any expense reimbursable hereunder or under any other Loan Document within ten (10) days following Agent's demand for such reimbursement or payment of expenses. (b) Any Credit Party fails or neglects to perform, keep or observe any of the provisions of Sections 1.4, 1.8, 1.14, 5.4(a) and 5.4(c), 5.6 or 6, or any of the provisions set forth in Annexes C or G, respectively. (c) Borrower fails or neglects to perform, keep or observe any of the provisions of Section 4 or any provisions set forth in Annexes E or F, respectively, and the same shall remain unremedied for three (3) Business Days or more. (d) Any Credit Party fails or neglects to perform, keep or observe any other provision of this Agreement or of any of the other Loan Documents (other than any provision embodied in or covered by any other clause of this Section 8.1) and the same shall remain unremedied for thirty (30) days or more. (e) A default or breach occurs under any other agreement, document or instrument to which any Credit Party is a party that is not cured within any applicable grace period therefor, and such default or breach (i) involves the failure to make any payment when due in respect of any Indebtedness (other than the Obligations) of any Credit Party in excess of $500,000 in the aggregate, or (ii) causes, or permits any holder of such Indebtedness or a trustee to cause, Indebtedness or a portion thereof in excess of $500,000 in the aggregate to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, regardless of whether such default is waived, or such right is exercised, by such holder or trustee. (f) Any information contained in any Borrowing Base Certificate is untrue or incorrect in any respect (other than inadvertent, immaterial errors not exceeding $100,000 in the aggregate in any Borrowing Base Certificate), or any representation or warranty herein or in any Loan Document or in any written statement, report, financial statement or certificate (other than a Borrowing Base Certificate) made or delivered to Agent or any Lender by any Credit Party is untrue or incorrect in any material respect as of the date when made or deemed made. (g) Assets of any Credit Party with a fair market value of $100,000 or more are attached, seized, levied upon or subjected to a writ or distress warrant, or come within the 53 possession of any receiver, trustee, custodian or assignee for the benefit of creditors of any Credit Party and such condition continues for thirty (30) days or more. (h) A case or proceeding is commenced against any Credit Party seeking a decree or order in respect of such Credit Party (i) under the Insolvency Laws, as now constituted or hereafter amended or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for such Credit Party or for any substantial part of any such Credit Party's assets, or (iii) ordering the winding-up or liquidation of the affairs of such Credit Party, and such case or proceeding shall remain undismissed or unstayed for sixty (60) days or more or a decree or order granting the relief sought in such case or proceeding by a court of competent jurisdiction. (i) Any Credit Party (i) files a petition seeking relief under the Insolvency Laws, as now constituted or hereafter amended, or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) consents or fails to contest in a timely and appropriate manner to the institution of proceedings thereunder or to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for such Credit Party or for any substantial part of any such Credit Party's assets, (iii) makes an assignment for the benefit of creditors, (iv) files a proposal or notice of intention to file a proposal under any Insolvency Laws, (v) takes any corporate action in furtherance of any of the foregoing, (vi) admits in writing its inability to, or is generally unable to, pay its debts as such debts become due, or (vii) is not Solvent. (j) A final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate at any time are outstanding against one or more of the Credit Parties and the same are not, within thirty (30) days after the entry thereof, discharged or execution thereof stayed or bonded pending appeal, or such judgments are not discharged prior to the expiration of any such stay. (k) Any material provision of any Loan Document for any reason ceases to be valid, binding and enforceable in accordance with its terms (or any Credit Party shall challenge the enforceability of any Loan Document or shall assert in writing, or engage in any action or inaction based on any such assertion, that any provision of any of the Loan Documents has ceased to be or otherwise is not valid, binding and enforceable in accordance with its terms), or any Lien created under any Loan Document shall cease to be a valid and perfected first priority Lien (except as otherwise permitted herein or therein) in any of the Collateral purported to be covered thereby. (l) Any Change of Control occurs. 8.2. Remedies. (a) If any Default or Event of Default has occurred and is continuing, Agent may (and at the written request of the Requisite Revolving Lenders shall), without notice, suspend the Revolving Loan facility with respect to additional Advances and/or the incurrence of additional Letter of Credit Obligations, whereupon any additional Advances and the incurrence of additional Letter of Credit Obligations shall be made or extended in Agent's sole discretion (or in the sole discretion of the Requisite Revolving Lenders, if such 54 suspension occurred at their direction) so long as such Default or Event of Default is continuing. If any Event of Default has occurred and is continuing, Agent may (and at the written request of Requisite Lenders shall), without notice except as otherwise expressly provided herein, increase the rate of interest applicable to the Loans and the Letter of Credit Fees to the Default Rate. (b) If any Event of Default has occurred and is continuing, Agent may (and at the written request of the Requisite Lenders shall), without notice, (i) terminate the Revolving Loan facility with respect to further Advances or the incurrence of further Letter of Credit Obligations; (ii) declare all or any portion of the Obligations, including all or any portion of any Loan to be forthwith due and payable, and require that the Letter of Credit Obligations be cash collateralized as provided in Annex B, all without presentment, demand, protest or further notice of any kind, all of which are expressly waived by Borrower and each other Credit Party; or (iii) exercise any rights and remedies provided to Agent under the Loan Documents or at law or equity, including all remedies provided under the Code; provided, that upon the occurrence of an Event of Default specified in Sections 8.1(h) or (i), the Revolving Loan facility shall be immediately terminated and all of the Obligations, including the Revolving Loan, shall become immediately due and payable without declaration, notice or demand by any Person. 8.3. Priority of Payment. Notwithstanding any provision of this Agreement to the contrary, following acceleration of the Loans (including an automatic acceleration upon the occurrence of an Event of Default under Sections 8.1(h) or (i)), all payments received in payment of the Loans will be applied: (A) to the extent that such payments arise from a refinancing of the Obligations or the sale of the Credit Parties as a going concern: (1) to Fees and Agents' expenses reimbursable hereunder; (2) to interest on the Swing Line Loan; (3) to principal payments on the Swing Line Loan; (4) to interest on the Revolving Loan, Term Loan A, Term Loan B and the IP Loan, ratably in proportion to the interest accrued as to each such Loan; (5) to principal payments on the Revolving Loan, Term Loan A, Term Loan B and the IP Loan and to provide cash collateral for Letter of Credit Obligations in the manner described in Annex B, ratably to the aggregate, combined principal balance of such Loans and outstanding Letter of Credit Obligations; (6) to all other Obligations (other than principal and interest on Term Loan C), including expenses of Lenders to the extent reimbursable under Section 11.3; (7) to interest on Term Loan C; and (8) to the principal of Term Loan C; (B) to the extent that such payments constitute proceeds from the sale or other disposition of Collateral (other than IP Collateral) or the exercise of offset rights against a Credit Party's bank account(s): (1) to Fees and Agents' expenses reimbursable hereunder; (2) to interest on the Swing Line Loan; (3) to principal payments on the Swing Line Loan; (4) to interest on the Revolving Loan, Term Loan A and Term Loan B, ratably in proportion to the interest accrued as to each such Loan; (5) to principal payments on the Revolving Loan, Term Loan A and Term Loan B and to provide cash collateral for Letter of Credit Obligations in the manner described in Annex B, ratably to the aggregate, combined principal balance of such Loans and outstanding Letter of Credit Obligations; (6) to interest on the IP Loan; (7) to principal of the IP Loan; (8) to all other Obligations (other than principal and interest on Term Loan C), including expenses of Lenders to the extent reimbursable under Section 11.3; (9) to interest on Term Loan C; and (10) to principal of Term Loan C; (C) to the extent that such payments constitute proceeds from the sale or other disposition of IP Collateral: (1) to Agents' expenses reimbursable hereunder; (2) to interest on the IP Loan; (3) to principal of the IP Loan; (4) to interest on the Swing Line Loan; (5) to 55 principal payments on the Swing Line Loan; (6) to Fees and to interest on the Revolving Loan, Term Loan A and Term Loan B, ratably in proportion to the interest accrued as to each such Loan; (7) to principal payments on the Revolving Loan, Term Loan A and Term Loan B and to provide cash collateral for Letter of Credit Obligations in the manner described in Annex B, ratably to the aggregate, combined principal balance of such Loans and outstanding Letter of Credit Obligations; (8) to all other Obligations (other than principal and interest on Term Loan C), including expenses of Lenders to the extent reimbursable under Section 11.3; (9) to interest on Term Loan C; and (10) to principal of Term Loan C. 8.4. Waivers by Credit Parties. Except as otherwise provided for in this Agreement or by applicable law, each Credit Party waives: (a) presentment, demand and protest and notice of presentment, dishonor, notice of intent to accelerate, notice of acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Agent on which any Credit Party may in any way be liable, and hereby ratifies and confirms whatever Agent may do in this regard, (b) all rights to notice and a hearing prior to Agent's taking possession or control of, or to Agent's replevy, attachment or levy upon, the Collateral or any bond or security that might be required by any court prior to allowing Agent to exercise any of its remedies, and (c) the benefit of all valuation, appraisal, marshaling and exemption laws. 8.5. Receivership. Without limiting the generality of the foregoing or limiting in any way the rights of Agent or the Lenders under the Collateral Documents or otherwise under applicable law, at any time after (i) the entire principal balance of any Loan shall have become due and payable (whether at maturity, by acceleration or otherwise) and (ii) the Agent shall have provided to the Credit Parties not less than ten (10) days' prior written notice of its intention to apply for a receiver, the Agent shall be entitled to apply for and have a receiver appointed under state or federal law by a court of competent jurisdiction in any action taken by the Agent to enforce the Lenders' and Agent's rights and remedies hereunder and under the Collateral Documents in order to manage, protect, preserve, sell and otherwise dispose of all or any portion of the Collateral and continue the operation of the business of the Credit Parties, and to collect all revenues and profits thereof and apply the same to the payment of all expenses and other charges of such receivership, including the compensation of the receiver, and to the payment of the Loans and other fees and expenses due hereunder and under the Collateral Documents as aforesaid until a sale or other disposition of such Collateral shall be finally made and consummated. THE CREDIT PARTIES HEREBY IRREVOCABLY CONSENT TO AND WAIVE ANY RIGHT TO OBJECT TO OR OTHERWISE CONTEST THE APPOINTMENT OF A RECEIVER AS PROVIDED ABOVE. THE CREDIT PARTIES (I) GRANT SUCH WAIVER AND CONSENT KNOWINGLY AFTER HAVING DISCUSSED THE IMPLICATIONS THEREOF WITH COUNSEL, (II) ACKNOWLEDGE THAT (A) THE UNCONTESTED RIGHT TO HAVE A RECEIVER APPOINTED FOR THE FOREGOING PURPOSES IS CONSIDERED ESSENTIAL BY THE LENDERS IN CONNECTION WITH THE ENFORCEMENT OF THE LENDERS' AND AGENT'S RIGHTS AND REMEDIES HEREUNDER AND UNDER THE COLLATERAL DOCUMENTS, AND (B) THE AVAILABILITY OF SUCH APPOINTMENT AS A REMEDY UNDER THE FOREGOING CIRCUMSTANCES WAS A MATERIAL FACTOR IN INDUCING THE LENDERS TO 56 MAKE THE LOANS TO THE BORROWER; AND (III) AGREE TO ENTER INTO ANY AND ALL STIPULATIONS IN ANY LEGAL ACTIONS, OR AGREEMENTS OR OTHER INSTRUMENTS IN CONNECTION WITH THE FOREGOING AND TO COOPERATE FULLY WITH THE AGENT AND THE LENDERS IN CONNECTION WITH THE ASSUMPTION AND EXERCISE OF CONTROL BY THE RECEIVER OVER ALL OR ANY PORTION OF THE COLLATERAL. THE LENDERS AND THE AGENT ACKNOWLEDGE AND AGREE THAT NOTHING IN THIS SECTION SHALL BE DEEMED TO CONSTITUTE A WAIVER OF THE CREDIT PARTIES' RIGHT TO FILE FOR PROTECTION UNDER TITLE 11 OF THE UNITED STATES CODE AT ANY TIME PRIOR TO THE APPOINTMENT OF A RECEIVER. 9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT 9.1. Assignment and Participations. (a) The Credit Parties signatory hereto consent to the sale of participations in, at any time or times, the Loan Documents, Loans, Letter of Credit Obligations and any Commitment or of any portion thereof or interest therein, including any Lender's rights, title, interests, remedies, powers or duties thereunder. Any assignment by a Lender shall: (i) require the consent of Agent (which consent shall not be unreasonably withheld or delayed with respect to a Qualified Assignee) and the execution of an assignment agreement (an "Assignment Agreement") substantially in the form attached hereto as Exhibit 9.1(a) and otherwise in form and substance satisfactory to, and acknowledged by, Agent; (ii) be conditioned on such assignee Lender representing to the assigning Lender and Agent that it is purchasing the applicable Loans to be assigned to it for its own account, for investment purposes and not with a view to the distribution thereof; (iii) if a partial assignment, be in an amount at least equal to $5,000,000 and, after giving effect to any such partial assignment, the assigning Lender shall have retained Commitments in an amount at least equal to $5,000,000; and (iv) include a payment to Agent of an assignment fee of $3,500. In the case of an assignment by a Lender under this Section 9.1, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as all other Lenders hereunder. Notwithstanding the foregoing, an assignment by a Lender to a Qualified Assignee under common ownership and control with such Lender does not require Agent's consent and is not subject to the $3,500 assignment fee. The assigning Lender shall be relieved of its obligations hereunder with respect to its Commitments or assigned portion thereof from and after the date of such assignment. Borrower hereby acknowledges and agrees that any assignment shall give rise to a direct obligation of Borrower to the assignee and that the assignee shall be considered to be a "Lender." In all instances, each Lender's liability to make Loans hereunder shall be several and not joint and shall be limited to such Lender's Pro Rata Share of the applicable Commitment. In the event Agent or any Lender assigns or otherwise transfers all or any part of the Obligations, Agent or any such Lender shall so notify Borrower and Borrower shall, upon the request of Agent or such Lender, execute new Notes in exchange for the Notes, if any, being assigned. Notwithstanding the foregoing provisions of this Section 9.1(a), any Lender may at any time pledge the Obligations held by it and such Lender's rights under this Agreement and the other Loan Documents to a Federal Reserve Bank, and any lender that is an investment fund may assign the Obligations held by it and such Lender's rights under this Agreement and the other Loan Documents to another investment fund managed by the same investment advisor; 57 provided, that no such pledge to a Federal Reserve Bank shall release such Lender from such Lender's obligations hereunder or under any other Loan Document. Upon any transfer of an interest in Term Loan C, the substitute notes evidencing such transfer shall bear the legend required by IRC Section 1275(c)(1) and Treasury Regulation 1.275-3(b). Credit Parties' consent to an assignment of Commitments is not required (i) if the assignee is a Qualified Assignee or (ii) if the assignee is not a Qualified Assignee, but an Event of Default has occurred and is continuing. Agent's consent to an assignment of Commitments is not required if the assignment is made by a Lender to one or more Qualified Assignees and such sale is made in connection with a sale of all or substantially all of that Lender's loan portfolio. (b) Any participation by a Lender of all or any part of its Commitments shall be made with the understanding that all amounts payable by Borrower hereunder shall be determined as if that Lender had not sold such participation, and that the holder of any such participation (other than a participant that is a majority-owned Subsidiary of the parent of such Lender) shall not be entitled to require such Lender to take or omit to take any action hereunder except actions directly affecting (i) any reduction in the principal amount of, or interest rate or Fees payable with respect to, any Loan in which such holder participates, (ii) any extension of the scheduled amortization of the principal amount of any Loan in which such holder participates or the final maturity date thereof, and (iii) any release of all or substantially all of the Collateral (other than in accordance with the terms of this Agreement, the Collateral Documents or the other Loan Documents). Solely for purposes of Sections 1.13, 1.15, 1.16(a) and (b) and 9.8, Borrower acknowledges and agrees that a participation shall give rise to a direct obligation of Borrower to the participant and the participant shall be considered to be a "Lender." Except as set forth in the preceding sentence neither Borrower nor any other Credit Party shall have any obligation or duty to any participant. Neither Agent nor any Lender (other than the Lender selling a participation) shall have any duty to any participant and may continue to deal solely with the Lender selling a participation as if no such sale had occurred. (c) Except as expressly provided in this Section 9.1, no Lender shall, as between Borrower and that Lender, or Agent and that Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of, or granting of participation in, all or any part of the Loans, the Notes or other Obligations owed to such Lender. (d) Each Credit Party executing this Agreement shall assist any Lender permitted to sell assignments or participations under this Section 9.1 as reasonably required to enable the assigning or selling Lender to effect any such assignment or participation, including the execution and delivery of any and all agreements, notes and other documents and instruments as shall be requested and the preparation of informational materials for, and the participation of management in meetings with, potential assignees or participants. Each Credit Party executing this Agreement shall certify the correctness, completeness and accuracy of all descriptions of the Credit Parties and their respective affairs contained in any selling materials provided by it and all other information provided by it and included in such materials, except that any Projections delivered by Borrower shall only be certified by Borrower as having been prepared by Borrower in compliance with the representations contained in Section 3.4(c). 58 (e) A Lender may furnish any information concerning Credit Parties in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants). Each Lender shall obtain from assignees or participants confidentiality covenants substantially equivalent to those contained in Section 11.8. (f) So long as no Event of Default has occurred and is continuing, no Lender shall assign or sell participations in any portion of its Loans or Commitments to a potential Lender or participant, if, as of the date of the proposed assignment or sale, the assignee Lender or participant would be subject to capital adequacy or similar requirements under Section 1.16(a), increased costs under Section 1.16(b), an inability to fund LIBOR Loans under Section 1.16(c), or withholding taxes in accordance with Section 1.15(a). 9.2. Appointment of Agent. GE Capital is hereby appointed to act on behalf of all Lenders as Agent and Fleet is appointed as Syndication Agent under this Agreement and the other Loan Documents. The provisions of this Section 9.2 are solely for the benefit of Agents and Lenders and no Credit Party nor any other Person shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and the other Loan Documents, each Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for any Credit Party or any other Person. Agents shall have no duties or responsibilities except for those expressly set forth in this Agreement and the other Loan Documents. The duties of Agents shall be mechanical and administrative in nature and Agents shall not have, or be deemed to have, by reason of this Agreement, any other Loan Document or otherwise a fiduciary relationship in respect of any Lender. No Agent nor any of their Affiliates nor any of their respective officers, directors, employees, agents or representatives shall be liable to any Lender for any action taken or omitted to be taken by it hereunder or under any other Loan Document, or in connection herewith or therewith, except for damages caused by its or their own gross negligence or willful misconduct. Except as expressly set forth herein and in the other Loan Documents, neither Agent shall have any duty to disclose, or shall be liable for the failure to disclose, any information relating to any Credit Party or any of their respective Subsidiaries that is communicated to or obtained by such Agent or any of its Affiliates in any capacity. Neither Agent shall be deemed to have knowledge of any Default or Event of Default unless and until written notice thereof is given to such Agent by the Borrower or a Lender, and neither Agent shall be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in, or in connection with, this Agreement or the other Loan Documents, (ii) the contents of any certificate, report or other document delivered hereunder or under any of the other Loan Documents or in connection herewith of therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or in any other Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, the other Loan Documents or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Section 2 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to Agents. If Agent requests instructions from Requisite Lenders, Requisite Revolving Lenders or all affected Lenders with respect to any act or action (including failure to act) in connection with this Agreement or any other Loan Document, then Agent shall be entitled to 59 refrain from such act or taking such action unless and until Agent shall have received instructions from Requisite Lenders, Requisite Revolving Lenders or all affected Lenders, as the case may be, and Agent shall not incur liability to any Person by reason of so refraining. Each Agent shall be fully justified in failing or refusing to take any action hereunder or under any other Loan Document (a) if such action would, in the opinion of such Agent, be contrary to law or the terms of this Agreement or any other Loan Document, (b) if such action would, in the opinion of such Agent, expose such Agent to Environmental Liabilities or (c) if such Agent shall not first be indemnified to its satisfaction against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Without limiting the foregoing, no Lender shall have any right of action whatsoever against either Agent as a result of such Agent acting or refraining from acting hereunder or under any other Loan Document in accordance with the instructions of Requisite Lenders, Requisite Revolving Lenders or all affected Lenders, as applicable. 9.3. Agents' Reliance, Etc. No Agent nor any of their Affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or the other Loan Documents, except for damages caused by its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, each Agent: (a) may treat the payee of any Note as the holder thereof until Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to Agent; (b) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in or in connection with this Agreement or the other Loan Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or the other Loan Documents on the part of any Credit Party or to inspect the Collateral (including the books and records) of any Credit Party; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; and (f) shall incur no liability under or in respect of this Agreement or the other Loan Documents by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopy, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. 9.4. Agents and Affiliates. With respect to its Commitments hereunder, each Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any other Lender and may exercise the same as though it were not Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include GE Capital and Fleet in their individual capacities. Each Agent and its Affiliates may lend money to, invest in, and generally engage in any kind of business with, any Credit Party, any of their Affiliates and any Person who may do business with or own securities of any Credit Party or any such Affiliate, all as if GE Capital and Fleet were not Agents and without any duty to account therefor to Lenders. Each Agent and its Affiliates may accept fees and other consideration from any Credit Party for services in connection with this Agreement or otherwise without having to account for 60 the same to Lenders. Each Lender acknowledges the potential conflict of interest between GE Capital and Fleet as Lenders holding disproportionate interests in the Loans and having differing priorities in the various pools of Collateral upon acceleration of the Obligations and GE Capital and Fleet as Agents, and expressly consents to and waives any claim based upon, such conflict of interest. 9.5. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon Agent or any other Lender and based on the Financial Statements referred to in Section 3.4(a) and such other documents and information as it has deemed appropriate, made its own credit and financial analysis of the Credit Parties and its own decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon either Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Each Lender acknowledges the potential conflict of interest of each other Lender as a result of Lenders holding disproportionate interests in the Loans, and expressly consents to, and waives any claim based upon, such conflict of interest. 9.6. Indemnification. Lenders agree to indemnify each Agent (to the extent not reimbursed by Credit Parties and without limiting the obligations of Borrower hereunder), ratably according to their respective Pro Rata Shares, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against either Agent in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted to be taken by such Agent in connection therewith; provided, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from either Agent's gross negligence or willful misconduct. Without limiting the foregoing, each Lender agrees to reimburse each Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by such Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement and each other Loan Document, to the extent that such Agent is not reimbursed for such expenses by Credit Parties. 9.7. Successor Agent. Either Agent may resign at any time by giving not less than thirty (30) days' prior written notice thereof to Lenders and Borrower. Upon any such resignation, the Requisite Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Requisite Lenders and shall have accepted such appointment within 30 days after the resigning Agent's giving notice of resignation, then the resigning Agent may, on behalf of Lenders, appoint a successor Agent, which shall be a Lender, if a Lender is willing to accept such appointment, or otherwise shall be a commercial bank or financial institution or a subsidiary of a commercial bank or financial institution if such commercial bank or financial institution is organized under the laws of the United States of America or of any State thereof and has a combined capital and surplus of at least $300,000,000. If no successor Agent has been appointed pursuant to the foregoing, within 30 days after the date 61 such notice of resignation was given by the resigning Agent, such resignation shall become effective and the Requisite Lenders shall thereafter perform all the duties of the resigning Agent hereunder until such time, if any, as the Requisite Lenders appoint a successor Agent as provided above. Any successor Agent appointed by Requisite Lenders hereunder shall be subject to the approval of Borrower, such approval not to be unreasonably withheld or delayed; provided that such approval shall not be required if a Default or an Event of Default has occurred and is continuing. Upon the acceptance of any appointment as an Agent hereunder by a successor Agent, such successor Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent. Upon the earlier of the acceptance of any appointment as an Agent hereunder by a successor Agent or the effective date of the resigning Agent's resignation, the resigning Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents, except that any indemnity rights or other rights in favor of such resigning Agent shall continue. After any resigning Agent's resignation hereunder, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was acting as an Agent under this Agreement and the other Loan Documents. 9.8. Setoff and Sharing of Payments. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default and subject to Section 9.9(f), each Lender is hereby authorized at any time or from time to time, without notice to any Credit Party or to any other Person, any such notice being hereby expressly waived, to offset and to appropriate and to apply any and all balances held by it at any of its offices for the account of Borrower or any Guarantor (regardless of whether such balances are then due to Borrower or any Guarantor) and any other properties or assets at any time held or owing by that Lender or that holder to or for the credit or for the account of Borrower or any Guarantor against and on account of any of the Obligations that are not paid when due. Any Lender exercising a right of setoff or otherwise receiving any payment on account of the Obligations in excess of its Pro Rata Share thereof shall purchase for cash (and the other Lenders or holders shall sell) such participations in each such other Lender's or holder's Pro Rata Share of the Obligations as would be necessary to cause such Lender to share the amount so offset or otherwise received with each other Lender or holder in accordance with their respective Pro Rata Shares, (other than offset rights exercised by any Lender with respect to Sections 1.13, 1.15 or 1.16). Each Lender's obligation under this Section 9.8 shall be in addition to and not in limitation of its obligations to purchase a participation in an amount equal to its Pro Rata Share of the Swing Line Loans under Section 1.1. Borrower and each Guarantor agree, to the fullest extent permitted by law, that (a) any Lender may exercise its right to offset with respect to amounts in excess of its Pro Rata Share of the Obligations and may sell participations in such amounts so offset to other Lenders and holders and (b) any Lender so purchasing a participation in the Loans made or other Obligations held by other Lenders or holders may exercise all rights of offset, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender or holder were a direct holder of the Loans and the other Obligations in the amount of such participation. Notwithstanding the foregoing, if all or any portion of the offset amount or payment otherwise received is thereafter recovered from the Lender that has exercised the right of offset, the purchase of participations by that Lender shall be rescinded and the purchase price restored without interest. 62 9.9. Advances; Payments; Non-Funding Lenders; Information; Actions in Concert. (a) Advances; Payments. (i) Revolving Lenders shall refund or participate in the Swing Line Loan in accordance with clauses (iii) and (iv) of Section 1.1(c). If the Swing Line Lender declines to make a Swing Line Loan or if Swing Line Availability is zero, Agent shall notify Revolving Lenders, promptly after receipt of a Notice of Revolving Advance and in any event prior to 1:00 p.m. (New York time) on the date such Notice of Revolving Advance is received, by telecopy, telephone or other similar form of transmission. Each Revolving Lender shall make the amount of such Lender's Pro Rata Share of such Revolving Credit Advance available to Agent in same day funds by wire transfer to Agent's account as set forth in Annex H not later than 3:00 p.m. (New York time) on the requested funding date, in the case of an Index Rate Loan and not later than 11:00 a.m. (New York time) on the requested funding date in the case of a LIBOR Loan. After receipt of such wire transfers (or, in the Agent's sole discretion, before receipt of such wire transfers), subject to the terms hereof, Agent shall make the requested Revolving Credit Advance to Borrower. All payments by each Revolving Lender shall be made without setoff, counterclaim or deduction of any kind. (ii) On the second (2nd) Business Day of each calendar week or more frequently as aggregate cumulative payments in excess of $2,000,000 are received with respect to the Loans (other than the Swing Line Loan) (each, a "Settlement Date"), Agent shall advise each Lender by telephone, or telecopy of the amount of such Lender's Pro Rata Share of principal, interest and Fees paid for the benefit of Lenders with respect to each applicable Loan. Provided that each Lender has funded all payments and Advances required to be made by it and purchased all participations required to be purchased by it under this Agreement and the other Loan Documents as of such Settlement Date, Agent shall pay to each Lender such Lender's Pro Rata Share of principal, interest and Fees paid by Borrower since the previous Settlement Date for the benefit of such Lender on the Loans held by it. To the extent that any Lender (a "Non-Funding Lender") has failed to fund all such payments and Advances or failed to fund the purchase of all such participations, Agent shall be entitled to set off the funding short-fall against that Non-Funding Lender's Pro Rata Share of all payments received from Borrower. Such payments shall be made by wire transfer to such Lender's account (as specified by such Lender in Annex H or the applicable Assignment Agreement) not later than 2:00 p.m. (Chicago time) on the next Business Day following each Settlement Date. (b) Availability of Lender's Pro Rata Share. Agent may assume that each Revolving Lender will make its Pro Rata Share of each Revolving Credit Advance available to Agent on each funding date. If such Pro Rata Share is not, in fact, paid to Agent by such Revolving Lender when due, Agent will be entitled to recover such amount on demand from such Revolving Lender without setoff, counterclaim or deduction of any kind. If any Revolving Lender fails to pay the amount of its Pro Rata Share forthwith upon Agent's demand, Agent shall promptly notify Borrower and Borrower shall immediately repay such amount to Agent. Nothing in this Section 9.9(b) or elsewhere in this Agreement or the other Loan Documents shall be deemed to require Agent to advance funds on behalf of any Revolving Lender or to relieve any 63 Revolving Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Borrower may have against any Revolving Lender as a result of any default by such Revolving Lender hereunder. To the extent that Agent advances funds to Borrower on behalf of any Revolving Lender and is not reimbursed therefor on the same Business Day as such Advance is made, Agent shall be entitled to retain for its account all interest accrued on such Advance until reimbursed by the applicable Revolving Lender. (c) Return of Payments. (i) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender on demand without setoff, counterclaim or deduction of any kind. (ii) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to Borrower or paid to any other Person pursuant to any Insolvency Law or otherwise, then, notwithstanding any other term or condition of this Agreement or any other Loan Document, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without setoff, counterclaim or deduction of any kind. (d) Non-Funding Lenders. The failure of any Non-Funding Lender to make any Revolving Credit Advance or any payment required by it hereunder, or to purchase any participation in any Swing Line Loan to be made or purchased by it on the date specified therefor shall not relieve any other Lender (each such other Revolving Lender, an "Other Lender") of its obligations to make such Advance or purchase such participation on such date, but neither any Other Lender nor Agent shall be responsible for the failure of any Non-Funding Lender to make an Advance, purchase a participation or make any other payment required hereunder. Notwithstanding anything set forth herein to the contrary, a Non-Funding Lender shall not have any voting or consent rights under or with respect to any Loan Document or constitute a "Lender" or a "Revolving Lender" (or be included in the calculation of "Requisite Lenders," or "Requisite Revolving Lenders" hereunder) for any voting or consent rights under or with respect to any Loan Document. At Borrower's request, Agent or a Person acceptable to Agent shall have the right with Agent's consent and in Agent's sole discretion (but shall have no obligation) to purchase from any Non-Funding Lender, and each Non-Funding Lender agrees that it shall, at Agent's request, sell and assign to Agent or such Person, all of the Commitments of that Non-Funding Lender for an amount equal to the principal balance of all Loans held by such Non-Funding Lender and all accrued interest and fees with respect thereto through the date of sale, such purchase and sale to be consummated pursuant to an executed Assignment Agreement. (e) Dissemination of Information. Agent shall use reasonable efforts to provide Lenders with any notice of Default or Event of Default received by Agent from, or delivered by Agent to, any Credit Party, with notice of any Event of Default of which Agent has 64 actually become aware and with notice of any action taken by Agent following any Event of Default; provided, that Agent shall not be liable to any Lender for any failure to do so, except to the extent that such failure is attributable to Agent's gross negligence or willful misconduct. Lenders acknowledge that Borrower is required to provide Financial Statements and Collateral Reports to Lenders in accordance with Annexes E and F hereto and agree that Agent shall have no duty to provide the same to Lenders. (f) Actions in Concert. Anything in this Agreement to the contrary notwithstanding, each Lender hereby agrees with each other Lender that no Lender shall take any action to protect or enforce its rights arising out of this Agreement or the Notes (including exercising any rights of setoff) without first obtaining the prior written consent of Agent and Requisite Lenders, it being the intent of Lenders that any such action to protect or enforce rights under this Agreement and the Notes shall be taken in concert and at the direction or with the consent of Agent. 10. SUCCESSORS AND ASSIGNS 10.1. Successors and Assigns. This Agreement and the other Loan Documents shall be binding on and shall inure to the benefit of each Credit Party, Agent, Lenders and their respective successors and assigns (including, in the case of any Credit Party, a debtor-in-possession on behalf of such Credit Party), except as otherwise provided herein or therein. No Credit Party may assign, transfer, hypothecate or otherwise convey its rights, benefits, obligations or duties hereunder or under any of the other Loan Documents without the prior express written consent of Agent and Lenders. Any such purported assignment, transfer, hypothecation or other conveyance by any Credit Party without the prior express written consent of Agent and Lenders shall be void. The terms and provisions of this Agreement are for the purpose of defining the relative rights and obligations of each Credit Party, Agent and Lenders with respect to the transactions contemplated hereby and no Person shall be a third party beneficiary of any of the terms and provisions of this Agreement or any of the other Loan Documents. 11. MISCELLANEOUS 11.1. Complete Agreement; Modification of Agreement. The Loan Documents constitute the complete agreement between the parties with respect to the subject matter thereof and may not be modified, altered or amended except as set forth in Section 11.2. Any letter of interest, commitment letter, or fee letter (other than the Fee Letter) between any Credit Party and Agent or any Lender or any of their respective Affiliates, predating this Agreement and relating to a financing of substantially similar form, purpose or effect shall be superseded by this Agreement. 11.2. Amendments and Waivers. (a) Except for actions expressly permitted to be taken by Agent, no amendment, modification, termination or waiver of any provision of this Agreement or any other Loan Document, or any consent to any departure by any Credit Party therefrom, shall in any event be effective unless the same shall be in writing and signed by Agent and Borrower, and by 65 Requisite Lenders, Requisite Revolving Lenders or all affected Lenders, as applicable. Except as set forth in clauses (b) and (c) below, all such amendments, modifications, terminations or waivers requiring the consent of any Lenders shall require the written consent of Requisite Lenders. (b) No amendment, modification, termination or waiver of or consent with respect to any provision of this Agreement that increases the percentage advance rates set forth in the definition of the Borrowing Base, or that makes less restrictive the nondiscretionary criteria for exclusion from Eligible Accounts and Eligible Inventory set forth in Sections 1.6 and 1.7, or Eligible Equipment or Eligible Real Estate shall be effective unless the same shall be in writing and signed by Agent, Requisite Revolving Lenders and Borrower. No amendment, modification, termination or waiver of or consent with respect to any provision of this Agreement that waives compliance with the conditions precedent set forth in Section 2.2 to the making of any Loan or the incurrence of any Letter of Credit Obligations shall be effective unless the same shall be in writing and signed by Agent, Requisite Revolving Lenders and Borrower. Notwithstanding anything contained in this Agreement to the contrary, no waiver or consent with respect to any Default or any Event of Default shall be effective for purposes of the conditions precedent to the making of Loans or the incurrence of Letter of Credit Obligations set forth in Section 2.2 unless the same shall be in writing and signed by Agent, Requisite Revolving Lenders and Borrower. (c) (i) No amendment, modification, termination or waiver shall, unless in writing and signed by Agent and each Lender directly affected thereby: (a) increase the aggregate principal amount of the Commitments or increase the principal amount of any Lender's Term Loan A Commitment, Term Loan B Commitment, Term Loan C Commitment, Revolving Loan Commitment or IP Loan Commitment (which action shall be deemed to directly affect all Lenders); (b) reduce the principal of, rate of interest on or Fees payable with respect to any Loan or Letter of Credit Obligations of any affected Lender; (c) extend or waive any payment date or final maturity date of the principal amount of any Loan of any affected Lender; (d) waive, forgive, defer, extend or postpone any payment of interest or Fees as to any affected Lender; (e) release any Guaranty or, except as otherwise permitted herein or in the other Loan Documents, release, or subordinate Agent's Liens in, or permit any Credit Party to sell or otherwise dispose of, any Collateral with a value exceeding $5,000,000 in the aggregate so long as the Obligations remain outstanding (which action shall be deemed to directly affect all Lenders); (f) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans that shall be required for Lenders or any of them to take any action hereunder; (g) amend or waive this Section 11.2 or the definitions of the terms "Requisite Lenders" or "Requisite Revolving Lenders" insofar as such definitions affect the substance of this Section 11.2; and (h) amend or waive Sections 1.3(a)(ii), 1.3(c), 1.3(f), 1.5(a)(iii), 1.11 or 8.3. Furthermore, no amendment, modification, termination or waiver affecting the rights or duties of Agents under this Agreement or any other Loan Document shall be effective unless in writing and signed by Agents, in addition to Lenders required hereinabove to take such action. Each amendment, modification, termination or waiver shall be effective only in the specific instance and for the specific purpose for which it was given. No amendment, modification, termination or waiver shall be required for Agent to take additional Collateral pursuant to any Loan Document. 66 No amendment, modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the holder of that Note. No notice to or demand on any Credit Party in any case shall entitle such Credit Party or any other Credit Party to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this Section 11.2 shall be binding upon each holder of the Notes at the time outstanding and each future holder of the Notes. All Lenders and Credit Parties acknowledge that if all Revolving Lenders elect to extend the maturity date of the Revolving Loan beyond August 31, 2004, the definition of the Commitment Termination Date will be deemed to be amended accordingly. (ii) No voluntary prepayment shall be applied to the outstanding principal balance of Term Loan C without the prior written consent of all of the holders of the Revolving Loan Commitments, the Term Loan A Commitments, the IP Loan Commitments and the Term Loan B Commitments, except for prepayments of Term Loan C with the proceeds of Permitted Subordinated Debt. (d) If, in connection with any proposed amendment, modification, waiver or termination (a "Proposed Change"): (i) requiring the consent of all affected Lenders, the consent of Requisite Lenders is obtained, but the consent of other Lenders whose consent is required is not obtained (any such Lender whose consent is not obtained as described in this clause (i) and in clauses (ii) and (iii) below being referred to as a "Non-Consenting Lender"), (ii) requiring the consent of Requisite Revolving Lenders, the consent of Revolving Lenders holding 51% or more of the aggregate Revolving Loan Commitments is obtained, but the consent of Requisite Revolving Lenders is not obtained, or (iii) requiring the consent of Requisite Lenders, the consent of Lenders holding 51% or more of the aggregate Commitments is obtained, but the consent of Requisite Lenders is not obtained, then, so long as Agent is not a Non-Consenting Lender, at Borrower's request Agent, or a Person acceptable to Agent, shall have the right with Agent's consent and in Agent's sole discretion (but shall have no obligation) to purchase from such Non-Consenting Lenders, and such Non-Consenting Lenders agree that they shall, upon Agent's request, sell and assign to Agent or such Person, all of the Commitments of such Non-Consenting Lenders for an amount equal to the principal balance of all Loans held by the Non-Consenting Lenders and all accrued interest and Fees with respect thereto through the date of sale, such purchase and sale to be consummated pursuant to an executed Assignment Agreement. (e) Upon payment in full in cash and performance of all of the Obligations (other than indemnification Obligations), termination of the Commitments and a release of all 67 claims against Agent and Lenders, and so long as no suits, actions proceedings, or claims are pending or threatened against any Indemnified Person asserting any damages, losses or liabilities that are Indemnified Liabilities, Agent shall deliver to Borrower termination statements, mortgage releases and other documents necessary or appropriate to evidence the termination of the Liens securing payment of the Obligations. (f) In order to complete syndication of the Loans, Agents specifically reserve their rights as to amendments related to syndication as provided in the Fee Letter. (g) Notwithstanding any provision herein contained to the contrary, Credit Parties shall not be permitted to sell or dispose of IP Collateral with a value in excess of $500,000 in the aggregate so long as the IP Loan is outstanding without the prior written consent of at least sixty-six and two-thirds percent (66 2/3%) of the IP Loan Commitment. (h) Notwithstanding any provision herein contained to the contrary, the percentage advance rates for Eligible Accounts and Eligible Inventory set forth in the definition of Borrowing Base may not be increased without the prior written consent of the holders of at least eighty percent (80%) of the Revolving Loan Commitment. 11.3. Fees and Expenses. Borrower shall reimburse (i) Agents for all fees, costs and expenses (including the reasonable fees and expenses of all of its special counsel, advisors, consultants and auditors) and (ii) Agents (and, with respect to clauses (c) and (d) below, all Lenders) for all fees, costs and expenses, including the reasonable fees, costs and expenses of counsel or other advisors (including environmental and management consultants and appraisers) incurred in connection with the negotiation and preparation of the Loan Documents and for advice, assistance, or other representation in connection with: (a) the forwarding to Borrower or any other Person on behalf of Borrower by Agents of the proceeds of the Loans; (b) any amendment, modification or waiver of, or consent with respect to, or termination of, any of the Loan Documents or Related Transactions Documents or advice in connection with the administration of the Loans made pursuant hereto or its rights hereunder or thereunder; (c) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Agent, any Lender, Borrower or any other Person and whether as a party, witness or otherwise) in any way relating to the Collateral, any of the Loan Documents or any other agreement to be executed or delivered in connection herewith or therewith, including any litigation, contest, dispute, suit, case, proceeding or action, and any appeal or review thereof, in connection with a case commenced by or against Borrower or any other Person that may be obligated to Agent by virtue of the Loan Documents, including any such litigation, contest, dispute, suit, proceeding or action arising in connection with any work-out or restructuring of the Loans during the pendency of one or more Events of Default; provided, that in the case of reimbursement of counsel for Lenders other than Agent, such reimbursement shall be limited to one counsel for all such Lenders; 68 (d) any attempt to enforce any remedies of Agent or any Lender against any or all of the Credit Parties or any other Person that may be obligated to Agent or any Lender by virtue of any of the Loan Documents, including any such attempt to enforce any such remedies in the course of any work-out or restructuring of the Loans during the pendency of one or more Events of Default; provided, that in the case of reimbursement of counsel for Lenders other than Agent, such reimbursement shall be limited to one counsel for all such Lenders; (e) any workout or restructuring of the Loans during the pendency of one or more Events of Default; and (f) efforts to (i) monitor the Loans or any of the other Obligations, (ii) evaluate, observe or assess any of the Credit Parties or their respective affairs, and (iii) verify, protect, evaluate, assess, appraise, collect, sell, liquidate or otherwise dispose of any of the Collateral; including, as to each of clauses (a) through (f) above, all attorneys' and other professional and service providers' fees arising from such services, including those in connection with any appellate proceedings, and all expenses, costs, charges and other fees incurred by such counsel and others in connection with or relating to any of the events or actions described in this Section 11.3, all of which shall be payable, on demand, by Borrower to Agents. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: fees, costs and expenses of accountants, environmental advisors, appraisers, investment bankers, management and other consultants and paralegals; court costs and expenses; photocopying and duplication expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges; telegram or telecopy charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal or other advisory services. 11.4. No Waiver. Agents' or any Lender's failure, at any time or times, to require strict performance by the Credit Parties of any provision of this Agreement or any other Loan Document shall not waive, affect or diminish any right of Agents or such Lender thereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver of an Event of Default shall not suspend, waive or affect any other Event of Default whether the same is prior or subsequent thereto and whether the same or of a different type. Subject to the provisions of Section 11.2, none of the undertakings, agreements, warranties, covenants and representations of any Credit Party contained in this Agreement or any of the other Loan Documents and no Default or Event of Default by any Credit Party shall be deemed to have been suspended or waived by Agent or any Lender, unless such waiver or suspension is by an instrument in writing signed by an officer of or other authorized employee of Agent and the applicable required Lenders and directed to Borrower specifying such suspension or waiver. 11.5. Remedies. Agent's and Lenders' rights and remedies under this Agreement shall be cumulative and nonexclusive of any other rights and remedies that Agent or any Lender may have under any other agreement, including the other Loan Documents, by operation of law or otherwise. Recourse to the Collateral shall not be required. 69 11.6. Severability. Wherever possible, each provision of this Agreement and the other Loan Documents shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement or any other Loan Document shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.7. Conflict of Terms. Except as otherwise provided in this Agreement or any of the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement conflicts with any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.8. Confidentiality. Agent and each Lender agree to use commercially reasonable efforts (equivalent to the efforts Agent or such Lender applies to maintain the confidentiality of its own confidential information) to maintain as confidential all confidential information provided to them by the Credit Parties for a period of one (1) year following the Termination Date, except that Agent and each Lender may disclose such information (a) to Persons employed or engaged by Agent or such Lender in evaluating, approving, structuring or administering the Loans and the Commitments; (b) to any bona fide assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 11.8 (and any such bona fide assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any Governmental Authority (including the Securities Valuation Office of the National Association of Insurance Commissioners) or reasonably believed by Agent or such Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advise of Agent's or such Lender's counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any Litigation to which Agent or such Lender is a party; or (f) that ceases to be confidential through no fault of Agent or any Lender. 11.9. GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. EACH CREDIT PARTY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN COOK COUNTY, CITY OF CHICAGO, ILLINOIS SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE CREDIT PARTIES, AGENT AND LENDERS PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT AGENT, LENDERS AND THE CREDIT 70 PARTIES ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF COOK COUNTY, CITY OF CHICAGO, ILLINOIS AND; PROVIDED, FURTHER THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF AGENT. EACH CREDIT PARTY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH CREDIT PARTY HEREBY WAIVES ANY OBJECTION THAT SUCH CREDIT PARTY MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH CREDIT PARTY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH CREDIT PARTY AT THE ADDRESS SET FORTH IN ANNEX I OF THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH CREDIT PARTY'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS, PROPER POSTAGE PREPAID. 11.10. Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other parties, or whenever any of the parties desires to give or serve upon any other parties any communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be deemed to have been validly served, given or delivered (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the United States Mail, registered or certified mail, return receipt requested, with proper postage prepaid, (b) upon transmission, when sent by telecopy or other similar facsimile transmission (with such telecopy or facsimile promptly confirmed by delivery of a copy by personal delivery or United States Mail as otherwise provided in this Section 11.10); (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address or facsimile number indicated in Annex I or to such other address (or facsimile number) as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to any Person (other than Borrower or Agent) designated in Annex I to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. 71 11.11. Section Titles. The Section titles and Table of Contents contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 11.12. Counterparts. This Agreement may be executed in any number of separate counterparts, each of which shall collectively and separately constitute one agreement. 11.13. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG AGENT, LENDERS AND ANY CREDIT PARTY ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. 11.14. Press Releases; Etc. Each Credit Party executing this Agreement agrees that neither it nor its Affiliates will in the future issue any press releases or other public disclosure using the name of GE Capital or its affiliates or referring to this Agreement, the other Loan Documents or the Related Transactions Documents without at least two (2) Business Days' prior notice to GE Capital and without the prior written consent of GE Capital unless (and only to the extent that) such Credit Party or Affiliate is required to do so under law and then, in any event, such Credit Party or Affiliate will consult with GE Capital before issuing such press release or other public disclosure. Each Credit Party consents to the publication by Agent or any Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement. Agent or such Lender shall provide a draft of any such tombstone or similar advertising material to each Credit Party for review and comment prior to the publication thereof. Agent and Lenders reserve the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements with Borrower's consent which shall not be unreasonably withheld or delayed. 11.15. Reinstatement. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against Borrower for liquidation or reorganization, should Borrower become insolvent or make an assignment for the benefit of any creditor or creditors or should a receiver or trustee be appointed for all or any significant part of Borrower's assets, and shall continue to be effective or to be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations, whether as a "voidable preference," "fraudulent 72 conveyance," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 11.16. Advice of Counsel. Each of the parties represents to each other party hereto that it has discussed this Agreement and, specifically, the provisions of Sections 11.9 and 11.13, with its counsel. 11.17. No Drafting Presumptions. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. 11.18. License. Each Credit Party hereby grants to Agent for the benefit of all of the Lenders a world-wide, royalty-free license to use all of its Patents and Trademarks after the occurrence of an Event of Default to complete, the manufacture of, and to sell or otherwise dispose of, all of each Credit Party's Inventory. Such royalty-free license shall extend to any person or persons purchasing Inventory from the Lenders. The IP Lenders acknowledge that any sale or disposition of the Patents and Trademarks is expressly made subject to the foregoing license and that the existence thereof may delay the sale or disposition of the Patents and Trademarks and may affect the prices obtained upon the sale or disposition of the Patents and Trademarks. 73 IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. BORROWER ICON HEALTH & FITNESS, INC. By:________________________________________ Name:______________________________________ Title:_____________________________________ GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and Lender By:________________________________________ Duly Authorized Signatory FLEET NATIONAL BANK, as Syndication Agent and Lender By:________________________________________ Name:______________________________________ Title:_____________________________________ S-1 JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM Financial Inc., as attorney-in-fact By:________________________________________ Name:______________________________________ Title:_____________________________________ S-2 ZIONS FIRST NATIONAL BANK By:________________________________________ Name:______________________________________ Title:_____________________________________ S-3 LASALLE BUSINESS CREDIT, INC. By:________________________________________ Name: William A. Stapel Title: First Vice President S-4 PNC BANK, NATIONAL ASSOCIATION By:________________________________________ Name: Scott Carpenter Title: Vice President S-5 FIRST SOURCE FINANCIAL LLP By: First Source Financial, Inc., its Agent/Manager By:________________________________________ Name: John P. Thacker Title: Senior Vice President S-6 COMERICA BANK By:________________________________________ Name:______________________________________ Title:_____________________________________ S-7 BANK POLSKA KASA OPIEKA S.A. By:________________________________________ Name:______________________________________ Title:_____________________________________ S-8 INTENTIONALLY OMITTED S-9 THE CHASE MANHATTAN BANK By:________________________________________ Name:______________________________________ Title:_____________________________________ S-10 HELLER FINANCIAL, INC. By:________________________________________ Name: Albert J. Forzano Title: Vice President S-11 The following Persons are signatories to this Agreement in their capacity as Credit Parties and not as Borrowers. HF HOLDINGS, INC. By:________________________________________ Name:______________________________________ Title:_____________________________________ JUMPKING, INC. By:________________________________________ Name:______________________________________ Title:_____________________________________ ICON INTERNATIONAL HOLDINGS, INC. By:________________________________________ Name:______________________________________ Title:_____________________________________ UNIVERSAL TECHNICAL SERVICES By:________________________________________ Name:______________________________________ Title:_____________________________________ S-12 ICON DU CANADA INC./ICON OF CANADA INC. By:________________________________________ Name:______________________________________ Title:_____________________________________ 510152 N.B. LTD. By:________________________________________ Name:______________________________________ Title:_____________________________________ S-13 ANNEX A (Recitals) to CREDIT AGREEMENT DEFINITIONS Capitalized terms used in the Loan Documents shall have (unless otherwise provided elsewhere in the Loan Documents) the following respective meanings and all references to Sections, Exhibits, Schedules or Annexes in the following definitions shall refer to Sections, Exhibits, Schedules or Annexes of or to the Agreement: "Account Debtor" means any Person who may become obligated to any Credit Party under, with respect to, or on account of, an Account. "Accounting Changes" has the meaning ascribed thereto in Annex G. "Accounts" means all "accounts," as such term is defined in the Code, and all "claims," as such term is defined in the Quebec Civil Code, now owned or hereafter acquired by any Credit Party and, in any event, including (a) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments), whether arising out of goods sold or services rendered by it or from any other transaction (including any such obligations that may be characterized as an account or contract right under the Code), (b) all of each Credit Party's rights in, to and under all purchase orders or receipts for goods or services, (c) all of each Credit Party's rights to any goods represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (d) all monies due or to become due to any Credit Party, under all purchase orders and contracts for the sale of goods or the performance of services or both by such Credit Party or in connection with any other transaction (whether or not yet earned by performance on the part of such Credit Party), including the right to receive the proceeds of said purchase orders and contracts, and (e) all collateral security and guaranties of any kind, now or hereafter in existence, given by any Person with respect to any of the foregoing. "Advance" means any Revolving Credit Advance or Swing Line Advance, as the context may require. "Affiliate" means, with respect to any Person, (a) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, five percent (5%) or more of the Stock having ordinary voting power in the election of directors of such Person, (b) each Person that controls, is controlled by or is under common control with such Person, (c) each of such Person's officers, directors, joint venturers and partners and (d) in the case of Borrower, the immediate family members, spouses and lineal descendants of individuals who are Affiliates of Borrower. For the purposes of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or A-1 otherwise; provided, however, that the term "Affiliate" shall specifically exclude Agent and each Lender. "Agent" means GE Capital in its capacity as Administrative Agent for Lenders or its successor appointed pursuant to Section 9.7. "Agents" means GE Capital and Fleet as Syndication Agent hereunder, or their respective successors and assigns. "Agreement" means the Credit Agreement by and among Borrower, the other Credit Parties party thereto, GE Capital, as Agent and Lender, Fleet, as Syndication Agent and Lender and the other Lenders from time to time party thereto, as the same may be amended, supplemented, restated or otherwise modified from time to time. "Appendices" has the meaning ascribed to it in the recitals to the Agreement. Applicable IP Loan Index Margin" means the per annum interest rate from time to time in effect and payable in addition to the Index Rate applicable to the IP Loan, as set forth in Section 1.5(a). "Applicable L/C Margin" means the per annum fee, from time to time in effect, payable with respect to outstanding Letter of Credit Obligations as determined by reference to Section 1.5(a). "Applicable Margins" means collectively the Applicable L/C Margin, the Applicable Unused Line Fee Margin, the Applicable Revolver Index Margin, the Applicable Term Loan A Index Margin, the Applicable Term Loan B Index Margin, the Applicable Term Loan C Index Margin, the Applicable Revolver LIBOR Margin, the Applicable Term Loan A LIBOR Margin, the Applicable Term Loan B LIBOR Margin, the Applicable Term Loan C LIBOR Margin and the Applicable IP Loan Index Margin. "Applicable Revolver Index Margin" means the per annum interest rate margin from time to time in effect and payable in addition to the Index Rate applicable to the Revolving Loan, as determined by reference to Section 1.5(a). "Applicable Revolver LIBOR Margin" means the per annum interest rate from time to time in effect and payable in addition to the LIBOR Rate applicable to the Revolving Loan, as determined by reference to Section 1.5(a). "Applicable Term Loan A Index Margin" means the per annum interest rate from time to time in effect and payable in addition to the Index Rate applicable to Term Loan A, as determined by reference to Section 1.5(a). "Applicable Term Loan A LIBOR Margin" means the per annum interest rate from time to time in effect and payable in addition to the LIBOR Rate applicable to Term Loan A, as determined by reference to Section 1.5(a). A-2 "Applicable Term Loan B Index Margin" means the per annum interest rate from time to time in effect and payable in addition to the Index Rate applicable to Term Loan B, as set forth in Section 1.5(a). "Applicable Term Loan B LIBOR Margin" means the per annum interest rate from time to time in effect and payable in addition to the LIBOR Rate applicable to Term Loan B, as set forth in Section 1.5(a). "Applicable Term Loan C Index Margin" means the per annum interest rate from time to time in effect and payable in addition to the Index Rate applicable to Term Loan C, as set forth in Section 1.5(a). "Applicable Term Loan C LIBOR Margin" means the per annum interest rate from time to time in effect and payable in addition to the LIBOR Rate applicable to Term Loan C, as determined by reference to Section 1.5(a). "Applicable Unused Line Fee Margin" means the per annum fee, from time to time in effect, payable in respect of Borrower's non-use of committed funds pursuant to Section 1.9(b), which fee is determined by reference to Section 1.5(a). "Assignment Agreement" has the meaning ascribed to it in Section 9.1(a). "Bain Entities" shall mean, collectively, Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., Bain Associates and BCIP Trust Associates, L.P. and funds or trusts managed or controlled by Bain Capital, Inc. "Bankruptcy Code" means the provisions of Title 11 of the United States Code, 11 U.S.C.ss.ss. 101 et seq. "Borrower" has the meaning ascribed thereto in the recitals to the Agreement. "Borrower Accounts" has the meaning ascribed to it in Annex C. "Borrower Pledge Agreement" means the Pledge Agreement of even date herewith executed by Borrower in favor of Agent, on behalf of itself and Lenders, pledging all Stock of its domestic and Canadian Subsidiaries and all Intercompany Notes owing to or held by it. "Borrowing Availability" has the meaning ascribed to it in Section 1.1(a)(i). "Borrowing Base" means, as of any date of determination by Agent, from time to time, an amount equal to the sum at such time of: (a) eighty-five percent (85%) of the book value of Borrower's and its domestic and Canadian Subsidiaries' Eligible Accounts, less any Reserves established by Agent at such time; A-3 (b) up to sixty percent (60%) (seventy percent (70%) during the period of July 1 to November 30 of each year) of the book value of Borrower's and its domestic and Canadian Subsidiaries' Eligible Inventory valued on a first-in, first-out basis (at the lower of cost or market), less any Reserves established by Agent at such time; (c) eighty percent (80%) of the orderly liquidation value of Borrower's and its domestic and Canadian Subsidiaries' owned Eligible Equipment (excluding taxes, shipping, imbedded software, installation charges, training fees and other soft costs); (d) seventy-five percent (75%) of the fair market value of Borrower's and its domestic Subsidiaries' owned Eligible Real Estate; less (e) the principal balances of Term Loan A and Term Loan B from time to time outstanding; provided that the aggregate amount of Revolving Credit Advances against the Collateral described in clauses (c) and (d) above shall not exceed Fifteen Million Dollars ($15,000,000) (the "sublimit"); provided, further, that the sublimit will be reduced by $3,000,000 on each anniversary of the Closing Date and reduced to zero on the fifth anniversary of the Closing Date; and provided, further, that Advances against assets of Borrower's Canadian Subsidiaries shall not exceed Twenty Million Dollars ($20,000,000) in the aggregate at any one time outstanding. For the purpose of valuing the Collateral of each of Borrower's Canadian Subsidiaries that is denominated in Canadian Dollars, such Collateral shall be converted into the Equivalent Amount thereof in Dollars, in each case, as determined as of the last day of each Fiscal Month unless Agent has notified Borrower that, in light of recent or expected currency fluctuations, the conversion shall be made on a more current basis. "Borrowing Base Certificate" means a certificate to be executed and delivered from time to time by Borrower in the form attached to the Agreement as Exhibit 4.1(b). "Business Day" means any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the States of Illinois or New York and in reference to LIBOR Loans shall mean any such day that is also a LIBOR Business Day. "Canadian Benefit Plans" means all material employee benefit plans of any nature or kind whatsoever that are not Canadian Pension Plans and are maintained or contributed to by any Credit Party having employees in Canada. "Canadian Dollars" and "C$" each mean lawful money of Canada. "Canadian Pension Plans" means each plan which is considered to be a pension plan for the purposes of any applicable pension benefits standards statute and/or regulation in Canada established, maintained or contributed to by any Credit Party for its employees or former employees. A-4 "Canadian Security Agreements" means each of the Security Agreements entered into by and between Agent, on behalf of itself and Lenders, and ICON of Canada and ICON New Brunswick. "Capital Expenditures" means, with respect to any Person, all expenditures (by the expenditure of cash or the incurrence of Indebtedness) by such Person during any measuring period for any fixed assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of more than one year and that are required to be capitalized under GAAP. "Capital Lease" means, with respect to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee that, in accordance with GAAP, would be required to be classified and accounted for as a capital lease on a balance sheet of such Person. "Capital Lease Obligation" means, with respect to any Capital Lease of any Person, the amount of the obligation of the lessee thereunder that, in accordance with GAAP, would appear on a balance sheet of such lessee in respect of such Capital Lease. "Cash Collateral Account" has the meaning ascribed to it in Annex B. "Cash Equivalents" has the meaning ascribed to it in Annex B. "Cash Management Systems" has the meaning ascribed to it in Section 1.8. "Change of Control" means any event, transaction or occurrence as a result of which (a) the Bain Entities shall cease to constitute a Voting Majority of HF Investment so long as the Bain Entities hold their investment in New Holdings through HF Investment, (b) the Bain Entities shall cease to have or exercise the right, directly or indirectly, to designate at least 5 of the 9 members of the Board of Directors of New Holdings, (c) the Bain Entities and Credit Suisse First Boston Corporation and their Affiliates cease to own (directly or indirectly) and control all of the economic and voting rights associated with ownership of at least fifty-one percent (51%) of all classes of the outstanding capital Stock of all classes of New Holdings on a fully diluted basis, (d) New Holdings ceases to own and control all of the economic and voting rights associated with all of the outstanding capital Stock of Borrower, (e) Borrower ceases to own and control all of the economic and voting rights associated with all of the outstanding capital Stock of each of its Subsidiaries or (f) any "Change of Control" (as such term is defined in the Subordinated Notes Documents) shall occur. "Charges" means all federal, state, county, city, municipal, local, foreign or other governmental taxes (including taxes owed to the PBGC at the time due and payable), levies, assessments, charges, liens, claims or encumbrances upon or relating to (a) the Collateral, (b) the Obligations, (c) the employees, payroll, income or gross receipts of any Credit Party, (d) any Credit Party's ownership or use of any properties or other assets, or (e) any other aspect of any Credit Party's business. A-5 "Chattel Paper" means any "chattel paper," as such term is defined in the Code, now owned or hereafter acquired by any Credit Party, wherever located. "Closing Date" means September 27, 1999. "Closing Checklist" means the schedule, including all appendices, exhibits or schedules thereto, listing certain documents and information to be delivered in connection with the Agreement, the other Loan Documents and the transactions contemplated thereunder, substantially in the form attached hereto as Annex D. "Code" means the Uniform Commercial Code as the same may, from time to time, be enacted and in effect in the State of Illinois; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Agent's or any Lender's Lien on any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of Illinois or by foreign personal property security laws as enacted and in effect in a foreign jurisdiction, the term "Code" shall mean the Uniform Commercial Code or such foreign personal property security laws as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions. "Collateral" means the property covered by the Security Agreement, the Mortgages and the other Collateral Documents and any other property, real or personal, tangible or intangible, now existing or hereafter acquired, that may at any time be or become subject to a Lien granted by a Credit Party in favor of Agent, on behalf of itself and Lenders, to secure the Obligations. "Collateral Documents" means the Security Agreement, the Pledge Agreements, the New Holdings Guarantee, the Mortgages, the Patent Security Agreement, the Trademark Security Agreement, the Copyright Security Agreement, the Canadian Security Agreements, the ICON of Canada Hypothec, the ICON of Canada Debenture, the ICON of Canada Pledge Agreement, and all similar agreements entered into guaranteeing payment of, or granting a Lien upon property as security for payment of, the Obligations. "Collateral Reports" means the reports with respect to the Collateral referred to in Annex F. "Collection Account" means that certain account of Agent, account number 502-328-54 in the name of Agent at Bankers Trust Company in New York, New York ABA No. 021 001 033, or such other account as may be specified in writing by Agent as the "Collection Account." "Commitment Termination Date" means the earliest of (a) August 31, 2004, (b) the date of termination of Lenders' obligations to make Advances and to incur Letter of Credit Obligations or permit existing Loans to remain outstanding pursuant to Section 8.2(b), and (c) the date of indefeasible prepayment in full by Borrower of the Loans and the cancellation and A-6 return (or stand-by guarantee) of all Letters of Credit or the cash collateralization of all Letter of Credit Obligations pursuant to Annex B, and the permanent reduction of the Revolving Loan Commitment and the Swing Line Commitment to zero dollars ($0). "Commitments" means (a) as to any Lender, the aggregate of such Lender's Revolving Loan Commitment (including without duplication the Swing Line Lender's Swing Line Commitment as a subset of its Revolving Loan Commitment), IP Loan Commitment and Term Loan Commitment as set forth on Annex J to the Agreement or in the most recent Assignment Agreement executed by such Lender and (b) as to all Lenders, the aggregate of all Lenders' Revolving Loan Commitments (including without duplication the Swing Line Lender's Swing Line Commitment as a subset of its Revolving Loan Commitment), IP Loan Commitments and Term Loan Commitments, which aggregate commitment shall be Three Hundred Million Dollars ($300,000,000) on the Closing Date, as to each of clauses (a) and (b), as such Commitments may be reduced, amortized or adjusted from time to time in accordance with the Agreement. "Compliance Certificate" has the meaning ascribed to it in Annex E. "Concentration Account" has the meaning ascribed to it in Annex C. "Contracts" means all "contracts," as such term is defined in the Code, now owned or hereafter acquired by any Credit Party, in any event, including all contracts, undertakings, or agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which any Credit Party may now or hereafter have any right, title or interest, including any agreement relating to the terms of payment or the terms of performance of any Account. "Control Letter" means a letter agreement between Agent and (i) the issuer of uncertificated securities with respect to uncertificated securities in the name of any Credit Party, (ii) a securities intermediary with respect to securities, whether certificated or uncertificated, securities entitlements and other financial assets held in a securities account in the name of any Credit Party, (iii) a futures commission merchant, as applicable, or clearing house with respect to commodity accounts and commodity contracts held by any Credit Party, whereby, among other things, the issuer, securities intermediary or futures commission merchant disclaims any security interest in the applicable financial assets, acknowledges the Lien of Agent, on behalf of itself and Lenders, on such financial assets, and agrees to follow the instructions or entitlement orders of Agent without further consent by the affected Credit Party. "Copyright License" means any and all rights now owned or hereafter acquired by any Credit Party under any written agreement granting any right to use any Copyright or Copyright registration. "Copyright Security Agreements" means the Copyright Security Agreements made in favor of Agent, on behalf of itself and Lenders, by each applicable Credit Party. A-7 "Copyrights" means all of the following now owned or hereafter adopted or acquired by any Credit Party: (a) all copyrights and General Intangibles of like nature (whether registered or unregistered), all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Copyright Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof, and (b) all reissues, extensions or renewals thereof. "Credit Parties" means New Holdings, Borrower and each of their respective Subsidiaries. "CS First Boston Debt" means Indebtedness of New Holdings issued to Credit Suisse First Boston Corporation in the amount of $5,000,000 pursuant to a Note Agreement dated as of the Closing Date. "Current Assets" means, with respect to any Person, all current assets of such Person as of any date of determination calculated in accordance with GAAP, but excluding cash, cash equivalents and debts due from Affiliates. "Current Liabilities" means, with respect to any Person, all liabilities that should, in accordance with GAAP, be classified as current liabilities, and in any event shall include all Indebtedness payable on demand, all accruals for federal or other taxes based on or measured by income and payable within such year, but excluding, in the case of Borrower, the aggregate outstanding principal balances of the Loans. "Debt Service" means, with respect to any Person for any fiscal period, an amount equal to the sum of (a) Interest Expense for such period (excluding any original issue discount, interest paid in kind or amortized debt discount, to the extent included in determining Interest Expense) and (b) the scheduled amortization of the IP Loan and Term Loans during such period. "Debt Service Coverage Ratio" means, with respect to any Person for any period, the ratio of EBITDA to Debt Service. "Default" means any event that, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. "Default Rate" has the meaning ascribed to it in Section 1.5(d). "Design" means the following now owned or hereafter acquired by any Credit Party: (a) all industrial designs, design patents and other designs now owned or existing or hereafter adopted or acquired, all registrations and recordings thereof and all applications in connection therewith, including all registrations, recordings and applications in the Canadian Industrial Designs Office or any similar office in any country and all records thereof and (b) all reissues, extensions or renewals thereof. "Design License" means rights under any written agreement now owned or hereafter acquired by any Credit Party granting any right to use any Design. A-8 "Disbursement Accounts" has the meaning ascribed to it in Annex C. "Disclosure Schedules" means the Schedules prepared by Borrower and denominated as Disclosure Schedules (1.4) through (6.7) in the Index to the Agreement. "Documents" means any "documents," as such term is defined in the Code, now owned or hereafter acquired by any Credit Party, wherever located. "Dollars" or "$" means lawful currency of the United States of America. "EBITDA" means, with respect to any Person for any fiscal period, without duplication, an amount equal to (a) consolidated net income of such Person for such period, minus (b) the sum of (i) income tax credits, (ii) interest income, (iii) gain from extraordinary items for such period, (iv) any aggregate net gain (but not any aggregate net loss) during such period arising from the sale, exchange or other disposition of capital assets by such Person (including any fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets and all securities), and (v) any other non-cash gains that have been added in determining consolidated net income, in each case to the extent included in the calculation of consolidated net income of such Person for such period in accordance with GAAP, but without duplication, plus (c) the sum of (i) any provision for income taxes, (ii) Interest Expense, (iii) loss from extraordinary items for such period, (iv) the amount of non-cash charges (including depreciation and amortization) for such period, (v) amortized debt discount for such period, and (vi) the amount of any deduction to consolidated net income as the result of any grant to any members of the management of such Person of any Stock, in each case to the extent included in the calculation of consolidated net income of such Person for such period in accordance with GAAP, but without duplication. For purposes of this definition, the following items shall be excluded in determining consolidated net income of a Person: (1) the income (or deficit) of any other Person accrued prior to the date it became a Subsidiary of, or was merged or consolidated into, such Person or any of such Person's Subsidiaries; (2) the income (or deficit) of any other Person (other than a Subsidiary) in which such Person has an ownership interest, except to the extent any such income has actually been received by such Person in the form of cash dividends or distributions; (3) the undistributed earnings of any Subsidiary of such Person to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any contractual obligation or requirement of law applicable to such Subsidiary; (4) any restoration to income of any extraordinary or contingency reserve, except to the extent that such restoration is deemed to have occurred in the same Fiscal Quarter during which the subject reserve was established; (5) any write-up of any asset; (6) any net gain from the collection of the proceeds of life insurance policies; (7) any net gain (but not any aggregate loss) arising from the acquisition of any securities, or the extinguishment, under GAAP, of any Indebtedness, of such Person; (8) in the case of a successor to such Person by consolidation or merger or as a transferee of its assets, any earnings of such successor prior to such consolidation, merger or transfer of assets; (9) any deferred credit representing the excess of equity in any Subsidiary of such Person at the date of acquisition of such Subsidiary over the cost to such Person of the investment in such Subsidiary; (10) the impact of write-offs of Accounts owing by Service Merchandise, Inc. during Fiscal Year 1999 to the extent deducted in the determination of Borrower's consolidated net income for that period; and (11) bonuses paid to A-9 management employees of Borrower of up to $1,500,000 paid in cash or by forgiveness of Indebtedness on or after the Closing Date, to the extent deducted in the determination of Borrower's consolidated net income for Fiscal Year 2000. "Eligible Accounts" has the meaning ascribed to it in Section 1.6 of the Agreement. "Eligible Equipment" means machinery, equipment (excluding software) and rolling stock owned by Borrower or its domestic or Canadian Subsidiaries and located in the United States or Canada, which machinery, equipment or rolling stock shall satisfy each of the following requirements: (i) Borrower or one of its domestic or Canadian Subsidiaries holds good and marketable title to the machinery, equipment or rolling stock; (ii) the full purchase price for the machinery, equipment or rolling stock has been paid by Borrower or one of its domestic or Canadian Subsidiaries; (iii) the Agent has a first priority Lien in such machinery, equipment or rolling stock securing the obligations of the Credit Parties under this Agreement, subject to Permitted Encumbrances and, without duplication, Prior Claims (other than claims of unpaid suppliers (other than another Credit Party)) under Section 81.1 of the Bankruptcy and Insolvency Act (Canada); (iv) the machinery, equipment or rolling stock is not subject to any mortgage, lien, pledge, attachment, assignment, deposit arrangement, charge, lease or other security interest or encumbrance of any kind, except for the Lien of the Agent securing the obligations of the Credit Parties under this Agreement and except for Permitted Encumbrances; (v) the Agent has received an appraisal report with respect to the machinery, equipment or rolling stock from an independent appraiser reasonably satisfactory to the Agent setting forth the orderly liquidation value of the machinery, equipment or rolling stock; (vi) the machinery, equipment or rolling stock is located on or stored at premises owned or leased by Borrower or one of its domestic or Canadian Subsidiaries; provided that if such premises are leased by Borrower or one of its domestic or Canadian Subsidiaries, the Agent has received a landlord's agreement (satisfying the requirements of Section 5.10) duly executed by the owner of such premises; (vii) the machinery, equipment or rolling stock is not subject to any agreement which would restrict the Agent's ability to sell or otherwise dispose of such machinery, equipment or rolling stock; A-10 (viii) the machinery, equipment or rolling stock is in good repair and working order and is used by Borrower or one of its domestic or Canadian Subsidiaries in the ordinary course of its business; and (ix) the machinery or equipment does not constitute "fixtures" under the applicable laws of the jurisdiction in which the machinery, equipment or rolling stock is located; provided, however, that, notwithstanding anything herein to the contrary, the Agent may from time to time in its reasonable credit discretion (a) exclude particular machinery, equipment or rolling stock from the definition of Eligible Equipment and (b) establish, modify or eliminate Reserves against Eligible Equipment; provided, further, that the orderly liquidation value of Eligible Equipment shall be based upon appraisals as of a date not more than forty-five (45) days prior to the Closing Date, which shall be updated as frequently as once each year if requested by Agent. "Eligible Inventory" has the meaning ascribed to it in Section 1.7 of the Agreement. "Eligible Real Estate" means the real property owned by any one or more of Borrower and its domestic Subsidiaries that satisfies each of the following requirements: (i) one or more of Borrower and its domestic Subsidiaries is the record owner of the fee title to such real property; (ii) the Agent has a first priority mortgage Lien on such real property securing the obligations of the Credit Parties under this Agreement, subject to Permitted Encumbrances (other than Permitted Encumbrances in clause (j) of the definition thereof); (iii) such real property is not subject to any mortgage, lien, pledge, attachment, assignment, deposit arrangement, charge, lease or other security interest or encumbrance of any kind, except for the mortgage Lien of the Agent securing obligations under this Agreement and Permitted Encumbrances; (iv) such real property is not subject to any agreement which would restrict the Agent's ability to sell or otherwise dispose of such real property; (v) the Agent has received environmental reports reasonably satisfactory to it with respect to such real property, which reports shall be prepared by environmental engineering firms satisfactory to the Agent; (vi) the Agent has received an appraisal report with respect to such real property from an independent appraiser reasonably satisfactory to the Agent setting forth the fair market value of such real property; A-11 (vii) the Agent has received ALTA mortgagee's title insurance policies with all endorsements reasonably requested by the Agent (or commitments for the issuance of same) with respect to such real property from insurers acceptable to the Agent; (viii) the Agent has received evidence satisfactory to it that such real property is not located in a flood plain (or if any such real property is located in a flood plain, an acceptable flood hazard insurance policy); (ix) the Agent has received evidence satisfactory to it that there are no outstanding real estate taxes which have been due and payable for more than thirty (30) days; and (x) the Agent has received opinions of local counsel to the Credit Parties in each jurisdiction in which such real property is located with respect to the validity and enforceability of the Agent's Lien on such real property securing the obligations of the Credit Parties under this Agreement, all in form and substance satisfactory to the Agent; provided, however, that the Agent may from time to time in its reasonable credit judgment (a) exclude particular parcels of real property from the definition of Eligible Real Estate and (b) establish, modify or eliminate Reserves against Eligible Real Estate; provided, further, that the orderly liquidation value of Eligible Real Estate shall be based upon appraisals as of a date not more than forty-five (45) days prior to the Closing Date, which shall be updated as frequently as once each year if requested by Agent. "Eligible Service Merchandise Accounts" means post-petition Accounts owing by Service Merchandise, Inc., as debtor-in-possession, with an aggregate book value not to exceed $3,000,000 in the aggregate; provided that (i) no such Account shall remain unpaid more than thirty (30) days after its original invoice date, (ii) the debtor-in-possession credit facility provided to Service Merchandise, Inc. shall not have been terminated or suspended or credit availability thereunder restricted and (iii) the Chapter 11 proceeding in which Service Merchandise, Inc. is the debtor shall not have been converted to a liquidating Chapter 11 case or a Chapter 7 bankruptcy proceeding. "Employment Agreements" means the Employment Agreement dated as of the Closing Date among New Holdings, Borrower and Scott Watterson and the Employment Agreement dated as of the Closing Date among New Holdings, Borrower and Gary Stevenson. "Environmental Laws" means all applicable federal, state, local and foreign laws, statutes, ordinances, codes, rules, standards, orders-in-council and regulations, now or hereafter in effect, and any applicable judicial or administrative interpretation thereof, including any applicable judicial or administrative order, consent decree, order or judgment, imposing liability or standards of conduct for or relating to the regulation and protection of human health, safety, the environment and natural resources (including ambient air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation). A-12 Environmental Laws include the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C.ss.ss.9601 et seq.) ("CERCLA"); the Hazardous Materials Transportation Authorization Act of 1994 (49 U.S.C.ss.ss.5101 et seq.); the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C.ss.ss.136 et seq.); the Solid Waste Disposal Act (42 U.S.C.ss.ss. 6901 et seq.); the Toxic Substance Control Act (15 U.S.C.ss.ss.2601 et seq.); the Clean Air Act (42 U.S.C.ss.ss. 7401 et seq.); the Federal Water Pollution Control Act (33 U.S.C.ss.ss.1251 et seq.); the Occupational Safety and Health Act (29 U.S.C.ss.ss.651 et seq.); and the Safe Drinking Water Act (42 U.S.C.ss.ss. 300(f) et seq.), and any and all regulations promulgated thereunder, and all analogous state, local and foreign counterparts or equivalents and any transfer of ownership notification or approval statutes. "Environmental Liabilities" means, with respect to any Person, all liabilities, obligations, responsibilities, response, remedial and removal costs, investigation and feasibility study costs, capital costs, operation and maintenance costs, losses, damages, punitive damages, property damages, natural resource damages, consequential damages, treble damages, costs and expenses (including all fees, disbursements and expenses of counsel, experts and consultants), fines, penalties, sanctions and interest incurred as a result of or related to any claim, suit, action, investigation, proceeding or demand by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law, including any arising under or related to any Environmental Laws, Environmental Permits, or in connection with any Release or threatened Release or presence of a Hazardous Material whether on, at, in, under, from or about or in the vicinity of any real or personal property. "Environmental Permits" means all permits, licenses, authorizations, certificates, approvals or registrations required by any Governmental Authority under any Environmental Laws. "Equipment" means all "equipment," as such term is defined in the Code, now owned or hereafter acquired by any Credit Party, wherever located and, in any event, including all such Credit Party's machinery and equipment, including processing equipment, conveyors, machine tools, data processing and computer equipment with software and peripheral equipment and all engineering, processing and manufacturing equipment, office machinery, furniture, materials handling equipment, tools, attachments, accessories, automotive equipment, trailers, trucks, forklifts, molds, dies, stamps, motor vehicles, rolling stock and other equipment of every kind and nature, trade fixtures and fixtures not forming a part of real property, together with all additions and accessions thereto, replacements therefor, all parts therefor, all substitutes for any of the foregoing, fuel therefor, and all manuals, drawings, instructions, warranties and rights with respect thereto, and all products and proceeds thereof and condemnation awards and insurance proceeds with respect thereto. "Equivalent Amount" means, on any date of determination, with respect to obligations or valuations denominated in one currency (the "first currency"), the amount of another currency (the "second currency") which would result from the conversion of the relevant amount of the first currency into the second currency at the 12:00 noon rate quoted on the Reuters Monitor Screen (Page BOFC or such other Page as may replace such Page for the purpose of displaying such exchange rates) on such date or, if such date is not a Business Day, on A-13 the Business Day immediately preceding such date of determination, or at such other rate as may have been agreed in writing between Borrower and Agent. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any regulations promulgated thereunder. "ERISA Affiliate" means, with respect to any Credit Party, any trade or business (whether or not incorporated) that, together with such Credit Party, are treated as a single employer within the meaning of Sections 414(b), (c), (m) or (o) of the IRC. "ERISA Event" means, with respect to any Credit Party or any ERISA Affiliate, (a) any event described in Section 4043(c) of ERISA with respect to a Title IV Plan; (b) the withdrawal of any Credit Party or ERISA Affiliate from a Title IV 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; (c) the complete or partial withdrawal of any Credit Party or any ERISA Affiliate from any Multiemployer Plan; (d) the filing of a notice of intent to terminate a Title IV Plan or the treatment of a plan amendment as a termination under Section 4041 of ERISA; (e) the institution of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC; (f) the failure by any Credit Party or ERISA Affiliate to make when due required contributions to a Multiemployer Plan or Title IV Plan unless such failure is cured within 30 days; (g) any other event or condition that 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 Title IV Plan or Multiemployer Plan or for the imposition of liability under Section 4069 or 4212(c) of ERISA; (h) the termination of a Multiemployer Plan under Section 4041A of ERISA or the reorganization or insolvency of a Multiemployer Plan under Section 4241 of ERISA; (i) the loss of a Qualified Plan's qualification or tax exempt status; or (j) the termination of a Plan described in Section 4064 of ERISA. "ESOP" means a Plan that is intended to satisfy the requirements of Section 4975(e)(7) of the IRC. "European Subsidiaries" means ICON Health & Fitness Ltd., ICON Health & Fitness Italia SRL, ICON Fitness Lifestyle Limited, ICON Health & Fitness France SARL, HealthRider International Limited, Weider Health & Fitness France SA and HealthRider GmbH. "Event of Default" has the meaning ascribed to it in Section 8.1. "Exchange Offer" means the HF Holdings Inc. and ICON Health and Fitness, Inc. Exchange Offer and Consent Solicitation Statement dated July 30, 1999, including all supplements, amendments, or modifications thereto, in each case in form and substance satisfactory to the Agents. "Excess Cash Flow" means, without duplication, with respect to any Fiscal Year of Borrower and its Subsidiaries, consolidated net income plus (a) depreciation, amortization and Interest Expense to the extent deducted in determining consolidated net income, plus decreases or minus increases (as the case may be) (b) in Working Capital, minus (c) Capital Expenditures A-14 during such Fiscal Year (excluding the financed portion thereof and excluding any Capital Expenditures in such Fiscal Year to the extent in excess of the amount permitted to be made in such Fiscal Year pursuant to clause (a) of Annex G), minus (d) Interest Expense paid or accrued (excluding any original issue discount, interest paid in kind or amortized debt discount, to the extent included in determining Interest Expense) and scheduled principal payments paid or payable in respect of Funded Debt, plus or minus (as the case may be), (e) extraordinary gains or losses which are cash items not included in the calculation of net income, minus (f) mandatory prepayments paid in cash pursuant to Section 1.3 other than mandatory prepayments made pursuant to Sections 1.3(b)(i), 1.3(b)(iv) or 1.3(d), minus (g) voluntary prepayments made pursuant to Section 1.3(a)(i), plus (h) taxes deducted in determining consolidated net income to the extent not paid for in cash minus (i) taxes paid in cash during such period and not deducted in determining consolidated net income for that period. For purposes of this definition, "Working Capital" means Current Assets minus Current Liabilities. "Excess PIK Interest" means an amount equal to the excess, if any, on a PIK Interest Catch-Up Date of (a) the amount of accrued and unpaid PIK Interest (including capitalized interest) and all other accrued and unpaid original issue discount outstanding on such PIK Interest Catch-Up Date with respect to Term Loan C over (b) the product of (x) the issue price (as defined in section 1273(b) of the IRC) of Term Loan C times (y) the yield to maturity (interpreted in accordance with section 163(i) of the IRC) of Term Loan C. "Fair Labor Standards Act" means the Fair Labor Standards Act, 29 U.S.C.ss.201 et seq. "Federal Funds Rate" means, for any day, a floating rate equal to the weighted average of the rates on overnight federal funds transactions among members of the Federal Reserve System, as determined by Agent. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "Fee Letter" means that certain letter, dated as of June 11, 1999 among GE Capital, Fleet and Borrower with respect to certain Fees to be paid from time to time by Borrower to GE Capital and Fleet. "Fees" means any and all fees payable to Agent or any Lender pursuant to the Agreement or any of the other Loan Documents. "Financial Covenants" means the financial covenants set forth in Annex G. "Financial Statements" means the consolidated and consolidating income statements, statements of cash flows and balance sheets of Borrower delivered in accordance with Section 3.4 and Annex E. "Fiscal Month" means any of the monthly accounting periods of Borrower. A-15 "Fiscal Quarter" means any of the quarterly accounting periods of Borrower, ending on August 31, November 30, February 28 and May 31 of each year; provided, however, that the first three Fiscal Quarters of each Fiscal Year end on the Saturday nearest the dates set forth in this definition. "Fiscal Year" means any of the annual accounting periods of Borrower ending on May 31 of each year. "Fixtures" means all "fixtures" as such term is defined in the Code, now owned or hereafter acquired by any Credit Party. "Fleet" means Fleet National Bank. "Funded Debt" means, with respect to any Person, without duplication, all Indebtedness for borrowed money evidenced by notes, bonds, debentures, or similar evidences of Indebtedness and that by its terms matures more than one year from, or is directly or indirectly renewable or extendible at such Person's option under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of more than one year from the date of creation thereof, and specifically including Capital Lease Obligations, current maturities of long-term debt, revolving credit and short-term debt extendible beyond one year at the option of the debtor, and also including, in the case of Borrower, the Obligations and, without duplication, Guaranteed Indebtedness consisting of guaranties of Funded Debt of other Persons. "GAAP" means generally accepted accounting principles in the United States of America, consistently applied, as such term is further defined in Annex G to the Agreement. "GE Capital" means General Electric Capital Corporation, a New York corporation. "General Intangibles" means "general intangibles," as such term is defined in the Code, now owned or hereafter acquired by any Credit Party, and, in any event, including all right, title and interest that such Credit Party may now or hereafter have in or under any Contract, all customer lists, Licenses, Copyrights, Trademarks, Patents, and all applications therefor and reissues, extensions or renewals thereof, rights in Intellectual Property, interests in partnerships, joint ventures and other business associations, licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, goodwill (including the goodwill associated with any Trademark or Trademark License), all rights and claims in or under insurance policies (including insurance for fire, damage, loss and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key man and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit, checking and other bank accounts, rights to receive tax refunds and other payments, rights of indemnification, all books and records, correspondence, credit files, invoices and other papers, including without limitation all tapes, cards, computer A-16 runs and other papers and documents in the possession or under the control of such Credit Party or any computer bureau or service company from time to time acting for such Credit Party. "Goods" means any "goods" as defined in the Code, now owned or hereafter acquired by any Person. "Governmental Authority" means any nation or government, any state, province or other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranteed Indebtedness" shall mean, as to any Person, any obligation of such Person guaranteeing any indebtedness, lease, dividend, or other obligation ("primary obligation") of any other Person (the "primary obligor") in any manner, including any obligation or arrangement of such Person to (a) purchase or repurchase any such primary obligation, (b) advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet condition of the primary obligor, (c) purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) indemnify the owner of such primary obligation against loss in respect thereof. The amount of any Guaranteed Indebtedness at any time shall be deemed to be an amount equal to the lesser at such time of (x) the stated or determinable amount of the primary obligation in respect of which such Guaranteed Indebtedness is incurred and (y) the maximum amount for which such Person may be liable pursuant to the terms of the instrument embodying such Guaranteed Indebtedness, or, if not stated or determinable, the maximum reasonably anticipated liability (assuming full performance) in respect thereof. "Guaranties" means, collectively, the New Holdings Guaranty and any other guaranty executed by any Guarantor in favor of Agent and Lenders in respect of the Obligations. "Guarantors" means New Holdings, ICON of Canada, ICON New Brunswick, ICON International Holdings, Inc., Universal Technical Services and JumpKing and each other Person, if any, that executes a guaranty or other similar agreement in favor of Agent in connection with the transactions contemplated by the Agreement and the other Loan Documents. "Hazardous Material" means any substance, material or waste that is regulated by, or forms the basis of liability now or hereafter under, any Environmental Laws, including any material or substance that is (a) defined as a "hazardous waste," "hazardous material," "hazardous substance," "dangerous good," "extremely hazardous waste," "restricted hazardous waste," "pollutant," "contaminant," "hazardous constituent," "special waste," "toxic substance" or other similar term or phrase under any Environmental Laws, or (b) petroleum or any fraction or by-product thereof, asbestos, polychlorinated biphenyls (PCB's), or any radioactive substance. "HF Investment" means HF Investment Holdings, LLC, a Delaware limited liability company. A-17 "HF Investment LLC Agreement" means the Limited Liability Company Agreement of HF Investment as in effect on the Closing Date. "Holdings" means IHF Holdings, Inc., a Delaware corporation. "ICON New Brunswick" means 510152 N.B. Ltd., a New Brunswick corporation. "ICON of Canada" means ICON of Canada Inc./ICON du Canada Inc., a Quebec company. "ICON of Canada Debenture" means the Debenture in the principal amount of C $600,000,000 issued by ICON of Canada to Agent pursuant to the ICON of Canada Hypothec. "ICON of Canada Hypothec" means the Deed of Hypothec entered into by and among Agent, Lenders and ICON of Canada. "ICON of Canada Pledge Agreement" means the Pledge Agreement between ICON of Canada and Agent pursuant to which ICON of Canada pledges the ICON of Canada Debenture to Agent and Lenders. "Indebtedness" means, with respect to any Person, without duplication (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property payment for which is deferred six (6) months or more, but excluding obligations to trade creditors incurred in the ordinary course of business that are not overdue by more than six (6) months unless being contested in good faith, (b) all reimbursement and other obligations with respect to letters of credit, bankers' acceptances and surety bonds, whether or not matured, (c) all obligations evidenced by notes, bonds, debentures or similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Capital Lease Obligations and the present value (discounted at the Index Rate as in effect on the Closing Date) of future rental payments under all synthetic leases, (f) all obligations of such Person under commodity purchase or option agreements or other commodity price hedging arrangements, in each case whether contingent or matured, (g) all net obligations of such Person under any foreign exchange contract, currency swap agreement, interest rate swap, cap or collar agreement or other similar agreement or arrangement designed to alter the risks of that Person arising from fluctuations in currency values or interest rates, in each case whether contingent or matured, (h) all Indebtedness referred to above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property or other assets (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, and (i) the Obligations. "Indemnified Liabilities" has the meaning ascribed to it in Section 1.13. "Indemnified Person" has the meaning ascribed to it in Section 1.13. A-18 "Index Rate" means, for any day, a floating rate equal to the higher of (i) the rate publicly quoted from time to time by The Wall Street Journal as the "base rate on corporate loans at large U.S. money center commercial banks" (or, if The Wall Street Journal ceases quoting a base rate of the type described, the highest per annum rate of interest published by the Federal Reserve Board in Federal Reserve statistical release H.15 (519) entitled "Selected Interest Rates" as the Bank prime loan rate or its equivalent), and (ii) the Federal Funds Rate plus fifty (50) basis points per annum. Each change in any interest rate provided for in the Agreement based upon the Index Rate shall take effect at the time of such change in the Index Rate. "Index Rate Loan" means a Loan or portion thereof bearing interest by reference to the Index Rate. "Insolvency Laws" means any of the Bankruptcy Code, the Bankruptcy and Insolvency Act (Canada) and the Companies' Creditors Arrangement Act (Canada), each as now and hereafter in effect, any successors to such statutes and any other applicable insolvency or other similar law of any jurisdiction including, without limitation, any law of any jurisdiction permitting a debtor to obtain a stay or a compromise of the claims of its creditors against it. "Instruments" means any "instrument," as such term is defined in the Code, now owned or hereafter acquired by any Credit Party, wherever located, and, in any event, including all certificated securities, all certificates of deposit, and all notes and other, without limitation, evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "Intellectual Property" means any and all Licenses, Patents, Designs, Copyrights, Trademarks, and the goodwill associated with such Trademarks. "Intercompany Note" has the meaning ascribed to it in Section 6.3. "International Holdings" means ICON International Holdings, Inc., a Delaware corporation. "International Holdings Pledge Agreement" means a Pledge Agreement dated as of the Closing Date, pledging to the Agent for the benefit of the Lenders 100% of the stock of ICON of Canada and ICON New Brunswick and 65% of the stock of all other Subsidiaries of International Holdings. "Interest Expense" means, with respect to any Person for any fiscal period, interest expense (whether cash or non-cash) of such Person determined in accordance with GAAP for the relevant period ended on such date, including interest expense with respect to any Funded Debt of such Person and interest expense for the relevant period that has been capitalized on the balance sheet of such Person. "Interest Payment Date" means (a) as to any Index Rate Loan (other than Term Loan C) the first Business Day of each month to occur while such Loan is outstanding, (b) as to that portion of Term Loan C that is an Index Rate Loan, the first day of March, June, September A-19 and December of each year, commencing December 1, 1999, and (c) as to any LIBOR Loan, the last day of the applicable LIBOR Period; provided, that in the case of any LIBOR Period greater than three months in duration, interest shall be payable at three month intervals and on the last day of such LIBOR Period; and provided further that, in addition to the foregoing, each of (x) the date upon which all of the Commitments have been terminated and the Loans have been paid in full and (y) the Commitment Termination Date shall be deemed to be an "Interest Payment Date" with respect to any interest that has then accrued under the Agreement. "Intermediate Holdings" means ICON Fitness Corporation, a Delaware corporation. "Inventory" means any "inventory," as such term is defined in the Code, now owned or hereafter acquired by any Credit Party, wherever located, and in any event including inventory, merchandise, goods and other personal property that are held by or on behalf of any Credit Party for sale or lease or are furnished or are to be furnished under a contract of service, or that constitute raw materials, work in process or materials used or consumed or to be used or consumed in such Credit Party's business or in the processing, production, packaging, promotion, delivery or shipping of the same, including other supplies. "Investment Property" means all "investment property" as such term is defined in Section 9-115 of the Code in those jurisdictions in which such definition has been adopted now owned or hereafter acquired by any Credit Party, wherever located, including (i) all securities, whether certificated or uncertificated, including stocks, bonds, interests in limited liability companies, partnership interests, treasuries, certificates of deposit, and mutual fund shares; (ii) all securities entitlements of any Credit Party, including the rights of such Credit Party to any securities account and the financial assets held by a securities intermediary in such securities account and any free credit balance or other money owing by any securities intermediary with respect to that account; (iii) all securities accounts of any Credit Party; (iv) all commodity contracts of any Credit Party; and (v) all commodity accounts held by any Credit Party. "IP Collateral" means all Patents, all Trademarks and all Proceeds of the foregoing. "IP Lender" means those Lenders having IP Loan Commitments. "IP Loan" has the meaning ascribed to it in Section 1.1(d). "IP Loan Commitment" means (a) as to any Lender with an IP Loan Commitment, the commitment of such Lender to make its Pro Rata Share of the IP Loan as set forth on Annex J to the Agreement or the most recent Assignment Agreement executed by such Lender, and (b) as to all Lenders with an IP Loan Commitment, the aggregate commitment of all Lenders to make the IP Loan, which commitment shall be Fifteen Million Dollars ($15,000,000) on the Closing Date. After advancing the IP Loan, each reference to a Lender's IP Loan Commitment shall refer to that Lender's Pro Rata Share of the outstanding IP Loan. "IP Note" has the meaning ascribed to it in Section 1.1(d). A-20 "IRC" means the Internal Revenue Code of 1986, as amended, and all regulations promulgated thereunder. "IRS" means the Internal Revenue Service. "ITA" means the Income Tax Act (Canada) as the same may, from time to time, be in effect. "JumpKing" means JumpKing, Inc., a Utah corporation. "L/C Issuer" has the meaning ascribed to it in Annex B. "L/C Sublimit" has the meaning ascribed to in it Annex B. "Lenders" means GE Capital, Fleet, the other Lenders named on the signature pages of the Agreement, and, if any such Lender shall decide to assign all or any portion of the Obligations, such term shall include any assignee of such Lender. "Letter of Credit Fee" has the meaning ascribed to it in Annex B. "Letter of Credit Obligations" means all outstanding obligations incurred by Agent and Lenders at the request of Borrower, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance of a reimbursement agreement or guaranty by Agent or purchase of a participation as set forth in Annex B with respect to any Letter of Credit. The amount of such Letter of Credit Obligations shall equal the maximum amount that may be payable by Agent or Lenders thereupon or pursuant thereto. "Letters of Credit" means commercial or standby letters of credit issued for the account of Borrower by any L/C Issuer, and bankers' acceptances issued by Borrower, for which Agent and Lenders have incurred Letter of Credit Obligations. "Leverage Ratio" means, with respect to Borrower, on a consolidated basis, the ratio of (a) Funded Debt as of any date of determination (including the average outstanding principal balance of the Revolving Loan for the three (3) months preceding that determination date) to (b) the sum of EBITDA less Capital Expenditures for the twelve months ending on that date of determination. "LIBOR Business Day" means a Business Day on which banks in the City of London are generally open for interbank or foreign exchange transactions. "LIBOR Loan" means a Loan or any portion thereof bearing interest by reference to the LIBOR Rate. "LIBOR Period" means, with respect to any LIBOR Loan, each period commencing on a LIBOR Business Day selected by Borrower pursuant to the Agreement and ending one, two, three or six months thereafter, as selected by Borrower's irrevocable notice to A-21 Agent as set forth in Section 1.5(e); provided, that the foregoing provision relating to LIBOR Periods is subject to the following: (a) if any LIBOR Period would otherwise end on a day that is not a LIBOR Business Day, such LIBOR Period shall be extended to the next succeeding LIBOR Business Day unless the result of such extension would be to carry such LIBOR Period into another calendar month in which event such LIBOR Period shall end on the immediately preceding LIBOR Business Day; (b) any LIBOR Period that would otherwise extend beyond the Commitment Termination Date shall end two (2) LIBOR Business Days prior to such date; (c) any LIBOR Period that begins on the last LIBOR 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 LIBOR Period) shall end on the last LIBOR Business Day of a calendar month; (d) Borrower shall select LIBOR Periods so as not to require a payment or prepayment of any LIBOR Loan during a LIBOR Period for such Loan; and (e) Borrower shall select LIBOR Periods so that there shall be no more than five (5) separate LIBOR Loans in existence at any one time. "LIBOR Rate" means for each LIBOR Period, a rate of interest determined by Agent equal to: (a) the offered rate for deposits in United States Dollars for the applicable LIBOR Period that appears on Telerate Page 3750 as of 11:00 a.m. (London time), on the second full LIBOR Business Day next preceding the first day of such LIBOR Period (unless such date is not a Business Day, in which event the next succeeding Business Day will be used); divided by (b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day that is two (2) LIBOR Business Days prior to the beginning of such LIBOR Period (including basic, supplemental, marginal and emergency reserves under any regulations of the Federal Reserve Board or other Governmental Authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board which are required to be maintained by a member bank of the Federal Reserve System. If such interest rates shall cease to be available from Telerate News Service, the LIBOR Rate shall be determined from such financial reporting service or other information as shall be mutually acceptable to Agent and Borrower. A-22 "License" means any Copyright License, Patent License, Trademark License, Design License or other license of rights or interests now held or hereafter acquired by any Credit Party. "Lien" means any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction). "Litigation" has the meaning ascribed to it in Section 3.13. "Loan Account" has the meaning ascribed to it in Section 1.12. "Loan Documents" means the Agreement, the Notes, the Collateral Documents and all other agreements, instruments, documents and certificates identified in the Closing Checklist executed and delivered to, or in favor of, Agent or any Lenders and including all other pledges, powers of attorney, consents, assignments, contracts, notices, and all other written matter whether heretofore, now or hereafter executed by or on behalf of any Credit Party, or any employee of any Credit Party, and delivered to Agent or any Lender in connection with the Agreement or the transactions contemplated thereby. Any reference in the Agreement or any other Loan Document to a Loan Document shall include all appendices, exhibits or schedules thereto, and all amendments, restatements, supplements or other modifications thereto, and shall refer to the Agreement or such Loan Document as the same may be in effect at any and all times such reference becomes operative. "Loans" means the Revolving Loan, the Swing Line Loan, the IP Loan and the Term Loans. "Lock Boxes" has the meaning ascribed to it in Annex C. "Management Agreements" means each of the Management Agreements dated as of the Closing Date among Borrower, New Holdings, and each of Scott Watterson and Gary Stevenson, the Management Agreement dated as of the Closing Date among Borrower, New Holdings and Bain Capital, Inc. and Section 7.1(b) of Securities Purchase Agreement dated as of the Closing Date between New Holdings and Credit Suisse First Boston. "Margin Stock" has the meaning ascribed to it in Section 3.10. "Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations or financial or other condition of the Credit Parties considered as a whole, (b) Borrower's ability to pay any of the Loans or any of the other Obligations in accordance with the terms of the Agreement, (c) the Collateral or Agent's Liens, on behalf of itself and Lenders, on the Collateral or the priority of such Liens, or (d) Agent's or any Lender's rights and remedies A-23 under the Agreement and the other Loan Documents. Without limiting the generality of the foregoing, any event or occurrence adverse to one or more Credit Parties which results or could reasonably be expected to result in costs and/or liabilities in excess of $5,000,000 shall constitute a Material Adverse Effect. "Maximum Amount" means, as of any date of determination, an amount equal to the Revolving Loan Commitment of all Lenders as of that date. "Mortgaged Properties" has the meaning assigned to it in Annex D. "Mortgages" means each of the mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, collateral assignments of leases or other real estate security documents delivered by any Credit Party to Agent on behalf of itself and Lenders with respect to the Mortgaged Properties, all in form and substance satisfactory to Agent. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, and to which any Credit Party or ERISA Affiliate is making, is obligated to make or has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Net Borrowing Availability" means as of any date of determination, the lesser of (i) the Maximum Amount and (ii) the Borrowing Base, in each case less the sum of the Revolving Loan and Swing Line Loan then outstanding. "Net Worth" means, with respect to any Person as of any date of determination, the book value of the assets of such Person, minus the sum of (a) reserves applicable thereto, and (b) all of such Person's liabilities on a consolidated basis (including accrued and deferred income taxes), all as determined in accordance with GAAP. "New Holdings" has the meaning ascribed to it in the recitals to the Agreement. "New Holdings Guaranty" means the guaranty of even date herewith executed by New Holdings in favor of Agent and Lenders. "New Holdings Pledge Agreement" means the Pledge Agreement of even date herewith executed by New Holdings in favor of Agent, on behalf of itself and Lenders, pledging all of the Stock of Borrower. "Non-Funding Lender" has the meaning ascribed to it in Section 9.9(a)(ii). "Notes" means the Revolving Notes, the Swing Line Note, the IP Notes and the Term Notes. "Notice of Conversion/Continuation" has the meaning ascribed to it in Section 1.5(e). A-24 "Notice of Revolving Credit Advance" has the meaning ascribed to it in Section 1.1(a). "Obligations" means all loans, advances, debts, liabilities and obligations, for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or such amounts are liquidated or determinable) owing by any Credit Party to Agent or any Lender, and all covenants and duties regarding such amounts, of any kind or nature, present or future, whether or not evidenced by any note, agreement or other instrument, arising under the Agreement or any of the other Loan Documents. This term includes all principal, interest (including all interest that accrues after the commencement of any case or proceeding by or against any Credit Party in bankruptcy, whether or not allowed in such case of proceeding), Fees, Charges, expenses, attorneys' fees and any other sum chargeable to any Credit Party under the Agreement or any of the other Loan Documents. "Old Holdcos" shall mean collectively IHF Capital, Inc., IHF Holdings, Inc., and ICON Fitness Corporation, each a Delaware corporation. "Old Management Agreement" has the meaning ascribed to it in Section 6.14. "Patent Security Agreements" means the Patent Security Agreements made in favor of Agent, on behalf of itself and Lenders, by each applicable Credit Party. "Patent License" means rights under any written agreement now owned or hereafter acquired by any Credit Party granting any right with respect to any invention on which a Patent is in existence. "Patents" means all of the following in which any Credit Party now holds or hereafter acquires any interest: (a) all letters patent of the United States or any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or of any other country, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State or any other country, and (b) all reissues, continuations, continuations-in-part or extensions thereof. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Plan" means a Plan described in Section 3(2) of ERISA. "Permitted Encumbrances" means the following encumbrances: (a) Liens for taxes or assessments or other governmental Charges not yet due and payable or which are being contested in accordance with Section 5.2(b); (b) pledges or deposits of money securing statutory obligations under workmen's compensation, unemployment insurance, social security or public liability laws or similar legislation (excluding Liens under ERISA); (c) pledges or deposits of money securing bids, tenders, contracts (other than contracts for the payment of money) or leases to which any Credit Party is a party as lessee made in the ordinary course of business; (d) inchoate and unperfected workers', mechanics' or similar liens arising in the ordinary course A-25 of business, so long as such Liens attach only to Equipment, Fixtures and/or Real Estate; (e) carriers', warehousemen's or other similar possessory liens arising in the ordinary course of business and securing liabilities in an outstanding aggregate amount not in excess of $1,000,000 at any time, so long as such Liens attach only to Inventory; (f) deposits securing, or in lieu of, surety, appeal or customs bonds in proceedings to which any Credit Party is a party; (g) any attachment or judgment lien not constituting an Event of Default under Section 8.1(j); (h) zoning restrictions, easements, licenses, or other restrictions on the use of any Real Estate or other minor irregularities in title (including leasehold title) thereto, so long as the same do not materially impair the use, value, or marketability of such Real Estate; (i) presently existing or hereafter created Liens in favor of Agent, on behalf of Agent and Lenders or in favor of Agent and Lenders, as applicable; (j) Liens expressly permitted under clauses (b), (c) and (d) of Section 6.7 of the Agreement; and (k) to the extent not included in clauses (a), (d) or (e) of this definition, Prior Claims that are unregistered and that secure amounts that are not yet due and payable. "Permitted Subordinated Debt" means Subordinated Debt that (i) is unsecured, (ii) is subordinated in right of payment to the Obligations on terms satisfactory to the Agents, (iii) is in a principal amount not to exceed the sum of (A) the principal balance of Term Loan C plus accrued interest thereon and prepayment fees with respect thereto to the extent the proceeds of such Permitted Subordinated Debt are used to pay the principal, interest and fees on Term Loan C, plus (B) the amount necessary to repurchase or prepay the Subordinated Notes in accordance with the Subordinated Notes Documents, but only to the extent the proceeds of such Permitted Subordinated Debt are used to make such repurchase or prepayment, (iv) amortizes in one or more installments commencing on or after the sixth anniversary of the Closing Date, (v) bears interest payable in cash at a rate less than the effective combined cash interest rate applicable to Term Loan C and the Subordinated Notes, and (vi) if applicable, bears PIK interest at a rate less than or equal to the PIK interest applicable to Term Loan C, and (vii) is otherwise incurred on terms and conditions reasonably satisfactory to Agents. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, other entity or government (whether federal, state, county, city, municipal, local, foreign, or otherwise, including any instrumentality, division, agency, body or department thereof). "PIK Interest" has the meaning ascribed to it in Section 1.5(a). "PIK Interest Catch-Up Date" means each Interest Payment Date and any other date (if any) on which principal is paid with respect to Term Loan C, in each case, occurring after the fifth anniversary of the Closing Date. "Plan" means, at any time, an "employee benefit plan," as defined in Section 3(3) of ERISA, that any Credit Party or ERISA Affiliate maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any Credit Party. A-26 "Pledge Agreements" means the Borrower Pledge Agreement, the New Holdings Pledge Agreement, and any other pledge agreement entered into after the Closing Date by any Credit Party (as required by the Agreement or any other Loan Document). "Prior Claims" means all Liens created by applicable law (in contrast with Liens voluntarily granted) which rank or are capable of ranking prior or pari passu with Agent's security interests or Agent's and Lenders' hypothecs (or the applicable equivalent of such Liens), as applicable, against all or part of the Collateral, including for amounts owing for wages, employee deductions, goods and services taxes, sales taxes, income taxes, employer health taxes, municipal taxes, workers' compensation, pension fund obligations and overdue rents. "Prior Lenders" means collectively GE Capital and the lenders under that Amended and Restated Credit Agreement dated as of November 14, 1994, as amended, and General Electric Capital Canada Inc. under that Credit Agreement dated as of November 18, 1997, as amended. "Prior Lenders' Obligations" means, collectively, all Obligations as such term is defined in each of the Amended and Restated Credit Agreement dated as of November 14, 1994, as amended, among Agent, Borrower and the other parties thereto and the Credit Agreement between General Electric Capital Canada, Inc. and ICON of Canada dated as of November 18, 1997, as amended. "Proceeds" means "proceeds," as such term is defined in the Code and, in any event, shall include (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to any Credit Party from time to time with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to any Credit Party from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any Person acting under color of governmental authority), (c) any claim of any Credit Party against third parties (i) for past, present or future infringement of any Patent or Patent License, or (ii) for past, present or future infringement or dilution of any Copyright, Copyright License, Trademark or Trademark License, or for injury to the goodwill associated with any Trademark or Trademark License, (d) any recoveries by any Credit Party against third parties with respect to any litigation or dispute concerning any of the Collateral, (e) dividends, interest and distributions with respect to Investment Property, and (f) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral, upon disposition or otherwise. "Pro Forma" means the unaudited consolidated and consolidating balance sheet of Borrower and its Subsidiaries as of May 31, 1999 after giving pro forma effect to the Related Transactions. "Pro Rata Share" means with respect to all matters relating to any Lender (a) with respect to the Revolving Loan (including the Swing Line Loan as a subset of the Swing Line Lender's Revolving Loan), the percentage obtained by dividing (i) the Revolving Loan Commitment (including the Swing Line Commitment as a subset of the Swing Line Lender's Revolving Loan Commitment) of that Lender by (ii) the aggregate Revolving Loan A-27 Commitments of all Lenders, (b) with respect to each Term Loan, the percentage obtained by dividing (i) the Term Loan Commitment of that Lender for Term Loans of that type by (ii) the aggregate Term Loan Commitments of all Lenders for Term Loans of that type, as any such percentages may be adjusted by assignments permitted pursuant to Section 9.1, (c) with respect to the IP Loan, the percentage obtained by dividing (i) the IP Loan Commitment of that Lender by the aggregate IP Loan Commitments of all Lenders, (d) with respect to all Loans, the percentage obtained by dividing (i) the aggregate Commitments of that Lender by (ii) the aggregate Commitments of all Lenders, and (d) with respect to all Loans on and after the Commitment Termination Date, the percentage obtained by dividing (i) the aggregate outstanding principal balance of the Loans held by that Lender, by (ii) the outstanding principal balance of the Loans held by all Lenders. "Projections" means Borrower's forecasted consolidated and consolidating: (a) balance sheets; (b) profit and loss statements; and (c) cash flow statements, all prepared on a Subsidiary by Subsidiary or division-by-division basis, if applicable, and otherwise consistent with the historical Financial Statements of Borrower, together with appropriate supporting details and a statement of underlying assumptions. "Public Offering" means a firm underwritten public offering of common stock registered on form S-1, S-2 or S-3 under the Securities Act of 1933, as amended, by a nationally recognized investment banking firm and after giving effect to which the issuer shall be qualified for listing on the NASDAQ National Market, the American Stock Exchange or the New York Stock Exchange. "Qualified Assignee" means (i) (a) any Lender, any Affiliate of any Lender and, with respect to any Lender that is an investment fund that invests in commercial loans, any other investment fund that invests in commercial loans and that is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor, and (b) any commercial bank, savings and loan association or savings bank or any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses, including insurance companies, mutual funds, lease financing companies and commercial finance companies; and (ii) in addition to the criteria set forth in the foregoing clause (i), any such Assignee shall be a Person which has and maintains a rating of BBB or higher from S&P and a rating of Baa2 or higher from Moody's and which, through its applicable lending office, is capable of lending to Borrower without the imposition of any withholding or similar taxes; provided that (a) no Affiliate of any Credit Party, (b) no Person determined by Agent to be acting in the capacity of a vulture fund and (c) no Person who holds Subordinated Debt or is an Affiliate of a holder of Subordinated Debt shall be a Qualified Assignee. "Qualified Plan" means a Pension Plan that is intended to be tax-qualified under Section 401(a) of the IRC. "Ratable Share" has the meaning ascribed to it in Section 1.1(b). "Real Estate" has the meaning ascribed to it in Section 3.6. A-28 "Recapitalization" means, collectively, the transactions described in the Exchange Offer and all other transactions related thereto, including, without limitation, (i) an exchange offer whereby the 14% senior discount notes issued by Holdings will be exchanged for a portion of equity in New Holdings, (ii) an exchange offer whereby the 15% senior discount notes issued by Intermediate Holdings will be exchanged for a portion of equity in New Holdings, (iii) a cash equity contribution of not less than $40,000,000 to Borrower by Bain Capital, Inc., CS First Boston and others, (iv) an exchange offer whereby the 13% senior subordinated notes issued by Borrower will be exchanged for $40,000,000 of cash, $45,000,000 of Subordinated Notes and a portion of equity in New Holdings, (v) the repayment in full of the Prior Lenders' Obligations and (vi) the merger of HF Acquisition, Inc., a wholly-owned Subsidiary of New Holdings with and into Borrower with Borrower as the surviving entity in that merger. "Recapitalization Documents" means the Exchange Offer, the Subordinated Notes Documents and the documents listed on Annex K hereto. "Refunded Swing Line Loan" has the meaning ascribed to it in Section 1.1(c)(iii). "Related Transactions" means the initial borrowing under the Revolving Loan, the IP Loan and the Term Loans on the Closing Date, the Recapitalization, the payment of all fees, costs and expenses associated with all of the foregoing and the execution and delivery of all of the Related Transactions Documents. "Related Transactions Documents" means the Loan Documents and the Recapitalization Documents. "Release" means any release, threatened release, spill, emission, leaking, pumping, pouring, emitting, emptying, escape, injection, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Material in the indoor or outdoor environment, including the movement of Hazardous Material through or in the air, soil, surface water, ground water or property. "Requisite Lenders" means Lenders having (a) more than sixty-six and two-thirds percent (66 2/3%) of the Commitments of all Lenders, or (b) if the Commitments have been terminated, more than sixty-six and two-thirds percent (66 2/3%) of the aggregate outstanding amount of the Loans. "Requisite Revolving Lenders" means Lenders having (a) more than sixty-six and two-thirds percent (66 2/3%) of the Revolving Loan Commitments of all Lenders, or (b) if the Revolving Loan Commitments have been terminated, more than sixty-six and two-thirds percent (66 2/3%) of the aggregate outstanding amount of the Revolving Loan. "Reserves" means, with respect to the Borrowing Base (a) reserves established by Agent from time to time against Eligible Inventory pursuant to Section 5.10, (b) reserves established pursuant to Section 5.4(c), and (c) such other reserves (including in respect of Prior Claims) against Eligible Accounts, Eligible Inventory or Borrowing Availability that Agent may, in its reasonable credit judgment, establish from time to time. Without limiting the generality of A-29 the foregoing, Reserves established to ensure the payment of accrued Interest Expenses, Indebtedness or Prior Claims shall be deemed to be a reasonable exercise of Agent's credit judgment. "Residual 13% Subordinated Notes" means subordinated notes due 2002 in aggregate principal amount not to exceed $1,500,000 issued pursuant to an Indenture between Borrower and Fleet Bank of Massachusetts, N.A. as trustee dated as of November 14, 1994 as amended as of the Closing Date. "Restricted Payment" means, with respect to any Credit Party (a) the declaration or payment of any dividend or the incurrence of any liability to make any other payment or distribution of cash or other property or assets in respect of Stock; (b) any payment on account of the purchase, redemption, defeasance, sinking fund or other retirement of such Credit Party's Stock or any other payment or distribution made in respect thereof, either directly or indirectly; (c) any payment or prepayment of principal of, premium, if any, or interest, fees or other charges on or with respect to, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment and any claim for rescission with respect to, any Subordinated Debt; (d) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire Stock of such Credit Party now or hereafter outstanding; (e) any payment of a claim for the rescission of the purchase or sale of, or for material damages arising from the purchase or sale of, any shares of such Credit Party's Stock or of a claim for reimbursement, indemnification or contribution arising out of or related to any such claim for damages or rescission; (f) any payment, loan, contribution, or other transfer of funds or other property to any Stockholder of such Credit Party other than payment of compensation in the ordinary course to stockholders who are employees of such Credit Party; and (g) any payment of management fees (or other fees of a similar nature) by such Credit Party to any Stockholder of such Credit Party or its Affiliates. "Retiree Welfare Plan" means, at any time, a Welfare Plan that provides for continuing coverage or benefits for any participant or any beneficiary of a participant after such participant's termination of employment, other than continuation coverage provided pursuant to Section 4980B of the IRC and at the sole expense of the participant or the beneficiary of the participant. "Revolving Credit Advance" has the meaning ascribed to it in Section 1.1(a)(i). "Revolving Lenders" means, as of any date of determination, Lenders having a Revolving Loan Commitment. "Revolving Loan" means, at any time, the sum of (i) the aggregate amount of Revolving Credit Advances outstanding to Borrower plus (ii) the aggregate Letter of Credit Obligations incurred on behalf of Borrower. Unless the context otherwise requires, references to the outstanding principal balance of the Revolving Loan shall include the outstanding balance of Letter of Credit Obligations. A-30 "Revolving Loan Commitment" means (a) as to any Revolving Lender, the aggregate commitment of such Revolving Lender to make Revolving Credit Advances (including without duplication Swing Line Advances as a subset of the Swing Line Lender's Revolving Loan Commitment) or incur Letter of Credit Obligations as set forth on Annex J to the Agreement or in the most recent Assignment Agreement executed by such Revolving Lender and (b) as to all Revolving Lenders, the aggregate commitment of all Revolving Lenders to make Revolving Credit Advances (including without duplication Swing Line Advances as a subset of the Swing Line Lender's Revolving Loan Commitment) or incur Letter of Credit Obligations, which aggregate commitment shall be One Hundred Twenty Million Dollars ($120,000,000) on the Closing Date, as such amount may be adjusted, if at all, from time to time in accordance with the Agreement. "Revolving Note" has the meaning ascribed to it in Section 1.1(a)(ii). "Security Agreement" means the Security Agreement of even date herewith entered into by and among Agent, on behalf of itself and Lenders, and each Credit Party that is a signatory thereto. "Senior Leverage Ratio" means, with respect to Borrower, on a consolidated basis, the ratio of (a) the outstanding principal balance of the Loans hereunder as of as of any date of determination (including the average outstanding principal balance of the Revolving Loan for the most recent Fiscal Quarter ending prior to that determination date), to (b) EBITDA for the twelve months ending on that date of determination. "Solvent" means (i) with respect to any Person on a particular date that is subject to Insolvency Laws of the United States of America, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person; (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person's property would constitute an unreasonably small capital and (ii) with respect to any Person on a particular date that is subject to Insolvency Laws of Canada, that on such date (a) the property of such Person is sufficient, if disposed of at a fairly conducted sale under legal process, to enable payment of all its obligations, due and accruing due, (b) the property of such Person is, at a fair valuation, greater than the total amount of liabilities, including contingent liabilities, of such Person; (c) such Person has not ceased paying its current obligations in the ordinary course of business as they generally become due. The amount of contingent liabilities (such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can be reasonably be expected to become an actual or matured liability. "Stock" means all shares, options, warrants, general or limited partnership interests, membership interests or other equivalents (regardless of how designated) of or in a A-31 corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934). "Stockholder" means, with respect to any Person, each holder of Stock of such Person. "Stockholders Agreement" means that certain Stockholders Agreement among the stockholders of HF Holdings, Inc. dated as of the Closing Date. "Subordinated Debt" means the Indebtedness of Borrower evidenced by the Subordinated Notes and any other Indebtedness of any Credit Party subordinated to the Obligations in a manner and form satisfactory to Agent and Lenders in their sole discretion, as to right and time of payment and as to any other rights and remedies thereunder. "Subordinated Notes" means those certain 12% Subordinated Notes due 2005 issued by Borrower in an aggregate original principal amount of $44,334,000. "Subordinated Notes Documents" means the Subordinated Notes and the Indenture between Borrower and IBJ Whitehall Bank & Trust Company dated as of September 22, 1999, as from time to time amended. "Subsidiary" means, with respect to any Person, (a) any corporation of which an aggregate of more than fifty percent (50%) of the outstanding Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person or one or more Subsidiaries of such Person, or with respect to which any such Person has the right to vote or designate the vote of fifty percent (50%) or more of such Stock whether by proxy, agreement, operation of law or otherwise, and (b) any partnership or limited liability company in which such Person and/or one or more Subsidiaries of such Person shall have an interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%) or of which any such Person is a general partner or may exercise the powers of a general partner. Unless the context otherwise requires, each reference to a Subsidiary shall be a reference to a Subsidiary of the Borrower. "Swing Line Advance" has the meaning ascribed to it in Section 1.1(c)(i). "Swing Line Availability" has the meaning ascribed to it in Section 1.1(c)(i). "Swing Line Commitment" means, as to the Swing Line Lender, the commitment of the Swing Line Lender to make Swing Line Advances as set forth on Annex J to the Agreement, which commitment constitutes a subfacility of the Revolving Loan Commitment of the Swing Line Lender. "Swing Line Lender" means GE Capital. A-32 "Swing Line Loan" means at any time, the aggregate amount of Swing Line Advances outstanding to Borrower. "Swing Line Note" has the meaning ascribed to it in Section 1.1(c)(ii). "Taxes" means taxes, levies, imposts, deductions, Charges and withholdings, and all liabilities with respect thereto, excluding taxes imposed on or measured by the net income of Agent or a Lender by the jurisdictions under the laws of which Agent and Lenders are organized or any political subdivision thereof. "Termination Date" means the date on which (a) the Loans have been indefeasibly repaid in full, (b) all other Obligations under the Agreement and the other Loan Documents have been completely discharged, (c) all Letter of Credit Obligations have been cash collateralized, cancelled or backed by stand-by letters of credit in accordance with Annex B, and (d) Borrower shall not have any further right to borrow any monies under the Agreement. "Term Lenders" means those Lenders having Term Loan A Commitments, Term Loan B Commitments and/or Term Loan C Commitments, as applicable. "Term Loans" shall have the meaning assigned to it in Section 1.1(b)(i). "Term Loan A Commitment" means (a) as to any Lender with a Term Loan A Commitment, the commitment of such Lender to make its Pro Rata Share of Term Loan A as set forth on Annex J to the Agreement or in the most recent Assignment Agreement executed by such Lender, and (b) as to all Lenders with a Term Loan A Commitment, the aggregate commitment of all Lenders to make Term Loan A, which aggregate commitment shall be Thirty Million Dollars ($30,000,000) on the Closing Date. After advancing Term Loan A, each reference to a Lender's Term Loan A Commitment shall refer to that Lender's Pro Rata Share of the outstanding Term Loan A. "Term Loan B Commitment" means (a) as to any Lender with a Term Loan B Commitment, the commitment of such Lender to make its Pro Rata Share of Term Loan B as set forth on Annex J to the Agreement or in the most recent Assignment Agreement executed by such Lender, and (b) as to all Lenders with a Term Loan B Commitment, the aggregate commitment of all Lenders to make Term Loan B, which aggregate commitment shall be Eighty Million Dollars ($80,000,000) on the Closing Date. After advancing Term Loan B, each reference to a Lender's Term Loan B Commitment shall refer to that Lender's Pro Rata Share of the outstanding Term Loan B. "Term Loan C Commitment" means (a) as to any Lender with a Term Loan C Commitment, the commitment of such Lender to make its Pro Rata Share of Term Loan C as set forth on Annex J to the Agreement or in the most recent Assignment Agreement executed by such Lender, and (b) as to all Lenders with a Term Loan C Commitment, the aggregate commitment of all Lenders to make Term Loan C, which aggregate commitment shall be Fifty-Five Million Dollars ($55,000,000) on the Closing Date. After advancing Term Loan C, each A-33 reference to a Lender's Term Loan C Commitment shall refer to that Lender's Pro Rata Share of the outstanding Term Loan C. "Term Loan Commitments" means the aggregate of the Term Loan A Commitment, Term Loan B and Term Loan C Commitment. "Term Note" has the meaning assigned to it in Section 1.1(b)(i). "Third Party Interactives" means all Persons with whom any Credit Party exchanges data electronically in the ordinary course of business, including, without limitation, customers, suppliers, third-party vendors, subcontractors, processors-converters, shippers and warehousemen. "Title IV Plan" means a Pension Plan (other than a Multiemployer Plan), that is covered by Title IV of ERISA, and that any Credit Party or ERISA Affiliate maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Trademark Security Agreements" means the Trademark Security Agreements made in favor of Agent, on behalf of Lenders, by each applicable Credit Party. "Trademark License" means rights under any written agreement now owned or hereafter acquired by any Credit Party granting any right to use any Trademark. "Trademarks" means all of the following now owned or hereafter adopted or acquired by any Credit Party: (a) all trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature (whether registered or unregistered), all registrations and recordings thereof, and all applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof; (b) all reissues, extensions or renewals thereof; and (c) all goodwill associated with or symbolized by any of the foregoing. "Unfunded Pension Liability" means, at any time, the aggregate amount, if any, of the sum of (a) the amount by which the present value of all accrued benefits under each Title IV Plan exceeds the fair market value of all assets of such Title IV Plan allocable to such benefits in accordance with Title IV of ERISA, all determined as of the most recent valuation date for each such Title IV Plan using the actuarial assumptions for funding purposes in effect under such Title IV Plan, and (b) for a period of five (5) years following a transaction which might reasonably be expected to be covered by Section 4069 of ERISA, the liabilities (whether or not accrued) that could be avoided by any Credit Party or any ERISA Affiliate as a result of such transaction. "Ultimate Holdings" means IHF Capital, Inc., a Delaware corporation. A-34 "Voting Majority" has the meaning ascribed to such term in the HF Investment LLC Agreement. "Welfare Plan" means a Plan described in Section 3(i) of ERISA. "Year 2000 Assessment" means a comprehensive written assessment of the nature and extent of each Credit Party's Year 2000 Problems and Year 2000 Date-Sensitive Systems/Components, including, without limitation, Year 2000 Problems regarding data exchanges with Third Party Interactives. "Year 2000 Corrective Actions" means, as to each Credit Party, all actions necessary to eliminate such Person's Year 2000 Problems, including, without limitation, computer code enhancements and revisions, upgrades and replacements of Year 2000 Date-Sensitive Systems/Components, and coordination of such enhancements, revisions, upgrades and replacements with Third Party Interactives. "Year 2000 Corrective Plan" means, with respect to each Credit Party, a comprehensive plan to eliminate all of its Year 2000 Problems on or before October 31, 1999, including without limitation (i) computer code enhancements or revisions, (ii) upgrades or replacements of Year 2000 Date-Sensitive Systems/Components, (iii) test and validation procedures, (iv) an implementation time line and budget and (v) designation of specific employees who will be responsible for planning, coordinating and implementing each phase or subpart of the Year 2000 Corrective Plan. "Year 2000 Date-Sensitive System/Component" means, as to any Person, any system software, network software, applications software, data base, computer file, embedded microchip, firmware or hardware that accepts, creates, manipulates, sorts, sequences, calculates, compares or outputs calendar-related data accurately; such systems and components shall include, without limitation, mainframe computers, file server/client systems, computer workstations, routers, hubs, other network-related hardware, and other computer-related software, firmware or hardware and information processing and delivery systems of any kind and telecommunications systems and other communications processors, security systems, alarms, elevators and HVAC systems. "Year 2000 Implementation Testing" means, as to each Credit Party, (i) the performance of test and validation procedures regarding Year 2000 Corrective Actions on an applications basis; (ii) the performance of test and validation procedures regarding data exchanges among the Credit Parties' Year 2000 Date-Sensitive Systems/Components and data exchanges with Third Party Interactives, and (iii) the design and implementation of additional Corrective Actions, the need for which has been demonstrated by test and validation procedures. "Year 2000 Problems" means, with respect to each Credit Party, limitations on the capacity or readiness of any such Credit Party's Year 2000 Date-Sensitive Systems/Components to accurately accept, create, manipulate, sort, sequence, calculate, compare or output calendar date information with respect to calendar year 1999 or any subsequent calendar year beginning on or after January 1, 2000 (including leap year computations), including, without limitation, A-35 exchanges of information among Year 2000 Date-Sensitive Systems/Components of the Credit Parties and exchanges of information among the Credit Parties and Year 2000 Date-Sensitive Systems/Components of Third Party Interactives and functionality of peripheral interfaces, firmware and embedded microchips. Rules of construction with respect to accounting terms used in the Agreement or the other Loan Documents shall be as set forth in Annex G. All other undefined terms contained in any of the Loan Documents shall, unless the context indicates otherwise, have the meanings provided for by the Code as in effect in the State of Illinois to the extent the same are used or defined therein. Unless otherwise specified, references in the Agreement or any of the Appendices to a Section, subsection or clause refer to such Section, subsection or clause as contained in the Agreement. The words "herein," "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole, including all Annexes, Exhibits and Schedules, as the same may from time to time be amended, restated, modified or supplemented, and not to any particular section, subsection or clause contained in the Agreement or any such Annex, Exhibit or Schedule. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter genders. The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; the word "or" is not exclusive; references to Persons include their respective successors and assigns (to the extent and only to the extent permitted by the Loan Documents) or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. Whenever any provision in any Loan Document refers to the knowledge (or an analogous phrase) of any Credit Party, such words are intended to signify that such Credit Party has actual knowledge or awareness of a particular fact or circumstance or that such Credit Party, if it had exercised reasonable diligence, would have known or been aware of such fact or circumstance. A-36 ANNEX B (Section 1.2) to CREDIT AGREEMENT LETTERS OF CREDIT (a) Issuance. Subject to the terms and conditions of the Agreement, Agent and Revolving Lenders agree to incur, from time to time prior to the Commitment Termination Date, upon the request of Borrower and for Borrower's account, Letter of Credit Obligations by causing Letters of Credit to be issued (by a bank or other legally authorized Person selected by or acceptable to Agent in its sole discretion (each, an "L/C Issuer")) for Borrower's account and guaranteed by Agent; provided, that if the L/C Issuer is a Revolving Lender, then such Letters of Credit shall not be guaranteed by Agent but rather each Revolving Lender shall, subject to the terms and conditions hereinafter set forth, purchase (or be deemed to have purchased) risk participations in all such Letters of Credit issued with the written consent of Agent, as more fully described in paragraph (b)(ii) below. The aggregate amount of all such Letter of Credit Obligations shall not at any time exceed the least of (i) Ten Million Dollars ($10,000,000) (the "L/C Sublimit"), (ii) the Maximum Amount less the aggregate outstanding principal balance of the Revolving Credit Advances and the Swing Line Loan, and (iii) the Borrowing Base less the aggregate outstanding principal balance of the Revolving Credit Advances and the Swing Line Loan. No such Letter of Credit shall have an expiry date that is more than one year following the date of issuance thereof, and neither Agent nor Revolving Lenders shall be under any obligation to incur Letter of Credit Obligations in respect of, or purchase risk participations in, any Letter of Credit having an expiry date that is later than the Commitment Termination Date. (b) (i) Advances Automatic; Participations. In the event that Agent or any Revolving Lender shall make any payment on or pursuant to any Letter of Credit Obligation, such payment shall then be deemed automatically to constitute a Revolving Credit Advance under Section 1.1(a) of the Agreement regardless of whether a Default or Event of Default has occurred and is continuing and notwithstanding Borrower's failure to satisfy the conditions precedent set forth in Section 2, and each Revolving Lender shall be obligated to pay its Pro Rata Share thereof in accordance with the Agreement. The failure of any Revolving Lender to make available to Agent for Agent's own account its Pro Rata Share of any such Revolving Credit Advance or payment by Agent under or in respect of a Letter of Credit shall not relieve any other Revolving Lender of its obligation hereunder to make available to Agent its Pro Rata Share thereof, but no Revolving Lender shall be responsible for the failure of any other Revolving Lender to make available such other Revolving Lender's Pro Rata Share of any such payment. (ii) If it shall be illegal or unlawful for Borrower to incur Revolving Credit Advances as contemplated by paragraph (b)(i) above because of an Event of Default described in Sections 8.1(h) or (i) or otherwise or if it shall be illegal or unlawful for any Revolving Lender to be deemed to have assumed a ratable share of the reimbursement obligations owed to an L/C Issuer, or if the L/C Issuer is a Revolving Lender, then (i) immediately and without further action whatsoever, each Revolving Lender shall be deemed to have irrevocably and unconditionally purchased from Agent (or such L/C Issuer, as the case may B-1 be) an undivided interest and participation equal to such Revolving Lender's Pro Rata Share (based on the Revolving Loan Commitments) of the Letter of Credit Obligations in respect of all Letters of Credit then outstanding and (ii) thereafter, immediately upon issuance of any Letter of Credit, each Revolving Lender shall be deemed to have irrevocably and unconditionally purchased from Agent (or such L/C Issuer, as the case may be) an undivided interest and participation in such Revolving Lender's Pro Rata Share (based on the Revolving Loan Commitments) of the Letter of Credit Obligations with respect to such Letter of Credit on the date of such issuance. Each Revolving Lender shall fund its participation in all payments or disbursements made under the Letters of Credit in the same manner as provided in the Agreement with respect to Revolving Credit Advances. (c) Cash Collateral. (i) If Borrower is required to provide cash collateral for any Letter of Credit Obligations pursuant to the Agreement prior to the Commitment Termination Date, Borrower will pay to Agent for the ratable benefit of itself and Revolving Lenders cash or cash equivalents acceptable to Agent ("Cash Equivalents") in an amount equal to 105% of the maximum amount then available to be drawn under each applicable Letter of Credit outstanding. Such funds or Cash Equivalents shall be held by Agent in a cash collateral account (the "Cash Collateral Account") maintained at a bank or financial institution acceptable to Agent. The Cash Collateral Account shall be in the name of Borrower and shall be pledged to, and subject to the control of, Agent, for the benefit of Agent and Lenders, in a manner satisfactory to Agent. Borrower hereby pledges and grants to Agent, on behalf of itself and Lenders, a security interest in all such funds and Cash Equivalents held in the Cash Collateral Account from time to time and all proceeds thereof, as security for the payment of all amounts due in respect of the Letter of Credit Obligations and other Obligations, whether or not then due. The Agreement, including this Annex B, shall constitute a security agreement under applicable law. (ii) If any Letter of Credit Obligations, whether or not then due and payable, shall for any reason be outstanding on the Commitment Termination Date, Borrower shall either (A) provide cash collateral therefor in the manner described above, or (B) cause all such Letters of Credit and guaranties thereof to be canceled and returned, or (C) deliver a stand-by letter (or letters) of credit in guarantee of such Letter of Credit Obligations, which stand-by letter (or letters) of credit shall be of like tenor and duration (plus thirty (30) additional days) as, and in an amount equal to 105% of the aggregate maximum amount then available to be drawn under, the Letters of Credit to which such outstanding Letter of Credit Obligations relate and shall be issued by a Person, and shall be subject to such terms and conditions, as are satisfactory to Agent in its sole discretion. (iii) From time to time after funds are deposited in the Cash Collateral Account by Borrower, whether before or after the Commitment Termination Date, Agent may apply such funds or Cash Equivalents then held in the Cash Collateral Account to the payment of any amounts, and in such order as Agent may elect, as shall be or shall become due and payable by Borrower to Agent and Lenders with respect to such Letter of Credit Obligations of Borrower and, upon the satisfaction in full of all Letter of Credit Obligations of Borrower, to any other Obligations then due and payable. B-2 Neither Borrower nor any Person claiming on behalf of or through Borrower shall have any right to withdraw any of the funds or Cash Equivalents held in the Cash Collateral Account, except that upon the termination of all Letter of Credit Obligations and the payment of all amounts payable by Borrower to Agent and Lenders in respect thereof, any funds remaining in the Cash Collateral Account shall be applied to other Obligations then due and owing and upon payment in full of such Obligations, any remaining amount shall be paid to Borrower or as otherwise required by law. (d) Fees and Expenses. Borrower agrees to pay to Agent for the benefit of Revolving Lenders, as compensation to such Lenders for Letter of Credit Obligations incurred hereunder, (x) all costs and expenses incurred by Agent or any Lender on account of such Letter of Credit Obligations, and (y) for each month during which any Letter of Credit Obligation shall remain outstanding, a fee (the "Letter of Credit Fee") in an amount equal to the Applicable L/C Margin from time to time in effect multiplied by the maximum amount available from time to time to be drawn under the applicable Letter of Credit. Such fee shall be paid to Agent for the benefit of the Revolving Lenders in arrears, on the first day of each month and on the Commitment Termination Date. In addition, Borrower shall pay to any L/C Issuer, on demand, such fees (including all per annum fees), charges and expenses of such L/C Issuer in respect of the issuance, negotiation, acceptance, amendment, transfer and payment of such Letter of Credit or otherwise payable pursuant to the application and related documentation under which such Letter of Credit is issued. (e) Request for Incurrence of Letter of Credit Obligations. Borrower shall give Agent at least two (2) Business Days' prior written notice requesting the incurrence of any Letter of Credit Obligation, specifying the date such Letter of Credit Obligation is to be incurred, identifying the beneficiary to which such Letter of Credit Obligation relates and describing the nature of the transactions proposed to be supported thereby. The notice shall be accompanied by the form of the Letter of Credit (which shall be acceptable to the L/C Issuer) to be guaranteed and, to the extent not previously delivered to Agent, copies of all agreements between Borrower and the L/C Issuer pertaining to the issuance of Letters of Credit. Notwithstanding anything contained herein to the contrary, Letter of Credit applications by Borrower and approvals by Agent and the L/C Issuer may be made and transmitted pursuant to electronic codes and security measures mutually agreed upon and established by and among Borrower, Agent and the L/C Issuer. (f) Obligation Absolute. The obligation of Borrower to reimburse Agent and Revolving Lenders for payments made with respect to any Letter of Credit Obligation shall be absolute, unconditional and irrevocable, without necessity of presentment, demand, protest or other formalities, and the obligations of each Revolving Lender to make payments to Agent with respect to Letters of Credit shall be unconditional and irrevocable. Such obligations of Borrower and Revolving Lenders shall be paid strictly in accordance with the terms hereof under all circumstances including the following: (i) any lack of validity or enforceability of any Letter of Credit or the Agreement or the other Loan Documents or any other agreement; B-3 (ii) the existence of any claim, setoff, defense or other right that Borrower or any of its Affiliates or any Lender may at any time have against a beneficiary or any transferee of any Letter of Credit (or any Persons or entities for whom any such transferee may be acting), Agent, any Lender, or any other Person, whether in connection with the Agreement, the Letter of Credit, the transactions contemplated herein or therein or any unrelated transaction (including any underlying transaction between Borrower or any of its Affiliates and the beneficiary for which the Letter of Credit was procured); (iii) any draft, demand, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by Agent (except as otherwise expressly provided in paragraph (g)(ii)(C) below) or any L/C Issuer under any Letter of Credit or guaranty thereof against presentation of a demand, draft or certificate or other document that does not comply with the terms of such Letter of Credit or such guaranty; (v) any other circumstance or event whatsoever, that is similar to any of the foregoing; or (vi) the fact that a Default or an Event of Default has occurred and is continuing. (g) Indemnification; Nature of Lenders' Duties. (i) In addition to amounts payable as elsewhere provided in the Agreement, Borrower hereby agrees to pay and to protect, indemnify, and save harmless Agent and each Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including attorneys' fees and allocated costs of internal counsel) that Agent or any Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or guaranty thereof, or (B) the failure of Agent or any Lender seeking indemnification or of any L/C Issuer to honor a demand for payment under any Letter of Credit or guaranty thereof as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority, in each case other than to the extent solely as a result of the gross negligence or willful misconduct of Agent or such Lender (as finally determined by a court of competent jurisdiction). (ii) As between Agent and any Lender and Borrower, Borrower assumes all risks of the acts and omissions of, or misuse of any Letter of Credit by beneficiaries of any Letter of Credit. In furtherance and not in limitation of the foregoing, to the fullest extent permitted by law neither Agent nor any Lender shall be responsible for: (A) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document issued by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) failure of the beneficiary of any Letter of Credit to B-4 comply fully with conditions required in order to demand payment under such Letter of Credit; provided, that in the case of any payment by L/C Issuer under any Letter of Credit or guaranty thereof, L/C Issuer shall be liable to the extent such payment was made primarily as a result of its gross negligence or willful misconduct in determining that the demand for payment under such Letter of Credit or guaranty thereof complies on its face with any applicable requirements for a demand for payment under such Letter of Credit or guaranty thereof; (D) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they may be in cipher; (E) errors in interpretation of technical terms; (F) any loss or delay in the transmission or otherwise of any document required in order to make a payment under any Letter of Credit or guaranty thereof or of the proceeds thereof; (G) the credit of the proceeds of any drawing under any Letter of Credit or guaranty thereof; and (H) any consequences arising from causes beyond the control of Agent or any Lender. None of the above shall affect, impair, or prevent the vesting of any of Agent's or any Lender's rights or powers hereunder or under the Agreement. (iii) Nothing contained herein shall be deemed to limit or to expand any waivers, covenants or indemnities made by Borrower in favor of any L/C Issuer in any letter of credit application, reimbursement agreement or similar document, instrument or agreement between Borrower and such L/C Issuer. B-5 ANNEX C (Section 1.8) to CREDIT AGREEMENT CASH MANAGEMENT SYSTEM Borrower shall, and shall cause its Subsidiaries to, establish and maintain the Cash Management Systems described below: (a) On or before the date that is ninety (90) days following the Closing Date and until the Termination Date, Borrower shall (i) establish lock boxes ("Lock Boxes") at one or more of the banks set forth in Disclosure Schedule (3.19), and shall request in writing and otherwise take such reasonable steps to ensure that all Account Debtors forward payment directly to such Lock Boxes, and (ii) deposit and cause its Subsidiaries to deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all cash, checks, drafts or other similar items of payment relating to or constituting payments made in respect of any and all Collateral (whether or not otherwise delivered to a Lock Box) into one or more bank accounts in Borrower's name or any such Subsidiary's name (each a "Borrower Account" and collectively, the "Borrower Accounts") at a bank identified in Disclosure Schedule (3.19) (each, a "Relationship Bank"). On or before the date that is ninety (90) days following the Closing Date, Borrower shall have established a concentration account in its name (the "Concentration Account") at the bank that shall be designated as the Concentration Account bank for Borrower in Disclosure Schedule (3.19) (the "Concentration Account Bank") which bank shall be satisfactory to Agent. (b) Borrower may maintain, in its name, an account (each a "Disbursement Account" and collectively, the "Disbursement Accounts") at a bank acceptable to Agent into which Agent shall, from time to time, deposit proceeds of Revolving Credit Advances and Swing Line Advances made to Borrower pursuant to Section 1.1 for use by Borrower solely in accordance with the provisions of Section 1.4. (c) On or before the date that is ninety (90) days following the Closing Date (or such later date as Agent shall consent to in writing), the Concentration Account Bank, each bank where a Disbursement Account is maintained and all other Relationship Banks, shall have entered into tri-party blocked account agreements with Agent, for the benefit of itself and Lenders, and Borrower and Subsidiaries thereof, as applicable, in form and substance acceptable to Agent, which shall become operative on or prior to the date that is ninety (90) days following the Closing Date. Each such blocked account agreement shall provide, among other things, that (i) all items of payment deposited in such account and proceeds thereof deposited in the Concentration Account are held by such bank as agent or bailee-in-possession for Agent, on behalf of itself and Lenders, (ii) the bank executing such agreement has no rights of setoff or recoupment or any other claim against such account, as the case may be, other than for payment of its service fees and other charges directly related to the administration of such account, for returned checks or other items of payment and for any required adjustments due to clerical errors or calculation errors relating to such account and in accordance with any court order, notice of C-1 garnishment binding on such bank or any other applicable law binding on such bank, and (iii) from and after the date that is ninety (90) days following the Closing Date (A) with respect to banks at which a Borrower Account is maintained, such bank agrees to forward immediately all amounts in each Borrower Account to the Concentration Account Bank and to commence the process of daily sweeps from such Borrower Account into the Concentration Account and (B) with respect to the Concentration Account Bank, such bank agrees to immediately forward all amounts received in the Concentration Account to the Collection Account through daily sweeps from such Concentration Account into the Collection Account. Borrower shall not, and shall not cause or permit any Subsidiary thereof to, accumulate or maintain cash in Disbursement Accounts or payroll accounts as of any date of determination in excess of checks outstanding against such accounts as of that date and amounts necessary to meet minimum balance requirements. (d) So long as no Default or Event of Default has occurred and is continuing, Borrower may amend Disclosure Schedule (3.19) to add or replace a Relationship Bank, Lock Box or Borrower Account or to replace any Concentration Account or any Disbursement Account; provided, that (i) Agent shall have consented in writing in advance to the opening of such account or Lock Box with the relevant bank and (ii) prior to the time of the opening of such account or Lock Box, Borrower or its Subsidiaries, as applicable, and such bank shall have executed and delivered to Agent a tri-party blocked account agreement, in form and substance satisfactory to Agent. Borrower shall close any of its accounts (and establish replacement accounts in accordance with the foregoing sentence) promptly and in any event within thirty (30) days following notice from Agent that the creditworthiness of any bank holding an account is no longer acceptable in Agent's reasonable judgment, or as promptly as practicable and in any event within sixty (60) days following notice from Agent that the operating performance, funds transfer or availability procedures or performance with respect to accounts or Lock Boxes of the bank holding such accounts or Agent's liability under any tri-party blocked account agreement with such bank is no longer acceptable in Agent's reasonable judgment. (e) The Lock Boxes, Borrower Accounts, Disbursement Accounts and the Concentration Account shall be cash collateral accounts, with all cash, checks and other similar items of payment in such accounts securing payment of the Loans and all other Obligations, and in which Borrower and each Subsidiary thereof shall have granted a Lien to Agent, on behalf of itself and Lenders, pursuant to the Security Agreement. (f) All amounts deposited in the Collection Account shall be deemed received by Agent in accordance with Section 1.10 and shall be applied (and allocated) by Agent in accordance with Section 1.11 or 8.3 as applicable. In no event shall any amount be so applied unless and until such amount shall have been credited in immediately available funds to the Collection Account. (g) Borrower shall and shall cause its Affiliates, officers, employees, agents, directors or other Persons acting for or in concert with Borrower (each a "Related Person") to (i) hold in trust for Agent, for the benefit of itself and Lenders, all checks, cash and other items of payment received by Borrower or any such Related Person, and (ii) within one (1) Business Day after receipt by Borrower or any such Related Person of any checks, cash or other items of C-2 payment, deposit the same into a Borrower Account. Borrower and each Related Person thereof acknowledges and agrees that all cash, checks or other items of payment constituting proceeds of Collateral are the property of Agent and Lenders. All proceeds of the sale or other disposition of any Collateral, shall be deposited directly into Borrower Accounts. C-3 ANNEX D (Section 2.1(a)) to CREDIT AGREEMENT CLOSING CHECKLIST In addition to, and not in limitation of, the conditions described in Section 2.1 of the Agreement, pursuant to Section 2.1(a), the following items must be received by Agent in form and substance satisfactory to Agent on or prior to the Closing Date (each capitalized term used but not otherwise defined herein shall have the meaning ascribed thereto in Annex A to the Agreement): A. Appendices. All Appendices to the Agreement, in form and substance satisfactory to Agent. B. Revolving Notes, Swing Line Note and Term Notes. Duly executed originals of the Revolving Notes, Swing Line Note, IP Notes and Term Notes for each applicable Lender, dated the Closing Date. C. Security Agreements. Duly executed originals of the Security Agreement, dated as of the date hereof, and all instruments, documents and agreements executed pursuant thereto. D. Insurance. Satisfactory evidence that the insurance policies required by Section 5.4 are in full force and effect, together with appropriate evidence showing loss payable and/or additional insured clauses or endorsements, as requested by Agent, in favor of Agent, on behalf of Lenders. E. Security Interests, Hypothecs and Code Filings. (a) Evidence satisfactory to Agents that Agent (for the benefit of itself and Lenders) has a valid and perfected first priority security interest in the Collateral and that Agent and Lenders have valid and registered first ranking hypothecs on the Collateral, including (i) such documents duly executed by each Credit Party (including financing statements under the Code and other applicable documents under the laws of any jurisdiction with respect to the perfection of Liens) as Agents may request in order to perfect the Agent's security interests in and Agent's and Lenders' hypothecs on the Collateral and (ii) copies of Code search reports listing all effective financing statements (or other applicable equivalent) that name any Credit Party as debtor, together with copies of such financing statements (or other applicable equivalent), none of which shall cover the Collateral, except for those relating to the Prior Lenders' Obligations (all of which shall be terminated on the Closing Date). (b) Evidence satisfactory to Agents, including copies, of all UCC-1 and other financing statements (or other applicable equivalent) filed in favor of any Credit Party with respect to each location, if any, at which Inventory may be consigned. D-1 (c) Control Letters from (i) all issuers of uncertificated securities and financial assets held by Borrower, (ii) all securities intermediaries with respect to all securities accounts and securities entitlements of Borrower, and (iii) all futures commission agents and clearing houses with respect to all commodities contracts and commodities accounts held by Borrower. F. Payoff Letter; Termination Statements. Copies of a duly executed payoff letter, in form and substance satisfactory to Agents, by and between all parties to the Prior Lenders loan documents evidencing repayment in full of all Prior Lenders' Obligations, together with (a) UCC-3 or other appropriate termination statements, in form and substance satisfactory to Agents, manually signed by the Prior Lenders releasing all liens of Prior Lenders upon any of the personal property and real property of each Credit Party, and (b) termination of all blocked account agreements, bank agency agreements or other similar agreements or arrangements or arrangements in favor of Prior Lenders or relating to the Prior Lenders' Obligations. G. Intellectual Property Security Agreements. Duly executed originals of Trademark Security Agreements, Copyright Security Agreements and Patent Security Agreements, each dated as of the date hereof and signed by each Credit Party which owns Trademarks, Copyrights and/or Patents, as applicable, all in form and substance satisfactory to Agent, together with all instruments, documents and agreements executed pursuant thereto. H. New Holdings Guaranty. Duly executed originals of the New Holdings Guaranty, dated as of the date hereof, and all documents, instruments and agreements executed pursuant thereto. I. Initial Borrowing Base Certificate. Duly executed originals of an initial Borrowing Base Certificate from Borrower, dated as of the date hereof, reflecting information concerning Eligible Accounts and Eligible Inventory of Borrower as of a date not more than seven (7) days prior to the date hereof. J. Initial Notice of Revolving Credit Advance. Duly executed originals of a Notice of Revolving Credit Advance, dated September 24, 1999, with respect to the initial Revolving Credit Advance to be requested by Borrower on the Closing Date. K. Letter of Direction. Duly executed originals of a letter of direction from Borrower addressed to Agent, on behalf of itself and Lenders, with respect to the disbursement on the Closing Date of the proceeds of the Term Loan and the initial Revolving Credit Advance. L. Charter and Good Standing. For each Credit Party, such Person's (a) charter and all amendments thereto, (b) good standing certificates (including verification of tax status) (or applicable equivalent) in its state (or province) of incorporation and (c) good standing certificates (including verification of tax status) and certificates of qualification (or applicable equivalents) to conduct business in each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, each dated a recent date prior to the date hereof and certified by the applicable Secretary of State or other authorized Governmental Authority. D-2 M. Bylaws and Resolutions. For each Credit Party, (a) such Person's bylaws, together with all amendments thereto and (b) resolutions of such Person's Board of Directors and stockholders, approving and authorizing the execution, delivery and performance of the Loan Documents to which such Person is a party and the transactions to be consummated in connection therewith, each certified as of the date hereof by such Person's corporate secretary or an assistant secretary as being in full force and effect without any modification or amendment. N. Incumbency Certificates. For each Credit Party, signature and incumbency certificates of the officers of each such Person executing any of the Loan Documents, certified as of the date hereof by such Person's corporate secretary or an assistant secretary as being true, accurate, correct and complete. O. Opinions of Counsel. Duly executed originals of opinions of Ropes & Gray, counsel for the Credit Parties, together with any local counsel opinions requested by Agent from counsel in Utah, Quebec, Ontario and New Brunswick, each in form and substance satisfactory to Agent and its counsel, dated as of the date hereof. P. Pledge Agreements. Duly executed originals of each of the Pledge Agreements accompanied by (as applicable) (a) (i) share certificates representing all of the outstanding Stock of Borrower and each domestic and Canadian Subsidiary of Borrower (registered in Agent's name in the case of each such Canadian Subsidiary in order to better perfect Agent's security therein) and 65% of the outstanding Stock of each other Subsidiary of Borrower and stock powers for such share certificates executed in blank (except when such Stock certificates are registered in Agent's name) and (ii) a photocopy of the share register of each Canadian Subsidiary showing Agent as the registered owner of all of the outstanding Stock of each Canadian Subsidiary certified to be true and complete by the Secretary or Assistant Secretary of each such Canadian Subsidiary and (b) the original Intercompany Note and other instruments evidencing Indebtedness being pledged pursuant to such Pledge Agreement, duly endorsed in blank. Q. Accountants' Letters. A letter from the Credit Parties to their independent auditors authorizing the independent certified public accountants of the Credit Parties to communicate with Agent and Lenders in accordance with Section 4.2, and a letter from such auditors acknowledging Lenders' reliance on the auditor's certification of past and future Financial Statements. R. Appointment of Agent for Service. An appointment of CT Corporation as each Credit Party's agent for service of process. S. Solvency Certificate. The Credit Parties shall deliver to Agent for the benefit of Lenders a solvency certificate signed by the Chief Financial Officer of Borrower in form and substance satisfactory to Agent. T. Fee Letter. Duly executed originals of the Fee Letter. D-3 U. Officer's Certificate. Agent shall have received duly executed originals of a certificate of the Chief Operating Officer of Borrower, dated as of the date hereof, stating that, except as set forth in the Credit Agreement, since February 28, 1999 (a) no event or condition has occurred or is existing which could reasonably be expected to have a Material Adverse Effect; (b) there has been no material adverse change in the industry in which Borrower operates; (c) no Litigation has been commenced which, if successful, would have a Material Adverse Effect or could challenge any of the transactions contemplated by the Agreement and the other Loan Documents; (d) there have been no Restricted Payments made by any Credit Party; and (e) there has been no material increase in liabilities, liquidated or contingent, and no material decrease in assets of Borrower or any of its Subsidiaries. V. Waivers. Agent, on behalf of Lenders, shall have received landlord waivers and consents, bailee letters and mortgagee agreements in form and substance satisfactory to Agent, in each case as required pursuant to Section 5.9. W. Mortgages. Mortgages or, in the case of Real Estate located in the Province of Quebec, the ICON of Canada Hypothec, covering all of the Real Estate (the "Mortgaged Properties") together with: (a) title insurance policies, flood insurance policies (if applicable), current as-built surveys, zoning letters, certificates of location, and certificates of occupancy, in each case satisfactory in form and substance to Agent, in its sole discretion; (b) evidence that counterparts of the Mortgages have been recorded in all places to the extent necessary or desirable, in the judgment of Agent, to create a valid and enforceable first priority lien (subject to Permitted Encumbrances) on each Mortgaged Property in favor of Agent for the benefit of itself and Lenders (or in favor of such other trustee as may be required or desired under local law); and (c) an opinion of counsel in each state in which any Mortgaged Property is located in form and substance and from counsel satisfactory to Agents. X. Subordination and Intercreditor Agreements. Agent and Lenders shall have received any and all subordination and/or intercreditor agreements, all in form and substance reasonably satisfactory to Agent, in its sole discretion, as Agent shall have deemed necessary or appropriate with respect to any Indebtedness of any Credit Party. Y. Environmental Reports. Agent shall have received Phase I Environmental Site Assessment Reports, consistent with American Society of Testing and Materials (ASTM) Standard E 1527-94, and applicable state requirements, on all of the Real Estate, dated no more than 6 months prior to the Closing Date, prepared by environmental engineers satisfactory to Agent, all in form and substance satisfactory to Agent, in its sole discretion; and Agent shall have further received such environmental review and audit reports, including Phase II reports, with respect to the Real Estate of any Credit Party as Agent shall have requested, and Agent shall be satisfied, in its sole discretion, with the contents of all such environmental reports. Agent shall have received letters executed by the environmental firms preparing such environmental reports, in form and substance satisfactory to Agent, authorizing Agent and Lenders to rely on such reports. Z. Appraisals. Agents shall have received appraisals from MEI, Inc. as to all Inventory, Fixtures, Equipment and as to each of the Mortgaged Properties, each of which shall D-4 be in form and substance satisfactory to Agents. Agents shall have received an appraisal of Borrower's Trademarks and Patents in form and substance satisfactory to Agents. AA. Audited Financials; Financial Condition. Agent shall have received Borrower's final Financial Statements for its Fiscal Year ended May 31, 1999, audited by PriceWaterhouseCoopers. Borrower shall have provided Agent with its current operating statements, a consolidated and consolidating balance sheet and statement of cash flows, the Pro Forma, Projections and a Borrowing Base Certificate with respect to Borrower certified by its Chief Financial Officer, in each case in form and substance satisfactory to Agent, and Agent shall be satisfied, in its sole discretion, with all of the foregoing. Agent shall have further received a certificate of the Chief Executive Officer and/or the Chief Financial Officer of Borrower, based on such Pro Forma and Projections, to the effect that (a) Borrower will be Solvent upon the consummation of the transactions contemplated herein; (b) the Pro Forma fairly presents the financial condition of Borrower as of the date thereof after giving effect to the transactions contemplated by the Loan Documents; (c) the Projections are based upon estimates and assumptions stated therein, all of which Borrower believes to be reasonable and fair in light of current conditions and current facts known to Borrower and, as of the date hereof, reflect Borrower's good faith and reasonable estimates of its future financial performance and of the other information projected therein for the period set forth therein; and (d) containing such other statements with respect to the solvency of Borrower and matters related thereto as Agent shall request. BB. Licensing Arrangements. All documents governing Borrower's licensing arrangement with Sears, Roebuck and Co. regarding Nordic Track products and trademarks. CC. Subsidiary Guaranties. Guaranties executed by the domestic and Canadian Subsidiaries of Borrower. DD. Management and Employment Agreements. Copies of all Management Agreements and employment agreements to which Borrower is a party. EE. Canadian Security Documents. (a) ICON of Canada Hypothec. Duly executed original of the ICON of Canada Hypothec, dated prior to the Closing Date, and all instruments, documents and agreements executed pursuant thereto, including the ICON of Canada Debenture and the ICON of Canada Pledge Agreement. (b) Canadian Security Agreements. Duly executed originals of the Canadian Security Agreements, dated as of the date hereof, and all instruments, documents and agreements executed pursuant thereto. FF. Recapitalization. Certificate from Borrower certifying as of the Closing Date that the Recapitalization has been completed and that Borrower has received not less than $40,000,000 in cash as an equity contribution from Bain Capital, Inc., Credit Suisse First Boston and management. D-5 GG. Recapitalization Documents. All other documents executed and delivered with respect to the Recapitalization. HH. Other Documents. Such other certificates, documents and agreements respecting any Credit Party as Agent may, in its sole discretion, request. D-6 ANNEX E (Section 4.1(a)) to CREDIT AGREEMENT FINANCIAL STATEMENTS AND PROJECTIONS -- REPORTING Borrower shall deliver or cause to be delivered to Agents or to Agents and Lenders, as indicated, the following: (a) Monthly Financials. To Agents and Lenders, within forty-five (45) days after the end of each Fiscal Month, financial information regarding Borrower and its Subsidiaries, certified by the Chief Financial Officer of Borrower, consisting of consolidated and consolidating (i) unaudited balance sheets as of the close of such Fiscal Month and the related statements of income and cash flows for that portion of the Fiscal Year ending as of the close of such Fiscal Month; (ii) unaudited statements of income and cash flows for such Fiscal Month, setting forth in comparative form the figures for the corresponding period in the prior year and the figures contained in the Projections for such Fiscal Year, all prepared in accordance with GAAP (subject to normal year-end adjustments); and (iii) a summary of the outstanding balance of all Intercompany Note as of the last day of that Fiscal Month. Such financial information shall be accompanied by the certification of the Chief Financial Officer of Borrower that (i) such financial information presents fairly in accordance with GAAP (subject to normal year-end adjustments) the financial position and results of operations of Borrower and its Subsidiaries, on a consolidated and consolidating basis, in each case as at the end of such Fiscal Month and for that portion of the Fiscal Year then ended and (ii) any other information presented is true, correct and complete in all material respects and that there was no Default or Event of Default in existence as of such time or, if a Default or Event of Default shall have occurred and be continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event of Default. (b) Quarterly Financials. To Agents and Lenders, within forty-five (45) days after the end of each Fiscal Quarter, consolidated and consolidating financial information regarding Borrower and its Subsidiaries, certified by the Chief Financial Officer of Borrower, including (i) unaudited balance sheets as of the close of such Fiscal Quarter and the related statements of income and cash flow for that portion of the Fiscal Year ending as of the close of such Fiscal Quarter and (ii) unaudited statements of income and cash flows for such Fiscal Quarter, in each case setting forth in comparative form the figures for the corresponding period in the prior year and the figures contained in the Projections for such Fiscal Year, all prepared in accordance with GAAP (subject to normal year-end adjustments). Such financial information shall be accompanied by (A) a statement in reasonable detail (each, a "Compliance Certificate") showing the calculations used in determining compliance with each of the Financial Covenants that is tested on a quarterly basis and (B) the certification of the Chief Financial Officer of Borrower that (i) such financial information presents fairly in accordance with GAAP (subject to normal year-end adjustments) the financial position, results of operations and statements of cash flows of Borrower and its Subsidiaries, on both a consolidated and consolidating basis, as at the end of such Fiscal Quarter and for that portion of the Fiscal Year then ended, (ii) any other E-1 information presented is true, correct and complete in all material respects and that there was no Default or Event of Default in existence as of such time or, if a Default or Event of Default has occurred and is continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event of Default. In addition, Borrower shall deliver to Agents and Lenders, within forty-five (45) days after the end of each Fiscal Quarter, a management discussion and analysis that includes a comparison to budget for that Fiscal Quarter and a comparison of performance for that Fiscal Quarter to the corresponding period in the prior year. (c) Operating Plan. To Agents and Lenders, as soon as available, but not later than thirty (30) days after the end of each Fiscal Year, an annual operating plan for Borrower, approved by the Board of Directors of Borrower, for the following Fiscal Year, which will (i)include a statement of all of the material assumptions on which such plan is based, (ii) include monthly balance sheets and a monthly budget for the following year and (iii) integrate sales, gross profits, operating expenses, operating profit, cash flow projections and Borrowing Availability projections, all prepared on the same basis and in similar detail as that on which operating results are reported (and in the case of cash flow projections, representing management's good faith estimates of future financial performance based on historical performance), and including plans for personnel, Capital Expenditures and facilities. (d) Annual Audited Financials. To Agents and Lenders, within ninety (90) days after the end of each Fiscal Year, audited Financial Statements for Borrower and its Subsidiaries on a consolidated and (unaudited) consolidating basis, consisting of balance sheets and statements of income and retained earnings and cash flows, setting forth in comparative form in each case the figures for the previous Fiscal Year, which Financial Statements shall be prepared in accordance with GAAP and certified without qualification, by an independent certified public accounting firm of national standing or otherwise acceptable to Agent. Such Financial Statements shall be accompanied by (i) a statement prepared in reasonable detail showing the calculations used in determining compliance with each of the Financial Covenants, (ii) a report from such accounting firm to the effect that, in connection with their audit examination, nothing has come to their attention to cause them to believe that a Default or Event of Default has occurred (or specifying those Defaults and Events of Default that they became aware of), it being understood that such audit examination extended only to accounting matters and that no special investigation was made with respect to the existence of Defaults or Events of Default, (iii) a letter addressed to Agent, on behalf of itself and Lenders, in form and substance reasonably satisfactory to Agent and subject to standard qualifications required by nationally recognized accounting firms, signed by such accounting firm acknowledging that Agent and Lenders are entitled to rely upon such accounting firm's certification of such audited Financial Statements, (iv) the annual letters to such accountants in connection with their audit examination detailing contingent liabilities and material litigation matters, and (v) the certification of the Chief Executive Officer or Chief Financial Officer of Borrower that all such Financial Statements present fairly in accordance with GAAP the financial position, results of operations and statements of cash flows of Borrower and its Subsidiaries on a consolidated and consolidating basis, as at the end of such Fiscal Year and for the period then ended, and that there was no Default or Event of Default in existence as of such time or, if a Default or Event of E-2 Default has occurred and is continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event of Default. (e) Management Letters. To Agent and Lenders, within five (5) Business Days after receipt thereof by any Credit Party, copies of all management letters, exception reports or similar letters or reports received by such Credit Party from its independent certified public accountants. (f) Default Notices. To Agent and Lenders, as soon as practicable, and in any event within five (5) Business Days after an executive officer of Borrower has actual knowledge of the existence of any Default, Event of Default or other event that has had a Material Adverse Effect, telephonic or telecopied notice specifying the nature of such Default or Event of Default or other event, including the anticipated effect thereof, which notice, if given telephonically, shall be promptly confirmed in writing on the next Business Day. (g) SEC Filings and Press Releases. To Agent and Lenders, promptly upon their becoming available, copies of: (i) all Financial Statements, reports, notices and proxy statements made publicly available by any Credit Party to its security holders; (ii) all regular and periodic reports and all registration statements and prospectuses, if any, filed by any Credit Party with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority; and (iii) all press releases and other statements made available by any Credit Party to the public concerning material changes or developments in the business of any such Person. (h) Subordinated Debt and Equity Notices. To Agent, as soon as practicable, copies of all material written notices given or received by any Credit Party with respect to any Subordinated Debt or Stock of such Person, and, within two (2) Business Days after any Credit Party obtains knowledge of any matured or unmatured event of default with respect to any Subordinated Debt, notice of such event of default. (i) Supplemental Schedules. To Agent, supplemental disclosures, if any, required by Section 5.6. (j) Litigation. To Agent in writing, promptly upon learning thereof, notice of any Litigation commenced or threatened against any Credit Party that (i) seeks damages in excess of $100,000, (ii) seeks injunctive relief, (iii) is asserted or instituted against any Plan, its fiduciaries or its assets or against any Credit Party or ERISA Affiliate in connection with any Plan, (iv) alleges criminal misconduct by any Credit Party, (v) alleges the violation of any law regarding, or seeks remedies in connection with, any Environmental Liabilities; or (vi) involves any product recall; (k) Insurance Notices. To Agent, disclosure of losses or casualties required by Section 5.4. (l) Lease Default Notices. To Agent, copies of (i) any and all default notices received under or with respect to any leased location or public warehouse where Collateral is E-3 located, and (ii) such other notices or documents as Agent may request in its reasonable discretion. (m) Lease Amendments. To Agent, prompt written notice of any product recall whether voluntary or otherwise. (n) Other Documents. To Agent and Lenders, such other financial and other information respecting any Credit Party's business or financial condition as Agent or any Lender shall, from time to time, request. E-4 ANNEX F (Section 4.1(b)) to CREDIT AGREEMENT COLLATERAL REPORTS Borrower shall deliver or cause to be delivered the following: (a) To Agents, upon Agent's request, and in any event no less frequently than five (5) Business Days after the end of each Fiscal Month (together with a copy of all or any part of the following reports requested by any Lender in writing after the Closing Date), each of the following reports, each of which shall be prepared by the Borrower as of the last day of the immediately preceding Fiscal Month: (i) a summary of Inventory by location and type with a supporting perpetual Inventory report, in each case accompanied by such supporting detail and documentation as shall be requested by Agent in its reasonable discretion; and (ii) a monthly trial balance showing Accounts outstanding aged from invoice due date as follows: 1 to 30 days, 31 to 60 days, 61 to 90 days and 91 days or more, accompanied by such supporting detail and documentation as shall be requested by Agent in its reasonable discretion. (b) To Lenders, upon Agent's request, and in any event no less frequently than two (2) Business Days after the end of each bi-weekly period (as of the last Business Day of each of those two week periods), a Borrowing Base Certificate, accompanied by such supporting detail and documentation as shall be requested by Agent in its reasonable discretion; provided that, so long as Borrowing Availability is less than $15,000,000, the Borrowing Base and accompanying information will be provided no less frequently than two (2) Business Days after the end of each week; provided, further, that if Borrower has remained in compliance at all times with the Financial Covenants through the measuring period ending May 31, 2000, such Borrowing Base Certificates and accompanying information will be delivered monthly concurrently with the information set forth in clause (a) above. (c) To Agents, on a weekly basis or at such more frequent intervals as Agent may request from time to time (together with a copy of all or any part of such delivery requested by any Lender in writing after the Closing Date), collateral reports with respect to Borrower, including all additions and reductions (cash and non-cash) with respect to Accounts of Borrower, in each case accompanied by such supporting detail and documentation as shall be requested by Agents in their reasonable discretion each of which shall be prepared by Borrower as of the last day of the immediately preceding week; (d) To Agents, at the time of delivery of each of the monthly Financial Statements delivered pursuant to Annex E, a reconciliation of the Accounts trial balance and month-end Inventory reports of Borrower to Borrower's general ledger and monthly Financial F-1 Statements delivered pursuant to such Annex E, in each case accompanied by such supporting detail and documentation as shall be requested by Agent in its reasonable discretion; (e) To Agent, at the time of delivery of each of the annual Financial Statements delivered pursuant to Annex E, (i) a listing of government contracts of Borrower subject to the Federal Assignment of Claims Act of 1940, the Financial Administrators Act (Canada) or any applicable state, provincial or territorial statute or municipal ordinance of similar purpose and effect; and (ii) a list of any applications for the registration of any Patent, Trademark or Copyright filed by any Credit Party with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency (including in any foreign jurisdiction) in the prior Fiscal Quarter; (f) Borrower, at its own expense, shall deliver to Agents the results of each physical verification, if any, that Borrower or any of its Subsidiaries may in their discretion have made, or caused any other Person to have made on their behalf, of all or any portion of their Inventory (and, if a Default or an Event of Default has occurred and be continuing, Borrower shall, upon the request of Agent, conduct, and deliver the results of, such physical verifications as Agent may require); (g) Borrower, at its own expense, shall deliver to Agents (i) annual appraisals of its Inventory and (ii) such appraisals of its inventory and other assets as Agent may request at any time after the occurrence and during the continuance of a Default or an Event of Default, such appraisals to be conducted by an appraiser, and in form and substance, satisfactory to Agent; and (h) Such other reports, statements and reconciliations with respect to the Borrowing Base or Collateral of any or all Credit Parties as Agent shall from time to time request in its reasonable discretion. F-2 ANNEX G (Section 6.10) to CREDIT AGREEMENT FINANCIAL COVENANTS Borrower shall not breach or fail to comply with any of the following financial covenants, each of which shall be calculated in accordance with GAAP consistently applied: (a) Maximum Capital Expenditures. Borrower and its Subsidiaries on a consolidated basis shall not make Capital Expenditures in excess of $13,000,000 in the aggregate during any Fiscal Year; provided, however, that the amount of permitted Capital Expenditures for each Fiscal Year after Fiscal Year 2000 may be increased by an amount equal to the lesser of (x) $1,500,000 and (y) $13,000,000 minus the actual amount of Capital Expenditures for the preceding Fiscal Year (the "Carry Over Amount"). For purposes of determining compliance with this covenant, the Carry Over Amount shall be deemed to be the last amount spent on Capital Expenditures in the succeeding Fiscal Year. (b) Minimum Debt Service Coverage Ratio. Borrower and its Subsidiaries shall have on a consolidated basis at the end of each Fiscal Quarter set forth below, a Debt Service Coverage Ratio for the 12-month period then ended (or with respect to the Fiscal Quarters ending on or before May 31, 2000, the period commencing on June 1, 1999, and ending on the last day of such Fiscal Quarter) of not less than the following: 1.2 to 1.0 for the Fiscal Quarter ending November 30, 1999; 1.7 to 1.0 for the Fiscal Quarter ending February 29, 2000; 1.5 to 1.0 for the Fiscal Quarters ending May 31, 2000 through August 31, 2004; and 1.0 to 1.0 for the Fiscal Quarter ending November 30, 2004 and each Fiscal Quarter ending thereafter. (c) Minimum EBITDA. Borrower and its Subsidiaries on a consolidated basis shall have, at the end of each Fiscal Quarter set forth below, EBITDA for the 12-month period then ended of not less than the following: $48,000,000 for the Fiscal Quarter ending November 30, 1999; $52,500,000 for the Fiscal Quarter ending February 29, 2000; $55,000,000 for the Fiscal Quarter ending May 31, 2000; $55,000,000 for the Fiscal Quarter ending August 31, 2000; $55,000,000 for the Fiscal Quarter ending November 30, 2000; G-1 $55,000,000 for the Fiscal Quarter ending February 28, 2001; $55,500,000 for each of the Fiscal Quarters ending May 31, 2001; August 31, 2001; November 30, 2001; and February 28, 2002; $56,500,000 for each of the Fiscal Quarters ending May 31, 2002; August 31, 2002; November 30, 2002; and February 28, 2003; $57,500,000 for each of the Fiscal Quarters ending May 31, 2003; August 31, 2003; November 30, 2003; and February 29, 2004; $58,500,000 for the Fiscal Quarter ending May 31, 2004, and each Fiscal Quarter ending thereafter. (d) Maximum Senior Leverage Ratio. Borrower and its Subsidiaries on a consolidated basis shall have, at the end of each Fiscal Quarter set forth below, a Senior Leverage Ratio as of the last day of such Fiscal Quarter and for the 12-month period then ended of not more than the following: 6.0 to 1.0 for the Fiscal Quarter ending November 30, 1999; 4.7 to 1.0 for the Fiscal Quarter ending February 29, 2000; 3.7 to 1.0 for the Fiscal Quarter ending May 31, 2000; 3.5 to 1.0 for the Fiscal Quarter ending August 31, 2000. 5.0 to 1.0 for the Fiscal Quarter ending November 30, 2000; 4.4 to 1.0 for the Fiscal Quarter ending February 28, 2001; 3.4 to 1.0 for the Fiscal Quarter ending May 31, 2001; 3.2 to 1.0 for the Fiscal Quarter ending August 31, 2001; 4.9 to 1.0 for the Fiscal Quarter ending November 30, 2001; 4.2 to 1.0 for the Fiscal Quarter ending February 28, 2002; 3.2 to 1.0 for the Fiscal Quarter ending May 31, 2002; 3.0 to 1.0 for the Fiscal Quarter ending August 31, 2002; 4.7 to 1.0 for the Fiscal Quarter ending November 30, 2002; 3.9 to 1.0 for the Fiscal Quarter ending February 28, 2003; 2.9 to 1.0 for the Fiscal Quarter ending May 31, 2003; 2.7 to 1.0 for the Fiscal Quarter ending August 31, 2003; 4.4 to 1.0 for the Fiscal Quarter ending November 30, 2003; 3.7 to 1.0 for the Fiscal Quarter ending February 29, 2004; 2.7 to 1.0 for the Fiscal Quarter ending May 31, 2004; 2.4 to 1.0 for the Fiscal Quarter ending August 31, 2004; 4.1 to 1.0 for the Fiscal Quarter ending November 30, 2004; 3.3 to 1.0 for the Fiscal Quarter ending February 28, 2005; 2.4 to 1.0 for the Fiscal Quarter ending May 31, 2005 and each Fiscal Quarter thereafter. (e) Revenue. Borrower and its Subsidiaries on a consolidated basis shall have at the end of each Fiscal Quarter set forth below for the period commencing on June 1, 1999 and ending on the last day of such Fiscal Quarter, net revenue of not less than the following: $288,000,000 for the Fiscal Quarter ending November 30, 1999; G-2 $500,000,000 for the Fiscal Quarter ending February 29, 2000; $600,000,000 for the Fiscal Quarter ending May 31, 2000. References to the Fiscal Quarters ending August 31, November 30, and February 28/29 shall be deemed to refer to the Fiscal Quarters ending on the Saturday closest to those dates. Unless otherwise specifically provided herein, any accounting term used in the Agreement shall have the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed in accordance with GAAP consistently applied. That certain items or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. If any "Accounting Changes" (as defined below) occur and such changes result in a change in the calculation of the financial covenants, standards or terms used in the Agreement or any other Loan Document, then Borrower, Agent and Lenders agree to enter into negotiations in order to amend such provisions of the Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating Borrower's and its Subsidiaries' financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made; provided, however, that the agreement of Requisite Lenders to any required amendments of such provisions shall be sufficient to bind all Lenders. "Accounting Changes" means (i) changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants (or successor thereto or any agency with similar functions), (ii) changes in accounting principles concurred in by Borrower's certified public accountants; (iii) purchase accounting adjustments under A.P.B. 16 or 17 and EITF 88-16, and the application of the accounting principles set forth in FASB 109, including the establishment of reserves pursuant thereto and any subsequent reversal (in whole or in part) of such reserves; and (iv) the reversal of any reserves established as a result of purchase accounting adjustments. All such adjustments resulting from expenditures made subsequent to the Closing Date (including capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made and deducted as part of the calculation of EBITDA in such period. If Agent, Borrower and Requisite Lenders agree upon the required amendments, then after appropriate amendments have been executed and the underlying Accounting Change with respect thereto has been implemented, any reference to GAAP contained in the Agreement or in any other Loan Document shall, only to the extent of such Accounting Change, refer to GAAP, consistently applied after giving effect to the implementation of such Accounting Change. If Agent, Borrower and Requisite Lenders cannot agree upon the required amendments within thirty (30) days following the date of implementation of any Accounting Change, then all Financial Statements delivered and all calculations of financial covenants and other standards and terms in accordance with the Agreement and the other Loan Documents shall be prepared, delivered and made without regard to the underlying Accounting Change. For purposes of Section 8.1, a breach of a Financial Covenant contained in this Annex G shall be deemed to have occurred as of any date of determination by Agent or as of the last day of any specified measurement period, regardless of when the Financial Statements reflecting such breach are delivered to Agent. G-3 ANNEX H (Section 9.9(a)) to CREDIT AGREEMENT LENDERS' WIRE TRANSFER INFORMATION General Electric Capital Corporation: Bankers Trust New York, New York ABA #021001033 Account #50232854 Account Name: GECC/CAF Depository Reference: CFC4201 ICON Fleet National Bank: Fleet National Bank Boston, Massachusetts 02110 ABA # 011-000-138 Account #151-0351-03156 Reference: Commercial Loan Services Incoming Wire Suspense Account R/E ICON Health & Fitness Jackson National Life Insurance Company: Bank of America Chicago, Illinois ABA #071-000-039 Account #8188-9-03526 Reference: Jackson National Life Insurance Company By: PPM Finance, Inc., as Attorney-In-Fact Zions First National Bank: Zions First National Bank 1 South Main Street, Salt Lake City, Utah 84111 ABA #124000054 Account #696600100187 Attention: Pat Youngren LaSalle Business Credit, Inc.: LaSalle Bank Chicago, Illinois ABA #071000505 Account #2321122 Reference: LaSalle Business Credit, Inc. for Benefit of ICON H-1 PNC Bank, National Association: PNC Business Credit East Brunswick, New Jersey ABA #031207607 Account #196039957830 Reference: ICON Health & Fitness First Source Financial LLP: LaSalle Bank National Association Chicago, Illinois ABA #071-000-505 Account #2358874 Reference: First Source Financial LLP ICON Health & Fitness, Inc. Comerica Bank: Comerica Bank Detroit, Michigan ABA #072 000 096 Account #new Reference: ICON Health & Fitness, Inc. Bank Polska Kasa Opieka S.A.: The Bank of New York New York, New York ABA #021000018 Account #8900051434 Reference: ICON GMAC Business Credit, LLC: Bank One Michigan Detroit, Michigan ABA #072000326 Account #3613249-84 Reference: ICON Health & Fitness, Inc. The Chase Manhattan Bank: The Chase Manhattan Bank ABA #021000021 Account #801-005477 (first funding) #801-903211 (thereafter) Reference: ICON Health & Fitness, Inc. Heller Financial, Inc.: Bank One, N.A. Chicago, Illinois 60670 ABA #071000013 Account #5298695 Reference: Heller Financial H-2 Pilgrim Prime Rate Trust: State Street Bank & Trust Co. Boston, Massachusetts ABA #011-00-0028 Account #5454-337-6 Reference: Pilgrim Prime Rate Trust ICON Health & Fitness H-3 ANNEX I (Section 11.10) to CREDIT AGREEMENT NOTICE ADDRESSES (A) If to Agent or GE Capital, at General Electric Capital Corporation 10 South LaSalle Street, Suite 2700 Chicago, Illinois 60603 Attention: ICON Health & Fitness, Account Manager Telecopier No.: (312) 419-5992 Telephone No.: (312) 419-0985 with copies to: Latham & Watkins Sears Tower, Suite 5800 Chicago, Illinois 60606 Attention: David G. Crumbaugh Telecopier No.: (312) 993-9767 Telephone No.: (312) 876-7700 and General Electric Capital Corporation 201 High Ridge Road Stamford, Connecticut 06927-5100 Attention: Corporate Counsel-Commercial Finance Telecopier No.: (203) 316-7889 Telephone No.: (203) 316-7552 (B) If to Borrower, at ICON Health & Fitness, Inc. 1500 South, 1000 West Logan, Utah 84321 Attention: S. Fred Beck Telecopier No.: (435) 750-3665 Telephone No.: (435) 750-4000 I-1 with copies to: Ropes & Gray One International Place Boston, Massachusetts 02110 Attention: David McKay Telecopier No.: (617) 951-7050 Telephone No.: (617) 951-7000 (C) If to Lenders, at Fleet National Bank MA OF DO3L 1 Federal Street Boston, Massachusetts 02110 Attention: Thomas Mahoney Telecopier No.: (617) 346-4806 Jackson National Life Insurance Company By: PPM Finance, Inc., as attorney-in-fact 225 W. Wacker Drive Chicago, Illinois 60606 Attention: Michael J. Williams Telecopier No.: (312) 634-1283 Zions First National Bank 1 South Main Street, Suite 200 Salt Lake City, Utah 84111 Attention: David J. Mathis Telecopier No.: (801) 534-2136 LaSalle Business Credit, Inc. Suite 400 135 South LaSalle Street Chicago, Illinois 60603 Attention: Credit Manager Telecopier No.: (312) 904-0291 PNC Business Credit Two Tower Center Blvd. East Brunswick, New Jersey 08816 Attention: Wing C. Louie Telecopier No.: (732) 220-4393 I-2 First Source Financial LLP 2850 W. Golf Road, 5th Floor Rolling Meadows, Illinois 60008 Attention: Kelli Marti (Credit) Telecopier No.: (847) 734-7911 Attention: Lauren Rolsing (Administration) Telecopier No.: (847) 734-7912 Attention: Ed Szarkowicz (Legal) Telecopier No.: (847) 723-7910 Comerica 999 18th Street Denver, Colorado 80202 Attention: Kerry McGuire Telecopier No.: (303) 298-8239 Bank Polska Kasa Opieka S.A. 470 Park Avenue South, 15th Floor New York, New York 10016 Attention: Harvey Winter Telecopier No.: (212) 251-1222 GMAC Business Credit, LLC 500 West Madison, Suite 3130 Chicago, Illinois 60661 Attention: Mary Bookman Telecopier No.: (312) 775-6006 The Chase Manhattan Bank Chase Business Credit Corp. (4th Floor) 600 Fifth Avenue New York, New York 10020 Attention: Credit Deputy Telecopier No.: (212) 332-4297 Heller Financial, Inc. 150 East 42nd Street New York, New York 10017 Attention: Albert J. Forzano Telecopier No.: (212) 880-7002 I-3 Pilgrim Prime Rate Trust Two Renaissance Square 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004-4424 Attention: Jeffrey S. Schultz Telecopier No.: (602) 417-8321 with a copy to: State Street Bank and Trust Company Alternative Structures Unit Boston, Massachusetts Attention: Rolando Albuja Telecopier No.: (617) 664-5366/5367/5368 Reference: Pilgrim Prime Rate Trust I-4 ANNEX J (from Annex A - Commitments definition) to CREDIT AGREEMENT Lenders: General Electric Capital Corporation Revolving Loan Commitment (including a Swing Line Commitment of $10,000,000): $9,042,662.08 [After giving effect to post-closing transfer to GMAC] Term Loan A Commitment: $2,260,665.71 [After giving effect to post-closing transfer to GMAC] Term Loan B Commitment: $6,168,747.79 [After giving effect to post-closing transfer to GMAC and Pilgrim] Term Loan C Commitment: $25,000,000 [After giving effect to post-closing transfer to GMAC and Pilgrim] IP Loan Commitment: $4,979,591.76 Fleet National Bank Revolving Loan Commitment: $9,228,855.08 [After giving effect to post-closing transfer to GMAC] Term Loan A Commitment: $2,307,213.71 [After giving effect to post-closing transfer to GMAC] Term Loan B Commitment: $9,012,264.55 [After giving effect to post-closing transfer to GMAC] Term Loan C Commitment: $25,000,000 J-1 Jackson National Life Insurance Company Revolving Loan Commitment: $26,086,956.52 Term Loan A Commitment: $6,521,739.13 Term Loan B Commitment: $17,391,304.35 Zions First National Bank Revolving Loan Commitment: $8,000,000 Term Loan A Commitment: $2,000,000 Pilgrim America Prime Rate Trust Term Loan B Commitment: $5,000,000 IP Loan Commitment: $5,000,000 Term Loan C Commitment: $5,000,000 [To be purchased post-closing] LaSalle Business Credit, Inc. Revolving Loan Commitment: $12,244,897.96 Term Loan A Commitment: $3,061,224.49 Term Loan B Commitment: $8,163,265.31 IP Loan Commitment: $1,530,612.24 PNC Business Credit, Inc. Revolving Loan Commitment: $7,826,086.96 Term Loan A Commitment: $1,956,521.74 Term Loan B Commitment: $5,217,391.30 J-2 First Source Financial LLP Revolving Loan Commitment: $5,877,551 Term Loan A Commitment: $1,469,388 Term Loan B Commitment: $3,918,367 IP Loan Commitment: $734,694 Comerica Bank Revolving Loan Commitment: $7,826,087 Term Loan A Commitment: $1,956,522 Term Loan B Commitment: $5,217,391.30 Bank Polska Kasa OPIEKA S.A. - PEKAO S.A. Group, New York Branch Revolving Loan Commitment: $4,000,000 Term Loan A Commitment: $1,000,000 Heller Financial, Inc. Revolving Loan Commitment: $9,795,918 Term Loan A Commitment: $2,448,980 Term Loan B Commitment: $6,530,612.24 IP Loan Commitment: $1,224,489.80 J-3 GMAC Business Credit, LLC Revolving Loan Commitment: $12,244,900 Term Loan A Commitment: $3,061,224 Term Loan B Commitment: $8,163,264 IP Loan Commitment: $1,530,612 [To be purchased post-closing] The Chase Manhattan Bank Revolving Loan Commitment: $7,826,086.96 Term Loan A Commitment: $1,956,521.74 Term Loan B Commitment: $5,217,391.30 J-4 ANNEX K (from Annex A - Recapitalization Documents definition) to CREDIT AGREEMENT A. Equity Restructuring 1. Limited Liability Company Agreement of HF Investment Holdings, LLC (the "LLC"), dated as of the Closing Date, among certain affiliates of Bain Capital, Inc. ("Bain"), Scott Watterson and Gary Stevenson, and [others] (collectively, the "Non-CSFB Investors"). 2. Subscription and Stock Purchase Agreement, dated as of the Closing Date, between HF Holdings, Inc. ("New Holdings") and the LLC. 3. Securities Purchase Agreement, dated as of the Closing Date, among New Holdings and Credit Suisse First Boston ("CSFB"). 4. Note Agreement, dated as of the Closing Date, between New Holdings and CSFB. 5. Subordinated Note issued to CSFB in the aggregate principal amount of $5,000,000. 6. Stockholders Agreement, dated as of the Closing Date, among New Holdings, ICON Health & Fitness, Inc. ("Borrower"), the LLC, participating old 13% holders, if any, Scott Watterson and Gary Stevenson, other management stockholders and CSFB. 7. Restated Employment Agreements, dated as of the Closing Date, between New Holdings, Borrower and each of Scott Watterson and Gary Stevenson. 8. Termination Agreements, dated as of the Closing date, between IHF Holdings, Inc., Borrower and each of Scott Watterson and Gary Stevenson. 9. `Non-recourse notes ($2.2 million aggregate), dated as of the Closing Date, issued to New Holdings by each of Scott Watterson and Gary Stevenson. 10. Pledge and Security Agreements, dated as of the Closing Date, between New Holdings and each of Scott Watterson and Gary Stevenson. 11. 1999 Junior Management Stock Option Plan. 12. Promissory Notes ($500,000 aggregate) of members of junior management. K-1 13. Option Certificates issued by New Holdings to members of junior management on the Closing Date. 14. ICON Junior Management Deferred Bonus Plan. 15. Management Agreement, dated as of the Closing Date, among New Holdings, Borrower and Bain. 16. Management Agreements among Borrower, New Holdings and each of Scott Watterson and Gary Stevenson. 17. Agreements and Plan of Merger, dated as of the Closing Date, among New Holdings, Borrower and Merger Sub. B. Exchange Offer/Consent Solicitation 1. New 12% Notes a. Indenture with IBJ Whitehall, as trustee b. Global 12% Note (for deposit with DTC) c. Subsidiary Guarantees (from each Domestic Subsidiary) d. Exchange and Registration Rights Agreement 2. New Holdings Warrants a. Warrant Agreement b. Global Warrant 3. Supplemental Indenture to 13% Notes a. Supplemental Indenture No. 1 and No. 2 b. Consents of majority to proposed amendments 4. Supplemental Indenture to 15% Notes a. Supplemental Indenture b. Consents of majority to proposed amendments 5. Supplemental Indenture to 14% Notes a. Supplemental Indenture b. Consents of majority to proposed amendments K-2 6. Miscellaneous a. Exchange and Tabulation Agent Agreement b. Information Agent Agreement K-3 SCHEDULE 1.1 AGENT'S REPRESENTATIVES General Electric Capital Corporation 10 South LaSalle Street, Suite 2700 Chicago, Illinois 60603 Attention: ICON Health & Fitness, Account Manager Telecopier No.: (312) 419-5992 Telephone No.: (312) 419-0985 Contact Persons: Scott Daum, Fran Krause 1.1 - 1 EX-10.3 11 EXHIBIT 10.3 Exhibit 10.3 OMNIBUS AMENDMENT AGREEMENT OMNIBUS AMENDMENT AGREEMENT (together with the Exhibits hereto, this "AGREEMENT"), dated as of September 27, 1999, by and among HF HOLDINGS, INC., a Delaware corporation (together with its successors and assigns, the "COMPANY"), CREDIT SUISSE FIRST BOSTON CORPORATION, a Massachusetts corporation (together with its successors and assigns, "CSFB"), CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION, a Delaware corporation (together with its successors and assigns, "CSFBM"), BAIN CAPITAL FUND IV, L.P., a Delaware limited partnership (together with its successors and assigns, "BAIN"), and HF INVESTMENT HOLDINGS, LLC, a Delaware limited liability company (together with its successors and assigns, the "LLC"). RECITALS: A. The Company has entered into that certain Securities Purchase Agreement, dated as of September 27, 1999, with CSFB (as in effect prior to the effectiveness of this Agreement, the "EXISTING SECURITIES PURCHASE AGREEMENT" and, as amended by this Agreement, the "AMENDED SECURITIES PURCHASE AGREEMENT"). B. The Company has entered into that certain Note Agreement, dated as of September 27, 1999 (as in effect prior to the effectiveness of this Agreement, the "EXISTING NOTE AGREEMENT" and, as amended by this Agreement, the "AMENDED NOTE AGREEMENT"), with CSFB, pursuant to which the Company originally issued and sold to CSFB a 0% Convertible Subordinated Note Due September 27, 2011 having an aggregate principal amount of Five Million Dollars ($5,000,000) (the "EXISTING NOTE", and, as amended by this Agreement, the "AMENDED NOTE"). C. The LLC has issued that certain HF Class C Units Purchase Warrant, dated as of September 27, 1999 (the "EXISTING WARRANT", and, as amended by this Agreement, the "AMENDED WARRANT") to CSFBM. D. Bain has entered into that certain Limited Liability Company Agreement, dated as of September 27, 1999 (as in effect prior to the effectiveness of this Agreement, the "EXISTING LLC AGREEMENT" and, as amended by this Agreement, the "AMENDED LLC AGREEMENT"), with Bain Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust Associates, L.P., Gary Stevenson, Scott Watterson and such other persons as may from time to time be admitted as Members under the Existing LLC Agreement. E. CSFB has entered into that certain letter agreement, dated as of September 27, 1999 (as amended from time to time prior to the date hereof, the "LETTER AGREEMENT") with Bain and Bain Capital Fund IV-B, L.P., pursuant to which the parties thereto have agreed, under certain circumstances, to enter into certain amendments to the Existing Securities Purchase Agreement, the Existing Note Agreement, the Existing Note, the Existing Warrant and the Existing LLC Agreement. F. The Company, CSFB, CSFBM, Bain and the LLC are desirous of entering into this Agreement to effectuate the amendments contemplated by the Letter Agreement. AGREEMENT: NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AMENDMENTS TO EXISTING SECURITIES PURCHASE AGREEMENT. The Company and CSFB hereby consent and agree to replace the Existing Securities Purchase Agreement with the Amended Securities Purchase Agreement as set forth in EXHIBIT A to this Agreement. 2. AMENDMENTS TO EXISTING NOTE AGREEMENT; EXISTING NOTES. The Company and CSFB hereby consent and agree to replace the Existing Note Agreement and the Existing Note with the Amended Note Agreement and the Amended Note as set forth in EXHIBIT B to this Agreement. Upon issuance of the Amended Note, the indebtedness evidenced by the Existing Notes shall thereafter be evidenced by the Amended Note, and the Existing Note shall thereupon be of no further force or effect. 3. AMENDMENTS TO EXISTING WARRANT. The LLC and CSFBM hereby consent and agree to replace the Existing Warrant with the Amended Warrant as set forth in EXHIBIT C to this Agreement. Upon issuance of the Amended Warrant, the obligations evidenced by the Existing Warrant shall thereafter be evidenced by the Amended Warrant, and the Existing Warrant shall thereupon be of no further force or effect. 4. AMENDMENTS TO EXISTING LLC AGREEMENT. Bain and CSFBM hereby consent and agree to replace the Existing LLC Agreement with the Amended LLC Agreement as set forth in EXHIBIT D to this Agreement. 2 5. CONDITIONS PRECEDENT. The amendments of the Existing Securities Purchase Agreement, the Existing Note Agreement, the Existing Note, the Existing Warrant and the Existing LLC Agreement shall become effective on the date (the "EFFECTIVE Date") upon which all of the following conditions precedent have been satisfied: 5.1 EXECUTION AND DELIVERY OF THIS AGREEMENT. The Company, CSFB, CSFBM, Bain and the LLC shall have executed and delivered a counterpart of this Agreement. 5.2 DELIVERY OF AMENDED NOTE, AMENDED WARRANT AND STOCK CERTIFICATE. The Company shall have delivered to CSFB or its counsel an originally executed Amended Note, an originally executed Amended Warrant and the shares of common stock of the Company to be issued pursuant to the Amended Securities Purchase Agreement, each in form and substance satisfactory to CSFB and its counsel. 5.3 DELIVERY OF EXISTING NOTE, EXISTING WARRANT AND ORIGINAL STOCK CERTIFICATE. CSFB shall have delivered to the Company or its counsel the Existing Note and the stock certificate representing 1,290,017 shares of common stock of the Company issued pursuant to the Existing Securities Purchase Agreement. CSFBM shall have delivered to the LLC or its counsel the Existing Warrant. 5.4 PROCEEDINGS SATISFACTORY. All proceedings taken in connection with this Agreement and all documents and papers relating hereto shall be satisfactory to CSFB, CSFBM, the Company, Bain and their respective counsel. CSFB, CSFBM, the Company, Bain and their respective counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, in form and substance satisfactory to them. 6. MISCELLANEOUS. 6.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. 3 6.2 WAIVERS AND AMENDMENTS. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by each of the parties signatory hereto. 6.3 DUPLICATE ORIGINALS, EXECUTION IN COUNTERPART. Two or more originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall be effective when at least one counterpart shall have been executed by each party hereto, and each set of counterparts which, collectively, show execution by each party hereto shall constitute one duplicate original. 6.4 ENTIRE AGREEMENT. This Agreement constitutes the final written expression of all of the terms hereof and is a complete and exclusive statement of those terms. [Remainder of Page Intentionally Blank. Next Page is Signature Page.] 4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by a duly authorized officer or agent thereof, as the case may be, as of the date first above written. HF HOLDINGS, INC. By: /s/ SCOTT R. WATTERSON ---------------------------- Name: Scott R. Watterson Title: Chairman & CEO CREDIT SUISSE FIRST BOSTON CORPORATION By: /s/ DAVID J. MATLIN ---------------------------- Name: David J. Matlin Title: Managing Director CREDIT SUISSE FIRST BOSTON MANAGEMENT CORPORATION By: /s/ DAVID J. MATLIN ---------------------------- Name: David J. Matlin Title: Managing Director BAIN CAPITAL FUND IV, L.P. By: /s/ ROBERT C. GAY ---------------------------- Name: Robert C. Gay Title: General Partner 5 HF INVESTMENT HOLDINGS, LLC By: /s/ SCOTT R. WATTERSON ---------------------------- Name: Scott R. Watterson Title: Administrative Member 6 EX-10.4 12 EXHIBIT 10.4 Exhibit 10.4 HF INVESTMENT HOLDINGS, LLC AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT Dated as of September 27, 1999 HF INVESTMENT HOLDINGS, LLC AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT TABLE OF CONTENTS Page ---- ARTICLE 1 - DEFINITIONS........................................................1 ARTICLE 2 - FORMATION AND PURPOSE..............................................1 2.1 Formation....................................................1 2.2 Name.........................................................1 2.3 Registered Office/Agent......................................2 2.4 Term.........................................................2 2.5 Purpose......................................................2 2.6 Specific Powers..............................................2 2.7 Certificate..................................................3 ARTICLE 3 - MEMBERSHIP AND CAPITAL.............................................4 3.1 Members; Units...............................................4 3.2 Capital Contributions........................................4 3.3 Capital Accounts.............................................5 3.4 Revaluations of Assets and Capital Account Adjustments.......5 3.5 Additional Capital Account Adjustments.......................5 3.6 Additional Capital Account Provisions........................6 3.7 Options, Warrants, Etc.......................................6 ARTICLE 4 - STATUS AND RIGHTS OF MEMBERS.......................................7 4.1 Limited Liability............................................7 4.2 Return of Distributions of Capital...........................7 ARTICLE 5 - DISTRIBUTIONS AND ALLOCATIONS OF PROFIT AND LOSS...................7 5.1 Distributions................................................7 5.2 No Violation................................................12 5.3 Withholdings................................................12 5.4 Property Distributions and Installment Sales................13 5.5 Net Profit or Net Loss......................................13 5.6 Limitation on Allocation of Losses; Qualified Income Offset; Curative Allocations................................15 5.7 Tax Allocations: Code Section 704(c) and Unrealized Appreciation or Depreciation................................16 -i- 5.8 Additional Investments......................................16 ARTICLE 6 - TAX MATTERS MEMBER................................................17 6.1 Tax Matters Member..........................................17 6.2 Certain Authorizations......................................17 6.3 Indemnity of Tax Matters Member.............................18 6.4 Information Furnished.......................................18 6.5 Notice of Proceedings, etc..................................18 6.6 Notices to Tax Matters Member...............................18 ARTICLE 7 - FEES AND EXPENSES.................................................18 7.1 Compensation to the Administrative Member and Affiliates....18 7.2 Company Expenses............................................19 ARTICLE 8 - DESIGNATION, RIGHTS, AND DUTIES OF THE ADMINISTRATIVE MEMBERS.......................................................................19 8.1 Designation.................................................19 8.2 Authority; Duties...........................................19 8.3 Business Decisions; Voting Shares of HF Holdings' Capital Stock...............................................20 ARTICLE 9 - TRANSFER OF INTERESTS.............................................21 9.1 Restrictions on Transfer....................................21 9.2 Transfers under this Agreement, etc.........................21 9.3 Transfers of Class B Units to Permitted Transferees.........21 9.4 Transfers of Class A Units or Class C Units to Immediate Family......................................................21 9.5 Transfers of Class A Units or Class C Units Upon Death......22 9.6 Transfers of Class A Units or Class C Units to Charities....22 9.7 Transfers of Units to Entities Under Common Control.........22 9.8 Bain Sell Down..............................................22 ARTICLE 10 - BOOKS, RECORDS, ACCOUNTING, AND REPORTS..........................23 10.1 Books and Records...........................................23 10.2 Information to Member.......................................24 10.3 Financial Statements........................................24 10.4 Filings.....................................................25 10.5 Non-Disclosure..............................................25 ARTICLE 11 - AMENDMENTS TO AGREEMENT..........................................25 11.1 Amendments..................................................25 11.2 Filings.....................................................26 ARTICLE 12 - DISSOLUTION OF COMPANY...........................................26 12.1 Events of Dissolution or Liquidation........................26 -ii- 12.2 Liquidation.................................................26 12.3 No Further Claim............................................27 12.4 No Action for Dissolution...................................27 ARTICLE 13 - INDEMNIFICATION..................................................27 13.1 General.....................................................27 13.2 Indemnification.............................................27 ARTICLE 14 - REPRESENTATIONS BY THE MEMBERS...................................28 14.1 Investment Intent...........................................28 14.2 Securities Regulation.......................................28 14.3 Knowledge and Experience....................................28 14.4 Independent Investment Decision.............................29 14.5 Economic Risk...............................................29 14.6 Binding Agreement...........................................29 14.7 Tax Position................................................30 14.8 Information.................................................30 ARTICLE 15 - COMPANY REPRESENTATIONS..........................................30 15.1 Legal Existence.............................................30 15.2 Valid Issuance..............................................30 15.3 Options, Etc................................................30 ARTICLE 16 - MISCELLANEOUS....................................................30 16.1 Additional Documents........................................30 16.2 General.....................................................31 16.3 Notices, Etc................................................31 16.4 Applicable Law..............................................31 16.5 Consent to Jurisdiction.....................................31 16.6 WAIVER OF JURY TRIAL........................................32 16.7 Gender and Number...........................................32 16.8 Severability................................................32 16.9 Headings....................................................33 16.10 Tax Status..................................................33 16.11 No Third Party Rights.......................................33 -iii- HF INVESTMENT HOLDINGS, LLC AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT of HF Investment Holdings, LLC is dated as of September 27, 1999 by and among Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust Associates, L.P., each a Delaware limited partnership, Gary Stevenson, an individual residing in Riverheight, UT, Scott Watterson, an individual residing in Providence, UT, and such other persons as may from time to time be admitted as Members. WHEREAS, the Original Members wish to form a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act in order to conduct the business described herein; and WHEREAS, the Members wish to enter into this Agreement to provide for, among other things, the management of the business and affairs of the Company, the allocation of profits and losses among the Members, the respective rights and obligations of the Members to each other and to the Company, and certain other matters. NOW, THEREFORE, the Members agree as follows: ARTICLE 1 DEFINITIONS For purposes of this Agreement certain capitalized terms have specifically defined meanings which are either set forth or referred to in Exhibit 1 which is attached hereto and incorporated herein by reference. ARTICLE 2 FORMATION AND PURPOSE 2.1 FORMATION. The Members hereby form a limited liability company pursuant to the Act effective retroactively to the filing of the Certificate with the Secretary of State of the State of Delaware. The rights, duties and liabilities of the Members shall be determined pursuant to the Act and this Agreement. To the extent that such rights, duties or obligations are different by reason of any provision of this Agreement than they would be in the absence of such provision, this Agreement shall, to the extent permitted by the Act, control. 2.2 NAME. The name of the Company is HF Investment Holdings, LLC. The business of the Company may be conducted under that name or, upon compliance with applicable laws, any other name that the Administrative Members deem appropriate or advisable. The Administrative Members shall file any fictitious name certificates and similar filings, and any amendments thereto, that the Administrative Members consider appropriate or advisable. 2.3 REGISTERED OFFICE/AGENT. The registered office required to be maintained by the Company in the State of Delaware pursuant to the Act shall initially be c/o Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. The name and address of the registered agent of the Company pursuant to the Act shall initially be Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. The Company may, upon compliance with the applicable provisions of the Act, change its registered office or registered agent from time to time in the discretion of the Administrative Members. 2.4 TERM. The term of the Company shall continue until December 31, 2024 unless sooner terminated as hereinafter provided. The holders of a majority of each of the Class A Units and Class B Units may extend the term (unless terminated pursuant to Section 12.1(b) or (c)) for up to two periods of two years each if they determine that extension is necessary or desirable. 2.5 PURPOSE. The purpose of the Company is to make investments in the capital stock of HF Holdings and such other investments as may from time to time be approved by a Voting Majority, and to engage in any and all activities necessary, advisable, convenient or incidental to the making, management or disposition of such investments. In addition, all cash of the Company, including without limitation all Capital Contributions pending their investment as contemplated by this Section 2.5, all interest, dividends and other distributions received with respect to all investments of the Company, all amounts realized on the sale, exchange or other disposition of securities and other assets of the Company (including without limitation through mandatory or voluntary redemptions and repurchases of capital stock), and all miscellaneous income received from investment of idle funds, shall be segregated and invested in Short-Term Investments by the Administrative Members to the extent they are not then required to provide for Distributions, expenses or investments. 2.6 SPECIFIC POWERS. Without limiting the generality of Section 2.5, the Company shall have the power and authority to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purpose set forth in Section 2.5, including, but not limited to, the power: 2.6.1 to conduct its business, carry on its operations and have and exercise the powers granted to a limited liability company by the Act or under any other applicable law in any jurisdiction, whether domestic or foreign, that may be necessary, convenient or incidental to the accomplishment of the purposes of the Company; -2- 2.6.2 to negotiate, enter into, renegotiate, extend, renew, terminate, modify, amend, waive, perform and carry out contracts of any kind, including without limitation contracts with any Member or any Affiliate thereof, in connection with, convenient to, or incidental to the accomplishment of the purposes of the Company; 2.6.3 to purchase, take, receive, subscribe for or otherwise acquire, own, hold, vote, use, employ, sell, lend, or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in or obligations of corporations, associations, general or limited partnerships, trusts, limited liability companies, or individuals or direct or indirect obligations of the United States or of any government, state, territory, governmental district or municipality or of any instrumentality of any of them; 2.6.4 to sue and be sued, complain and defend, and participate in administrative or other proceedings, in its name; 2.6.5 to elect and designate one or more managers of the Company and to appoint officers, employees, agents and representatives of the Company, and define their duties and fix their compensation; 2.6.6 to indemnify any Person in accordance with this Agreement; 2.6.7 to cease its activities and cancel its Certificate; 2.6.8 to pay, collect, compromise, litigate, arbitrate or otherwise adjust or settle any and all other claims or demands of or against the Company or to hold such proceeds against the payment of contingent liabilities; and 2.6.9 to make, execute, acknowledge and file any and all documents or instruments necessary, convenient or incidental to the accomplishment of the purpose of the Company. Notwithstanding the foregoing provisions of this Section 2.6, in no event shall the Company have the authority to borrow or otherwise incur or take property subject to indebtedness without the written consent of a Voting Majority. 2.7 CERTIFICATE. The filing by Taline Festekjian of the Certificate as an "authorized person" within the meaning of the Act is hereby authorized and ratified in all respects, and the Administrative Members, as well as R. Newcomb Stillwell and Ryan D. Darrah, are designated as "authorized persons" within the meaning of the Act to execute, deliver and file any amendments, restatements or cancellation of the Certificate, and any other certificates necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business. In addition, Ryan D. Darrah is authorized to sign the CSFB Warrant (as defined below) on the date hereof on behalf of the Company. -3- ARTICLE 3 MEMBERSHIP AND CAPITAL 3.1 MEMBERS; UNITS. The Members of the Company shall be listed on SCHEDULE I hereto, as from time to time amended and supplemented in accordance with the provisions of this Agreement. The Members' Interests in the Company shall be represented by up to three separate classes (each a "CLASS") of units ("UNITS"). The Interest of each of Scott Watterson and Gary Stevenson shall be represented by "Class A Units." The Interest of each Bain Member and of each other Member (other than Scott Watterson or Gary Stevenson) as the Bain Members shall designate shall be represented by "Class B Units." The Interest of any other Member shall be represented by "Class C Units." Each Unit issued as of the Closing Date shall represent a Capital Contribution of one hundred dollars ($100). The holders of Class A Units and Class B Units shall have the voting rights specified in this Agreement. The holders of Class C Units shall not have any voting rights, except the right to vote in respect of certain proposed amendments, as more fully specified in Section 11.1. From and after the making by the Members of Capital Contributions to fund an investment other than the investment in HF Holdings to be made as of the Closing Date, the Units of the Company shall be segregated not only by Class, but also by investment so that the Units issued in respect of an investment shall represent only an interest in that investment (and the Short-Term Investments, if any, related thereto). The holders of Class A Units, Class B Units and Class C Units issued in respect of a particular investment shall be entitled to receive the Distributions and allocations of Net Profit and Net Loss (and other items treated as Net Profit and Net Loss pursuant to Sections 3.4 and 3.5) in respect of such investment as are specified in Article 5. For the sake of clarity, the Units issued in respect of the investment in HF Holdings on the Closing Date shall be designated the "HF Class A Units", the "HF Class B Units" and the "HF Class C Units." 3.2 CAPITAL CONTRIBUTIONS. Each Member shall contribute to the Company on the Closing Date the amount set forth opposite such Member's name on SCHEDULE I, as in effect as of the Closing Date, under the heading "CAPITAL CONTRIBUTIONS" and shall receive the number of HF Class A Units, HF Class B Units and/or HF Class C Units, as the case may be, set forth on SCHEDULE I. (For the treatment of the CSFB Warrant (defined below), see Section 3.7.) Following the Closing Date, the Administrative Members, with the approval of a Voting Majority, may issue Class A, B and/or C Units to such persons in exchange for such additional Capital Contributions as they determine to be appropriate. Promptly following the issuance of additional Units, the Administrative Members shall amend SCHEDULE I so that it sets forth, effective as of the date of the amendment, opposite each Member's name, under the heading "CAPITAL CONTRIBUTIONS", the total amount of Capital Contributions made by such Member to the Company on and after the Closing Date, and under the headings "CLASS A UNITS," "CLASS B UNITS" and "CLASS C UNITS," the number of Class A Units, Class B or Class C Units, respectively, held by such Member and the investments in respect of which such Units were issued. -4- 3.3 CAPITAL ACCOUNTS. A separate account (each a "CAPITAL ACCOUNT") shall be established and maintained for each Member which shall be increased by (a) the amount of cash and the fair market value (as agreed upon by such Member and the Administrative Members, with the consent of a Voting Majority, at the time of contribution) of any other property contributed by such Member to the Company as a Capital Contribution (net of liabilities secured by such property or that the Company assumes or takes the property subject to), (b) such Member's share of the Net Profit of the Company and (c) amounts required to be credited to the Members' Capital Accounts in the same manner as Net Profit pursuant to Section 3.4 or 3.5, and shall be reduced by (d) the amount of cash and the fair market value (as agreed upon by such Member and the Administrative Members, with the consent of a Voting Majority, at the time of distribution) of any other property distributed to such Member (net of liabilities secured by such property or that the Member assumes or takes the property subject to), (e) such Member's share of the Net Loss of the Company and (f) amounts required to be credited to the Members' Capital Accounts in the same manner as Net Loss pursuant to Section 3.4 or Section 3.5. From and after the making by the Members (which term, for purposes of this sentence, shall not include the holder of any CSFB Warrant (defined below)) of Capital Contributions to fund an investment other than the investment in HF Holdings to be made as of the Closing Date, each Member's Capital Account shall be divided into two or more "Sub-Capital Accounts", and a separate Sub-Capital Account shall be maintained in the manner provided in the immediately preceding sentence for each investment (and the Short-Term Investments, if any, related thereto) in which the Member has an interest. 3.4 REVALUATIONS OF ASSETS AND CAPITAL ACCOUNT ADJUSTMENTS. Immediately preceding the issuance of additional Class A Units, Class B Units or Class C Units to a new or existing Member in exchange for cash or other contributions (other than in connection with the exercise of any CSFB Warrant (as defined below)), or upon the redemption of the Interest of a Member, the then prevailing Asset Values of the Company shall be adjusted to equal their respective gross fair market values, as determined in good faith by the Administrative Members, with the consent of a Voting Majority, and any increase in the net equity value of the Company (Asset Values less liabilities) shall be credited to the Capital Accounts (and the appropriate Sub-Capital Accounts) of the Members in the same manner as Net Profits are credited under Section 5.5.2 hereof (or any decrease in the net equity value of the Company shall be charged in the same manner as Net Losses are charged under Section 5.5.3). Accordingly, as of the date of issuance of additional Units or the redemption of all or a portion of a Member's Interest in the Company, the Capital Accounts (and the Sub-Capital Accounts) of Members will reflect both realized and unrealized gains and losses through such date and the net fair market value of the equity of the Company as of such date. 3.5 ADDITIONAL CAPITAL ACCOUNT ADJUSTMENTS. Any income of the Company that is exempt from federal income tax shall be credited to the Capital Accounts (and the appropriate Sub-Capital Accounts) of the Members in the same manner as Net Profits are credited under Section 5.5.2 when such income is realized. Any expenses or expenditures of the Company -5- which may neither be deducted or capitalized for tax purposes (or are so treated for tax purposes) shall be charged to the Capital Accounts (and the appropriate Sub-Capital Accounts) of the Members, in the same manner as Net Losses are charged under Section 5.5.3. If the Company makes an election under Section 754 of the Code to provide a special basis adjustment upon the transfer of an Interest in the Company or the distribution of property by the Company, Capital Accounts (and the appropriate Sub-Capital Accounts) shall be adjusted to the limited extent required by the Treasury Regulations under Section 704 following such transfer or distribution. 3.6 ADDITIONAL CAPITAL ACCOUNT PROVISIONS. 3.6.1 No Member shall have the right to demand a return of all or any part of its Capital Contributions. Any return of the Capital Contributions of any Member shall be made solely from the assets of the Company and only in accordance with the terms of this Agreement. No interest shall be paid to any Member with respect to its Capital Contributions or Capital Account (or any Sub-Capital Account). 3.6.2 In the event that all or a portion of the Units of a Member are transferred in accordance with the terms of this Agreement, the transferee of such Units shall also succeed to all or the relevant portion of the Capital Account (and the appropriate Sub-Capital Accounts) of the transferor. Units held by a Member may not be transferred independently of the interest in the capital of the Company to which the Units relate. 3.6.3 No Member shall have any obligation to repay any deficit balance in its Capital Account (or in any Sub-Capital Account). 3.7 OPTIONS, WARRANTS, ETC. The Administrative Members, with the approval of a Voting Majority, may issue options, warrants and other rights or interests in respect of the equity of the Company (each a "Right") to such persons, in exchange for such amounts of cash or other property, and having such terms, as the Administrative Members determine to be appropriate. By its signature to this Agreement, Bain, constituting a Voting Majority as of the date hereof, hereby approves the issuance as of the date hereof to Credit Suisse First Boston Management Corporation, a Delaware Corporation ("CSFB"), of a warrant for the purchase of fifty thousand (50,000) Class C Units having terms substantially identical to those set forth in the HF Class C Units Purchase Warrant attached hereto as EXHIBIT 2 (such warrant and any warrant issued to reflect a partial exercise or a transfer of a portion of such warrant, a "CSFB Warrant"). Upon the issuance of any Right, the Administrative Members shall set forth on SCHEDULE I the name of the holder of such Right and the terms of such Right. Upon the exercise of any CSFB Warrant, the holder thereof shall be deemed to have made a Capital Contribution equal to the sum of (i) the exercise price paid in connection with such exercise and (ii) the product of (A) five million dollars ($5,000,000) and (B) a fraction, the numerator of which is the number of HF Units received upon such exercise and the denominator of which is the sum of (I) the aggregate -6- number of HF Units for which all unexercised CSFB Warrants are exercisable and (II) the aggregate number of outstanding HF Units issued in connection with the exercise of any CSFB Warrants (for purposes of this clause II, adjusted to reflect any post-exercise distributions of additional HF Units in respect of HF Units, reclassifications by subdivision of outstanding HF Units, or reclassifications by combination of outstanding HF Units into a smaller number of HF Units). Such Capital Contribution shall be set forth on Schedule I. 3.8 LIMITATIONS ON ISSUANCES. The Company shall not issue any additional Units (or rights to acquire Units) to any Bain Member unless the Company shall have provided each other Member with the opportunity to purchase its pro rata share of such Units or rights on the same terms as such Bain Member. ARTICLE 4 STATUS AND RIGHTS OF MEMBERS 4.1 LIMITED LIABILITY. Except as otherwise provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member nor any other Indemnified Person shall be obligated personally for any such debt, obligation or liability of the Company. All Persons dealing with the Company shall look solely to the assets of the Company for the payment of the debts, obligations or liabilities of the Company. 4.2 RETURN OF DISTRIBUTIONS OF CAPITAL. Except as otherwise expressly required by law, a Member, in its capacity as such, shall have no liability either to the Company or any of the Company's creditors. Except as required by law or a court of competent jurisdiction, no Member or investor in or partner of a Member shall be obligated by this Agreement to return any Distribution to the Company or pay the amount of any Distribution for the account of the Company or to any creditor of the Company. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Member is obligated to return or pay any part of any Distribution, the obligation shall be that of such Member alone, and not of any other Member unless the court so provides. The amount of any Distribution returned to the Company by or on behalf of a Member or paid by or on behalf of a Member for the account of the Company or to a creditor of the Company shall be added to the account or accounts from which it was subtracted when it was distributed to the Member. ARTICLE 5 DISTRIBUTIONS AND ALLOCATIONS OF PROFIT AND LOSS 5.1 DISTRIBUTIONS. The Administrative Members shall cause the Company to make Distributions to the Members and the holder(s) of the CSFB Warrant(s) in accordance with this Section 5.1. -7- 5.1.1 DEFINITIONS. "AVAILABLE CASH" shall mean (a) cash received in respect of the Company's investment in HF Holdings and (b) cash received in respect of all Short-Term Investments (i) made with funds pending their investment in HF Holdings or (ii) made with funds received from HF Holdings pending the allocation of such funds pursuant to Section 5.1.2, in each case net of expenses of the Company authorized by this Agreement. "RELEASED SHARES" shall mean shares of HF Holdings common stock that were subject to a Junior Management Option which has lapsed or failed to vest or that were subject to the CSFB Option, prior to its lapse. "OPTION SHARES" shall mean shares of HF Holdings common stock that are subject to a Junior Management Option or to the CSFB Option. "FREE SHARES" shall mean shares of HF Holdings common stock that have never been subject to a Junior Management Option or the CSFB Option. 5.1.2 ALLOCATIONS OF AVAILABLE CASH. Available Cash shall be allocated among the Members and the holder(s) of the CSFB Warrant(s) as follows: (a) ALLOCATIONS OF AVAILABLE CASH ATTRIBUTABLE TO OPTION SHARES OR RELEASED SHARES. Available Cash received by the Company (i) as a result of the exercise, in whole or in part, of any Junior Management Option or the CSFB Option, (ii) as a result of the sale or other disposition of Released Shares or (iii) otherwise in respect of Option Shares or Released Shares (or Short-Term Investments related thereto), shall be allocated among all Members and holder(s) of the CSFB Warrant(s) in proportion to the relative number of HF Units (regardless of Class) held by the Members and the holder(s) of the CSFB Warrant(s) (treating, solely for this purpose, each holder of a CSFB Warrant as holding at the time of any allocation pursuant to this Section 5.1.2(a) a number of HF Units equal to the aggregate number of HF Units for which all CSFB Warrants then held by such holder may be exercised). PRESUMPTION 1 -- IDENTIFYING SHARES SUBJECT TO DISPOSITION. In the event that a Junior Management Option or the CSFB Option lapses or that a Junior Management Option fails to vest, any sale or other disposition of HF Holdings common stock by the Company thereafter (other than pursuant to the exercise of a Junior Management Option or the CSFB Option) shall be treated in part as a sale of Released Shares and in part as -8- a sale of Free Shares, (i) with the percentage of shares sold that are deemed to be Released Shares equal to THE PRODUCT OF (A) a fraction, (I) the numerator of which is equal to the number of Released Shares held by the Company immediately prior to such sale or disposition and (II) the denominator of which is equal to the total number of shares of HF Holdings common stock held by the Company immediately prior to such sale or disposition that are either Free Shares or Released Shares, and (B) 100; and (ii) with the percentage of shares sold that are deemed to be Free Shares equal to (C) 100 MINUS (D) the percentage of shares sold that are deemed to be Released Shares, as calculated in the immediately preceding clause (i). PRESUMPTION 2 -- IDENTIFYING SHARES IN RESPECT OF WHICH DIVIDEND IS PAID. In the event that the Company receives a dividend or other distribution (other than a distribution treated as proceeds from an exchange of HF Holdings Common Stock pursuant to Section 302(a) of the Code) in respect of shares of HF Holdings common stock, such distribution shall be treated in part as a distribution in respect of Option Shares and Released Shares and in part as a distribution in respect of Free Shares, (i) with the percentage of such distribution that is deemed attributable to Free Shares equal to THE PRODUCT OF (A) a fraction, (I) the numerator of which is equal to the number of Free Shares then held by the Company and (II) the denominator of which is equal to the total number of shares of HF Holdings common stock then held by the Company, and (B) 100, and (ii) the percentage of such distribution that is deemed attributable to Option Shares and Released Shares equal to (C) 100 minus (D) the percentage of such distribution that is deemed attributable to Free Shares, as calculated in the immediately preceding clause (i). (b) ALLOCATIONS OF AVAILABLE CASH ATTRIBUTABLE TO FREE SHARES. All Available Cash received by the Company in respect of Free Shares (or Short-Term Investments related thereto) shall be allocated as follows: (i) First, Available Cash in respect of Free Shares (or Short-Term Investments related thereto) shall be allocated among all Members and holder(s) of the CSFB Warrant(s), in proportion to the relative number of HF Units (regardless of Class) held by the Members and the holder(s) of the CSFB Warrant(s) (treating, solely for this purpose, each holder of a CSFB Warrant as -9- holding at the time of any allocation pursuant to this Section 5.1.2(b) a number of HF Units equal to the aggregate number of HF Units for which all CSFB Warrants then held by such holder may be exercised), until each Original Member has been allocated an amount of Available Cash equal to its Unreturned Investment; (ii) Thereafter, (A) an amount of Available Cash in respect of Free Shares (or Short-Term Investments related thereto) equal to (I) the Available Cash in respect of Free Shares (or Short-Term Investments related thereto) remaining after making the allocation pursuant to Section 5.1.2(b)(i) MULTIPLIED BY (II) the Class A Percentage shall be allocated to the holders of HF Class A Units, in proportion to the relative number of HF Class A Units held by the holders of such Units, and (B) an amount of Available Cash in respect of Free Shares (or Short-Term Investments related thereto) equal to (I) the Available Cash in respect of Free Shares (or Short-Term Investments related thereto) remaining after making the allocation pursuant to Section 5.1.2(b)(i) MULTIPLIED BY (II) the Residual Percentage shall be allocated to all Members and holder(s) of the CSFB Warrant(s), in proportion to the relative number of HF Units (regardless of Class) held by the Members and the holder(s) of the CSFB Warrant(s) (treating, solely for this purpose, each holder of a CSFB Warrant as holding at the time of any allocation pursuant to this Section 5.1.2(b) a number of HF Units equal to the aggregate number of HF Units for which all CSFB Warrants then held by such holder may be exercised). 5.1.3 ALLOCATIONS OF NON-CASH ASSETS. (a) IN GENERAL. Subject to Section 5.1.3(b), the Company shall allocate among all Members and holder(s) of the CSFB Warrant(s) all equity and other interests that it holds in HF Holdings or any successor thereto, and all of the non-cash proceeds received in exchange for any of its interests in HF Holdings, upon the earliest of the following times: (a) immediately following a Liquidity Event (other than an initial public offering); (b) immediately prior to the first secondary public offering of shares in HF Holdings to follow an initial public offering of shares in HF Holdings that is a Liquidity Event; or (c) upon the vote of the holders of a majority of each of the Class A Units and Class B Units to make such an allocation. An allocation pursuant to this Section 5.1.3 shall be made in the same proportions as an allocation of Available Cash -10- pursuant to Section 5.1.2 would have been made to the Members and the holder(s) of the CSFB Warrant(s) had the assets being allocated first been sold for an amount of cash equal to the fair market value of such assets, as determined (except as provided in the next sentence) in good faith by the Administrative Members, with the consent of a Voting Majority, and the proceeds from such sale been allocated pursuant to Section 5.1.2. For purposes of this Section, the "fair market value" of any share of HF Holdings or any successor thereto allocated hereunder shall be (i) in the case of a Liquidity Event (other than an initial public offering), the amount of consideration per share paid in connection with the Liquidity Event, (ii) in the case of a secondary public offering, the price at which shares are offered to the public in such offering or (iii) in all other cases, as determined in good faith by the Administrative Members, with the consent of a Voting Majority. (b) ALLOCATION TO CSFB WARRANT ACCOUNT. Notwithstanding the provisions of Section 5.1.3(a), in the event that any holder of a CSFB Warrant is at the time of an allocation pursuant to this Section 5.1.3(a) not permitted under the IBA or the BHCA to hold all or a portion (the "Impermissible Portion") of any non-cash asset that would otherwise be allocated to it (pursuant to Section 5.13(a)), then the Impermissible Portion of the non-cash asset that would otherwise be allocated pursuant to Section 5.1.3(a) to such holder shall instead be allocated to a CSFB Warrant Account established in respect of the CSFB Warrant held by such holder. 5.1.4 TREATMENT OF ALLOCATED ASSETS. (a) CURRENT DISTRIBUTION. All Available Cash allocated under Section 5.1.2 to any Member or any holder of a CSFB Warrant shall be distributed to such Member or such holder within two (2) Business Days of the receipt by the Company of such cash. All assets other than Available Cash allocated under Section 5.1.3(a) to any Member or any holder of a CSFB Warrant shall be distributed to such Member or such holder as soon as reasonably practicable. (b) SET ASIDE IN CSFB WARRANT ACCOUNT. The portion of each non-cash asset allocated pursuant to Section 5.1.3(b) to a CSFB Warrant Account shall be held in such account, and no portion of such non-cash asset shall be distributed to the holder of the CSFB Warrant in respect of which such account was established other than in accordance with Section 5.1.4(c). Notwithstanding the foregoing sentence, an amount equal to all cash earnings received by the Company in respect of any non-cash -11- asset held in the CSFB Warrant Account shall be distributed, to the extent of Available Cash, to the holder of the CSFB Warrant in respect of which such account was established as soon as reasonably practicable following the receipt by the Company of such cash. All non-cash earnings in respect of an asset in the CSFB Warrant Account shall remain in the account and be distributed in accordance with Section 5.1.4(c). (c) DISTRIBUTION OF NON-CASH ASSETS FROM CSFB WARRANT ACCOUNT. No non-cash asset held in a CSFB Warrant Account shall be distributed until such time as: (i) the holder of the CSFB Warrant in respect of which such account was established notifies the Company that it has become permissible under the IBA and/or the BHCA for such holder to hold all or a portion of one or more of the non-cash assets in such account, in which case, that portion of each non-cash asset in such CSFB Warrant Account which such holder may then hold shall be distributed to such holder within two (2) Business Days of such notification; or (ii) the CSFB Warrant in respect of which the CSFB Warrant Account was established is exercised in whole or in part. In the event of an exercise described in clause (ii) of the immediately preceding sentence, the CSFB Account Distribution Fraction of each remaining asset in the CSFB Warrant Account shall be distributed to the holder exercising the CSFB Warrant in respect of which the account was established, within two (2) Business Days after the date as of which exercise of the warrant shall be deemed to have been effected pursuant to Section 1.3 of such CSFB Warrant. In the event that a CSFB Warrant lapses, distributions that would have been made to the holder of such warrant pursuant to the foregoing provisions of this Section 5.1.4(c) shall be made to, or to the designee of, such holder within five (5) Business Days of such lapse. 5.2 NO VIOLATION. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make a Distribution to any Member on account of its Interest in the Company if such Distribution would violate Section 18-607 of the Act or other applicable law. 5.3 WITHHOLDINGS. All amounts withheld pursuant to the Code or any provision of any state, local or foreign tax law with respect to any payment, Distribution, or allocation to the Company shall be treated as amounts paid to the Company. The Administrative Members are authorized to withhold from Distributions, or with respect to allocations, to the Members and to pay over to the appropriate federal, state, local or foreign government any amounts required to be so withheld. The Administrative Members shall allocate any such amounts to the Members in respect of whose Distribution or allocation the tax was withheld and shall treat such amounts as actually distributed to such Members. -12- 5.4 PROPERTY DISTRIBUTIONS AND INSTALLMENT SALES. The amount by which the fair market value of any property to be distributed in kind pursuant to Sections 5.1.3 and 5.1.4 exceeds or is less than the then prevailing Asset Value of such property shall, to the extent not otherwise recognized by the Company, be taken into account in determining Net Profit and Net Loss and determining the Capital Accounts (and the appropriate Sub-Capital Accounts) of the Members as if such property had been sold at its fair market value immediately prior to the distribution. If any assets are sold in transactions in which, by reason of the provisions of Section 453 of the Code or any successor thereto, gain is realized but not recognized, such gain shall be taken into account when realized in computing gain or loss of the Company for purposes of allocation of Net Profit or Net Loss under this Article 5. 5.5 NET PROFIT OR NET LOSS. 5.5.1 DEFINITIONS. The "NET PROFIT" or "NET LOSS" of the Company for each Fiscal Year or relevant part thereof shall mean the Company's taxable income or loss for federal income tax purposes for such period (including therein all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code) with the following adjustments: (a) Gain or loss attributable to the disposition of property of the Company with an Asset Value different than the adjusted basis of such property for federal income tax purposes shall be computed with respect to the Asset Value of such property and any tax gain or loss not included in Net Profit or Loss shall be taken into account and allocated among the Members pursuant to Section 5.7 hereof. (b) Depreciation, amortization or cost recovery deductions with respect to any property with an Asset Value that differs from its adjusted basis for federal income tax purposes shall be computed in accordance with Asset Value and any depreciation allowable for federal income tax purposes shall be allocated in accordance with Section 5.7. 5.5.2 ALLOCATIONS OF NET PROFIT. The Net Profit of the Company attributable to the Company's investment in HF Holdings (or any Short-Term Investments related thereto) for any relevant fiscal period shall be allocated and credited to the Capital Accounts (or the appropriate Sub-Capital Accounts) of the Members as follows: (a) All income and gain recognized by the Company (and amounts so treated pursuant to Section 3.4 or 3.5) (i) as a result of the exercise, in whole or in part, of any Junior Management Option or the CSFB Option, (ii) as a result of the sale or other disposition of Released Shares or (iii) otherwise in respect of Option Shares or Released Shares (or Short- -13- Term Investments related thereto), shall be allocated to the Members' Capital Accounts (and, if appropriate, Sub-Capital Accounts for the HF Holdings investment) pro rata in proportion to their HF Units. (In determining the extent to which shares of HF Holdings that are sold are Released Shares, the presumptions set forth above in Section 5.1.2(a) shall apply.) (b) All income and gain recognized by the Company (or treated as recognized pursuant to Section 3.4 or 3.5) in respect of Free Shares (or Short-Term Investments related thereto) shall be allocated to the Members' Capital Accounts (and, if appropriate, Sub-Capital Accounts for the HF Holdings investment) as follows: (i) first, if losses and deductions have previously been allocated to the Members pursuant to Section 5.5.3(b)(ii), to the Members in proportion to the relative number of HF Units (regardless of Class) held by the Members, until the aggregate amount allocated pursuant to this clause (i) equals the aggregate amount of losses and deductions previously allocated pursuant to Section 5.5.3(b)(ii); and (ii) thereafter, (A) the balance of such income and gain multiplied by the Class A Percentage shall be allocated to the holders of HF Class A Units, in proportion to the relative number of HF Class A Units held by the holders of such Units, and (B) the balance of such income and gain multiplied by the Residual Percentage to all Members, in proportion to the relative number of HF Units (regardless of Class) held by the Members. 5.5.3 ALLOCATIONS OF NET LOSS. The Net Loss of the Company attributable to the Company's investment in HF Holdings (or any Short-Term Investments related thereto) for any relevant fiscal period shall be allocated and charged to the Capital Accounts (or the appropriate Sub-Capital Accounts) of the Members as follows: (a) All losses and deductions recognized by the Company (and amounts so treated pursuant to Section 3.4 or 3.5) (i) as a result of the exercise, in whole or in part, of any Junior Management Option or the CSFB Option, (ii) as a result of the sale or other disposition of Released Shares, or (iii) otherwise in respect of Option Shares or Released Shares (or Short-Term Investments related thereto), shall be allocated to the Members' Capital Accounts (and, if appropriate, Sub-Capital Accounts for the HF Holdings investment) pro rata in proportion to their HF Units. (In determining the extent to which shares of HF Holdings that -14- are sold are Released Shares, the presumptions set forth above in Section 5.1.2(a) shall apply.) (b) All losses and deductions recognized by the Company (or treated as recognized pursuant to Section 3.4 or 3.5) in respect of Free Shares (or Short-Term Investments related thereto) shall be allocated to the Members' Capital Accounts (and, if appropriate, Sub-Capital Accounts for the HF Holdings investment) as follows: (i) first, if income and gain have previously been allocated to the Members pursuant to Section 5.5.2(b)(ii), (A) the Class A Percentage multiplied by such losses and deductions in respect of Free Shares shall be allocated to the holders of HF Class A Units, in proportion to the relative number of HF Class A Units held by the holders of such Units, and (B) the Residual Percentage multiplied by such losses and deductions in respect of Free Shares shall be allocated to all Members, in proportion to the relative number of HF Units (regardless of Class ) held by the Members, until the aggregate amount allocated pursuant to this clause (i) equals (x) the aggregate amount of income and gain previously allocated pursuant to Section 5.5.2(b)(ii) LESS (y) the aggregate amount previously allocated for Distribution pursuant to Section 5.1.2(b)(ii) (or Section 5.1.3, to the extent allocated in accordance with Section 5.1.2(b)(ii)); and (ii) thereafter, to the Members in proportion to the relative number of HF Units (regardless of Class) held by the Members. 5.5.4. SPECIAL ALLOCATION. Notwithstanding the provisions of Sections 5.5.2 and 5.5.3, all income earned in respect of any non-cash assets allocated to a CSFB Warrant Account shall be specially allocated to the holder of the CSFB Warrant in respect of which such account was established. 5.6 LIMITATION ON ALLOCATION OF LOSSES; QUALIFIED INCOME OFFSET; CURATIVE ALLOCATIONS. Notwithstanding the provisions of Sections 5.5.2 and 5.5.3, in no event shall an item of loss, expense or deduction be allocated to a Member's Capital Account if it would cause or increase a deficit balance in such Member's Capital Account, within the meaning of Treasury Regulation ss.1.704-1(b)(2)(ii)(d). In addition, this Agreement shall for all purposes be deemed to contain a qualified income offset provision, within the meaning of such regulation. It is the intention of the Members that any allocations required by the first two sentences of this Section 5.6 not affect the amount or timing of Distributions to be made under this Agreement. In furtherance of this objective, in the event any allocation is made pursuant to either of the first two sentences of this Section 5.6, the Administrative Members are hereby -15- directed to make (with the advice of the Company's independent tax advisors and the consent of a Voting Majority) such curative allocations as they determine to be appropriate to offset the effects of such allocation. Any item of Net Profit or Net Loss allocated pursuant to this Section 5.6 shall not again be allocated pursuant to Section 5.5. 5.7 TAX ALLOCATIONS: CODE SECTION 704(C) AND UNREALIZED APPRECIATION OR DEPRECIATION. 5.7.1 CONTRIBUTED ASSETS. In accordance with Section 704(c) of the Code, income, gain, loss and deduction with respect to any property contributed to the Company with an adjusted basis for federal income tax purposes different from the initial Asset Value at which such property was accepted by the Company shall, solely for tax purposes, be allocated among the Members so as to take into account such difference in the manner required by Section 704(c) and the applicable Treasury Regulations. 5.7.2 REVALUED ASSETS. If upon the acquisition of additional Units in the Company by a new or existing Member the Asset Value of any the assets of the Company is adjusted pursuant to Section 3.4, subsequent allocations of income, gain, loss and deduction with respect to such assets shall, solely for tax purposes, be allocated among the Members so as to take into account such adjustment in the same manner as under Section 704(c) of the Code and the applicable Treasury Regulations. 5.7.3 ELECTIONS AND LIMITATIONS. The allocations required by this Section 5.7 are solely for purposes of federal, state and local income taxes and shall not affect the allocation of Net Profits or Net Losses as between Members or any Members' Capital Accounts (or Sub-Capital Accounts). All tax allocations required by this Section 5.7 shall be made using the so-called "traditional method" described in the Treasury Regulations 1.704-3(b); except that the Administrative Members, with the advice of the Company's auditors or tax counsel and the consent of a Voting Majority, may elect to use the so-called "traditional method with curative allocations" described in Treasury Regulations 1.704-3(c). 5.7.4 TAX ALLOCATIONS. Except as noted above, all items of income, deduction and loss shall be allocated for Federal, state and local income tax purposes in the same manner such items are allocated for purposes of calculating Net Profits and Net Losses. 5.8 ADDITIONAL INVESTMENTS. The Members acknowledge and agree that upon the making by the Company of an investment other than the investment in HF Holdings as of the Closing Date, Sections 5.1 and 5.5 shall be amended to include the necessary distribution and allocation provisions for such new investment. -16- ARTICLE 6 TAX MATTERS MEMBER 6.1 TAX MATTERS MEMBER. Unless and until another Member is designated as the tax matters partner by a Voting Majority, Bain shall be the tax matters partner of the Company as provided in the Regulations under Code Section 6231 and any analogous provisions of state law, and in such capacity is referred to as the "Tax Matters Member". 6.2 CERTAIN AUTHORIZATIONS. The Tax Matters Member shall represent the Company, at the Company's expense, in connection with all examinations of the Company's affairs by tax authorities including any resulting administrative or judicial proceedings. Without limiting the generality of the foregoing, the Tax Matters Member is hereby authorized, but not required: 6.2.1 to enter into any settlement with the Internal Revenue Service or the Secretary of the Treasury or his delegate (the "SECRETARY") with respect to any tax audit or judicial review, in which agreement the Tax Matters Member may expressly state that such agreement shall bind the other Members, except that such settlement agreement shall not bind any Member that (within the time prescribed pursuant to the Code and Regulations) files a statement with the Secretary providing that the Tax Matters Member shall not have the authority to enter into a settlement agreement on behalf of such Member; 6.2.2 if a notice of a final administrative adjustment at the Company level of any item required to be taken into account by a Member for tax purposes is mailed to the Tax Matters Member, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court, the District Court of the United States for the district in which the Company's principal place of business is located, or elsewhere as allowed by law, or the United States Claims Court; 6.2.3 to intervene in any action brought by any other Member for judicial review of a final adjustment; 6.2.4 to file a request for an administrative adjustment with the Secretary at any time and, if any part of such request is not allowed by the Secretary, to file a petition for judicial review with respect to such request; 6.2.5 to enter into an agreement with the Internal Revenue Service to extend the period for assessing any tax that is attributable to any item required to be taken into account by a Member for tax purposes, or an item affected by such item; and -17- 6.2.6 to take any other action on behalf of the Company in connection with any administrative or judicial tax proceeding to the extent permitted by applicable law or the Regulations. 6.3 INDEMNITY OF TAX MATTERS MEMBER. The Company shall indemnify and reimburse the Tax Matters Member for all reasonable expenses (including reasonable legal and accounting fees) incurred as Tax Matters Member pursuant to this Article 6 in connection with any administrative or judicial proceeding with respect to the tax liability of the Members as long as the Tax Matters Member has determined in good faith that its course of conduct was in, or not opposed to, the best interest of the Company. The payment of all such expenses shall be made before any Distributions are made to the Members. The taking of any action and the incurring of any expense by the Tax Matters Member in connection with any such proceeding, except to the extent provided herein or required by law, is a matter in the sole discretion of the Tax Matters Member and the provisions on limitations of liability of the Tax Matters Member and indemnification set forth in Article 13 shall be fully applicable to the Tax Matters Member in its capacity as such. 6.4 INFORMATION FURNISHED. To the extent and in the manner provided by applicable law and Regulations, the Tax Matters Member shall furnish the name, address, profits interest, and taxpayer identification number of each Member to the Secretary. 6.5 NOTICE OF PROCEEDINGS, ETC. The Tax Matters Member shall use its best efforts to keep each Member informed of any administrative and judicial proceedings for the adjustment at the Company level of any item required to be taken into account by a Member for income tax purposes or any extension of the period of limitations for making assessments of any tax against a Member with respect to any Company item, or of any agreement with the Internal Revenue Service that would result in any material change either in income or loss as previously reported. 6.6 NOTICES TO TAX MATTERS MEMBER. Any Member that receives a notice of an administrative proceeding under Code Section 6233 relating to the Company shall promptly notify the Tax Matters Member of the treatment of any Company item on such Member's federal income tax return that is or may be inconsistent with the treatment of that item on the Company's return. Any Member that enters into a settlement agreement with the Secretary with respect to any Company item shall notify the Tax Matters Member of such agreement and its terms within sixty days after its date. ARTICLE 7 FEES AND EXPENSES 7.1 COMPENSATION TO THE ADMINISTRATIVE MEMBER AND AFFILIATES. Neither the Administrative Members nor any Affiliate of the Administrative Members shall receive any -18- compensation directly or indirectly in connection with the formation, operation and dissolution of the Company except as expressly provided in this Agreement. 7.2 COMPANY EXPENSES. The Company shall pay or, if paid by the Administrative Members, reimburse the Administrative Members for, all expenditures that are made on behalf of the Company or by the Administrative Members in connection with their duties pursuant to this Agreement (if and to the extent such expenditures are approved by a Voting Majority, except that such approval shall not be required for payments made to PricewaterhouseCoopers, LLP in connection with such firm's preparation of the Company's financial statements and any of its audits thereof), including without limitation: (i) all expenses of legal, accounting, investment banking, consulting, research and other professional services to the Company, travel and other out-of-pocket expenses and filing and similar fees; (ii) all custody, transfer, registration and similar expenses; (iii) all brokerage and finders' fees and commissions and discounts incurred in connection with the purchase or sale of securities; (iv) all extraordinary expenses, such as litigation expenses; and (v) all taxes (if any). If any expenses of the Company are paid to an Affiliate of an Administrative Member, such expenses shall be paid on a basis not less favorable to the Company than such Affiliate would obtain in an arms' length transaction. ARTICLE 8 DESIGNATION, RIGHTS, AND DUTIES OF THE ADMINISTRATIVE MEMBERS 8.1 DESIGNATION. Each of Scott Watterson and Gary Stevenson is hereby designated as an administrative member (each an "Administrative Member" and, together, the "Administrative Members") of the Company with the powers set forth in this Agreement. The Administrative Members, to the extent of their powers set forth in this Agreement, are agents of the Company for the purpose of the Company's business, and the actions of the Administrative Members taken in accordance with such powers shall bind the Company. Except as otherwise expressly provided in this Agreement, the Administrative Members, acting on behalf of the Company, shall be the only Persons authorized to execute documents which shall be binding on the Company. 8.2 AUTHORITY; DUTIES. The power and authority granted to, and the duties undertaken by, the Administrative Members hereunder shall include only (a) the power and duty to perform administrative functions necessary or convenient for the furtherance of the purpose of the Company, including without limitation the maintenance of complete and accurate books and records reflecting all activities of the Company, the preparation and filing of necessary or appropriate certificates, reports or other documents with regulatory or administrative bodies, the preparation of reports for the Members, the determination and (with the consent of a Voting Majority) payment of expenses of the Company, the making of Short-Term Investments, and the execution of such documents in connection with the making of the investment in HF Holdings as are approved by a Voting Majority, including the Subscription -19- Agreement and the Stockholders Agreement, (b) the power and duty to seek out and provide advice to the Company concerning investments, including without limitation advice regarding investment opportunities potentially available to the Company, advice in connection with the structuring of any new or follow-on investment or the complete or partial disposition of any investment, and advice regarding the general management of the Company's investments, (c) the power to execute such documents in connection with any new investment as are approved by a Voting Majority, (d) the powers and/or duties specifically set forth in Sections 2.2, 2.3, 2.7, 3.2, 3.4, 5.1, 5.3, 5.6, 5.7.3, 8.3, 10.2, 10.3 and 11.2 and (e) such other powers and/or duties as are approved by the holders of a majority of each of the Class A Units and the Class B Units. 8.3 BUSINESS DECISIONS; VOTING SHARES OF HF HOLDINGS' CAPITAL STOCK. (a) All business decisions of the Company, including without limitation decisions with regard to the management, financing and capitalization of the Company; approving any amendment or waiver to any of the Stockholders Agreement or the Subscription Agreement; and the making and dispositions of investments, including without limitation all capital stock of HF Holdings owned by the Company (other than Short-Term Investments expressly permitted hereunder); shall be made by a Voting Majority. The Administrative Members shall notify the other Members when a business decision to be made arises, and the Administrative Members shall have the power and the obligation to implement such decision upon being so directed by a Voting Majority. If the Administrative Members fail to implement a decision of a Voting Majority, a Member designated by the Voting Majority may act on behalf of the Company for purposes of implementing such decision. (b) The Administrative Members shall notify each of the Voting Members whenever any Person has requested that the Company vote the shares of HF Holdings' common stock owned by the Company. A Voting Majority shall be entitled to direct the Company on how to vote such shares (except as provided in Section 8.3(c) below). Notwithstanding anything contained herein to the contrary, in no event shall the Administrative Members, acting in their capacity as such, have any right to determine how the Company should vote any of the shares of HF Holdings' capital stock owned by the Company. (c) Holders of a majority of the Class A Units shall be entitled to select two (2) of the seven (7) directors of HF Holdings to be selected by the Company pursuant to the Stockholders Agreement. The remaining five directors to be selected by the Company shall be selected by the holders of a majority of the Class B Units (subject to Section 9.8.2). -20- ARTICLE 9 TRANSFER OF INTERESTS 9.1 RESTRICTIONS ON TRANSFER. No Member shall have the right to withdraw from the Company except as set forth in this Article 9. No Member shall sell, assign, pledge, encumber, hypothecate, mortgage, exchange, give away, dispose of or otherwise transfer, voluntarily or involuntarily by operation of law, pursuant to judicial process or otherwise (herein, whether used as a noun or a verb, collectively called a "Transfer"), all or any part of the economic or other rights that comprise its Interest, except as permitted by this Article 9. Any Transfer in contravention of any of the provisions of this Article 9 shall be void and of no effect, and shall not bind or be recognized by the Company; PROVIDED, HOWEVER, that nothing herein shall prevent or prohibit the transfer of a CSFB Warrant in accordance with the terms thereof. 9.2 TRANSFERS UNDER THIS AGREEMENT, ETC. Any Member may Transfer any or all of such Member's Units: (i) to the Company in one or more transactions approved by a Voting Majority, (ii) to any holder of Class B Units in a transaction approved by a Voting Majority or (iii) to HF Holdings pursuant to any pledge agreement securing a debt obligation to HF Holdings. 9.3 TRANSFERS OF CLASS B UNITS TO PERMITTED TRANSFEREES. Any Member holding Class B Units may Transfer any or all of such Class B Units to: (i) a Bain Member or an Affiliated Fund, (ii) any trust established for the benefit of partners of a Member holding Class B Units or an Affiliated Fund or pro rata to the partners of a Member holding Class B Units or an Affiliated Fund; PROVIDED, HOWEVER, that no such Transfer shall be effective until the recipient has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that any shares of stock of HF Holdings to be distributed by the Company to such recipient shall be subject to all the provisions of the Stockholders Agreement and that such recipient is bound thereby and a party thereto to the same extent as the Member from whom the Transfer was made. 9.4 TRANSFERS OF CLASS A UNITS OR CLASS C UNITS TO IMMEDIATE FAMILY. Any individual Member holding Class A Units or Class C Units may Transfer any or all of such Class A Units or Class C Units to a Member of the Immediate Family of such Member; PROVIDED, HOWEVER, that no such Transfer shall be effective until such Member of the Immediate Family has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that any shares of stock of HF Holdings to be distributed by the Company to such Member of the Immediate Family shall be subject to all the provisions of the Stockholders Agreement and that such Member of the Immediate Family is bound thereby and a party thereto to the same extent as the Member from whom the Transfer was made. 9.5 TRANSFERS OF CLASS A UNITS OR CLASS C UNITS UPON DEATH. Upon the death of any individual Member holding Class A Units or Class C Units, the Units held by such Member may be distributed by will or other instrument taking effect at death or by applicable laws of descent and distribution to such Member's estate, executors, administrators and -21- personal representatives, and then to such Member's heirs, legatees or distributees, whether or not such recipients are Members of the Immediate Family of such Member; PROVIDED, HOWEVER, that no such Transfer shall be effective until the recipient has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that any shares of stock of HF Holdings to be distributed by the Company to such recipient shall subject to all the provisions of the Stockholders Agreement and that such recipient is bound thereby and a party thereto to the same extent as the Member from whom the Transfer was made. 9.6 TRANSFERS OF CLASS A UNITS OR CLASS C UNITS TO CHARITIES. Any Member holding Class A Units or Class C Units may Transfer as a charitable gift any or all of such Units to any Person which is described in Section 501(c)(3) of the Internal Revenue Code of 1986, as from time to time in effect; PROVIDED, HOWEVER, that no such Transfer shall be effective until such transferee has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that any shares of stock of HF Holdings to be distributed by the Company to such transferee shall be subject to all the provisions of the Stockholders Agreement and that such transferee is bound thereby and a party thereto to the same extent as the Member from whom the Transfer was made. 9.7 TRANSFERS OF UNITS TO ENTITIES UNDER COMMON CONTROL. Any Member which is an institutional investor may Transfer any or all of its Units to a Person under common control with such Member in a bona fide transfer not part of a transaction or series of transactions that results in the direct or indirect transfer of such Units to a Person not under common control with such holder; PROVIDED, HOWEVER, that no such Transfer shall be effective until such transferee under common control has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that any shares of stock of HF Holdings to be distributed by the Company to such transferee shall be subject to all the provisions of the Stockholders Agreement and that such transferee is bound thereby and a party thereto to the same extent as the Member from whom the Transfer was made. 9.8 BAIN SELL DOWN. Until the sixtieth (60th) day following the date of this Agreement, the Bain Members may Transfer some or all of their Units to their designees. The Units received by such designees shall be deemed Class B Units or Class C Units, as designated by Bain. 9.8.1 DIRECTORS. The Bain Members may assign, by voting agreement or other means, to assignees the right to designate up to two (2) directors otherwise designable by them pursuant Section 8.3(c) by virtue of their ownership of Class B Units. 9.8.2 PROFIT. The Bain Members may assign at a price different than the price paid by the Bain Members. -22- 9.9 EFFECTIVENESS OF TRANSFERS. No Transfer under this Article 9 shall be effective until the transferee shall have executed and delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that such transferee is bound by this Agreement and a party hereto to the same extent as the Member from whom the Transfer was made. 9.10 MANAGEMENT ROLL-OVER. The Members agree to take whatever actions may be reasonably necessary or appropriate in order to effectuate the "Management Roll-Over" provisions contained in Sections 6.3 and 7.3 of the Stockholders Agreement and the "Special Management Cut-Back" provisions contained in Section 8.3.1.3 of the Stockholders Agreement, provided that such provisions shall first affect shares of HF Holdings owned by the Company, other than shares subject to the CSFB Option or a Junior Management Option. 9.11 LIMITATIONS ON REDEMPTION. No Member may redeem all or a portion of its HF Units prior to a Liquidity Event without the prior consent of the holders of a majority of Class A Units and the holders of a majority of the Class B Units. ARTICLE 10 BOOKS, RECORDS, ACCOUNTING, AND REPORTS 10.1 BOOKS AND RECORDS. The Company shall maintain at its principal office all of the following: 10.1.1 A current list of the full name and last known business, residential or mailing address of each Member, together with true and full information regarding the amount of cash and a description and statement of the fair market value (as agreed upon by the contributing Member and the Administrative Members, with the consent of a Voting Majority, at the time of contribution) of any other contribution to the Company by each Member and which each Member has agreed to contribute to the Company in the future, and the date on which each Member became a Member of the Company; 10.1.2 A copy of the Certificate, this Agreement, including any and all amendments to either thereof, together with executed copies of any powers of attorney pursuant to which the Certificate, this Agreement or any amendment has been executed; 10.1.3 Copies of the Company's federal, state, and local income tax or information returns and reports, if any, for the six (6) most recent Fiscal Years; 10.1.4 The financial statements of the Company for the six (6) most recent Fiscal Years; and -23- 10.1.5 The Company's books and records for at least the current and past five (5) Fiscal Years. 10.2 INFORMATION TO MEMBER. Upon the request of any Member for any purpose reasonably related to such Member's Interest in the Company: 10.2.1 The Administrative Members shall promptly deliver to the requesting Member, at the expense of the Company, a copy of the information required to be maintained by Sections 10.1.1 through 10.1.4. 10.2.2 The Company will permit the Members to review, at the Company's office during normal business hours, the Company's books and records referred to in Section 10.1.5. 10.2.3 The Administrative Members will discuss with any Member such questions as the Member may wish to raise regarding the administrative affairs of the Company. 10.2.4 The Company will provide any Member, at such Member's expense if the expense of obtaining or producing such information is material, such other information regarding the business affairs of the Company as is reasonable under the circumstances. 10.3 FINANCIAL STATEMENTS. 10.3.1 The Administrative Members shall maintain or cause to be maintained books of account reflecting the operations of the Company. After the end of each Fiscal Year, the Administrative Members shall prepare or cause to be prepared financial statements of the Company for such year and shall cause an audit of the Company's financial statements for such year to be made by PricewaterhouseCoopers, LLP or another firm of independent public accountants of recognized national standing approved by a Voting Majority. Such financial statements shall be prepared in accordance with generally accepted accounting principles. The Administrative Members shall use their best efforts to cause a copy of the audited financial statements to be delivered to each of the Members within ninety (90) days of the end of such fiscal year. 10.3.2 The Administrative Members shall promptly furnish to each Member copies of any financial statements and any other material information it receives with respect to HF Holdings and its subsidiaries. 10.4 FILINGS. At the Company's expense the Tax Matters Member shall cause to be prepared and timely filed, with appropriate federal, state, local and foreign regulatory and -24- administrative bodies, all income tax returns and any other reports required to be filed by the Company with those entities under then current applicable laws, rules, and regulations. The reports shall be prepared on the accounting or reporting basis required by the regulatory bodies. In particular, the Tax Matters Member shall have prepared by PricewaterhouseCoopers, LLP, or another firm of independent public accountants of recognized national standing approved by a Voting Majority, the appropriate federal, state and local income tax returns of the Company and shall furnish the appropriate informational tax returns to each Member as soon as practicable after March 15 of each year. 10.5 NON-DISCLOSURE. Each Member agrees that, except as otherwise consented to by a Voting Majority, all non-public information furnished to it pursuant to this Agreement will be kept confidential and will not be disclosed by such Member, or by any of its agents, representatives, or employees, in any manner whatsoever, in whole or in part, except that (a) each Member shall be permitted to disclose such information to those of its agents, attorneys, accountants, financial and business consultants, other representatives, and employees who need to be familiar with such information in connection with such Member's investment in the Company and who are charged with an obligation of confidentiality, (b) the Bain Members shall be permitted to disclose such information to financial institutions, investment bankers and prospective purchasers and capital investors when such Persons are charged with an obligation of confidentiality, (c) each Member shall be permitted to disclose such information to its members, partners and stockholders and their members, partners and stockholders so long as they agree to keep such information confidential on the terms set forth herein, (d) each Member shall be permitted to disclose information to the extent required by law, so long as such Member shall have first afforded the Company with a reasonable opportunity to contest the necessity of disclosing such information, and (e) each Member shall be permitted to disclose information to the extent necessary for the enforcement of any right of such Member arising under this Agreement. No Member shall disclose the terms of this Agreement to any Person except (i) to the extent required by law or (ii) for legitimate business purposes. ARTICLE 11 AMENDMENTS TO AGREEMENT 11.1 AMENDMENTS. This Agreement may be amended or modified only with the prior written consent of (i) holders of a majority of the Class A Units, (ii) holders of a majority of the Class B Units (which majority must include Bain) and (iii) holders of a majority of the Class C Units (treating, solely for this purpose, the CSFB Warrant as representing the Class C Units associated therewith only to the extent that the proposed amendment or modification could significantly and adversely affect the rights or preferences of the CSFB Warrant or the Class C Units), which consent shall not be unreasonably withheld or delayed by any Member; PROVIDED, that the prior written consent of all of the Members shall be required for any amendment or modification of Section 5.1, 5.5, or 11.1 hereof; PROVIDED, FURTHER, that the prior written consent of Inverness/Phoenix Capital LLC shall be required for any amendment or modification of the restrictions on transfer of Class B Units contained in -25- Article 9. Notwithstanding the foregoing provisions of this Section 11.1, this Agreement may be amended or modified with the prior written consent of Bain and CSFB, and without the consent of any other Member, to the extent reasonably necessary or desirable to cause this Agreement adequately to embody the "Intent of the Parties," as defined in that certain letter agreement dated September 27, 1999 between Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P. and CSFB, provided, that, no such amendment shall adversely affect the rights of any Class of HF Units without the consent of the holders of a majority thereof. Any amendment or modification of this Agreement pursuant to this Section 11.1 shall be binding on all Members. 11.2 FILINGS. The Administrative Members shall cause to be prepared and filed any amendment to the Certificate that may be required to be filed under the Act as a consequence of any amendment to this Agreement. ARTICLE 12 DISSOLUTION OF COMPANY 12.1 EVENTS OF DISSOLUTION OR LIQUIDATION. The Company shall be dissolved upon the first to occur of the following events, but not upon any other event: (a) December 31, 2024 unless such date is extended pursuant to Section 2.4, (b) the written determination of the holders of a majority of each of the Class A Units and Class B Units, (c) the entry of a decree of judicial dissolution under Section 18-802 of the Act or (d) the disposition of all of the Company's assets. 12.2 LIQUIDATION. Upon dissolution of the Company for any reason, the Company shall immediately commence to wind up its affairs. A reasonable period of time shall be allowed for the orderly termination of the Company's business, discharge of its liabilities, and distribution or liquidation of the remaining assets so as to enable the Company to minimize the normal losses attendant to the liquidation process. The Company's property and assets or the proceeds from the liquidation thereof shall be distributed so as not to contravene the Act but otherwise in compliance with Section 5.1; PROVIDED, HOWEVER, that Distributions to Members shall be made after their Capital Accounts (and Sub-Capital Accounts) have been adjusted to reflect all Net Profits and Net Losses (and amounts treated as Net Profits and Losses pursuant to Sections 3.4 and 3.5) of the Company through the date of distribution. A full accounting of the assets and liabilities of the Company shall be taken and a statement thereof shall be furnished to each Member within thirty (30) days after the distribution of all of the assets of the Company. Such accounting and statements shall be prepared under the direction of the Administrative Members with the consent of a Voting Majority. Upon such final accounting, the Company shall terminate and an authorized person, appointed pursuant to Section 2.7, shall cancel the Certificate in accordance with the Act. 12.3 NO FURTHER CLAIM. Upon dissolution, each Member shall look solely to the assets of the Company for the return of its Capital Contributions, and if the Company's -26- property remaining after payment or discharge of the debts and liabilities of the Company, including debts and liabilities owed to one or more of the Members, is insufficient to return the aggregate Capital Contributions of each Member, such Members shall have no recourse against the Company or any other Member except to the extent that Member has received Distributions in excess of those to which such Member was entitled to under the terms of this Agreement. 12.4 NO ACTION FOR DISSOLUTION. The Members acknowledge that irreparable damage would be done to the Company if any Member should bring an action in court to dissolve the Company under circumstances where dissolution is not required by Section 12.1. This Agreement has been drawn carefully to provide fair treatment of all parties and equitable payment in liquidation of the Interests of all Members. Accordingly, except where the Company has not been liquidated as required by Section 12.1 and except as specifically provided in Section 18-802 of the Act, each Member hereby waives and renounces its right to initiate legal action to seek dissolution or to seek the appointment of a receiver or trustee to liquidate the Company. ARTICLE 13 INDEMNIFICATION 13.1 GENERAL. Neither the Administrative Members nor any holder of Class B Units nor any director, officer, partner, stockholder, affiliate, fiduciary, agent, advisor, attorney, controlling person or employee of the Administrative Members or any holder of Class B Units, nor any person serving at the request of the Company as a director, officer, employee, partner, trustee or independent contractor of another corporation, partnership, limited liability company, joint venture, trust or other enterprise (all of the foregoing persons and entities being referred to collectively as "Indemnified Parties" and individually as an "Indemnified Party") shall be liable to the Company or any Member for any act or omission suffered or taken by it that is not in material violation of this Agreement and does not constitute fraud, gross negligence or willful misconduct, and with respect to any criminal action or proceeding, without reasonable cause to believe that its conduct was unlawful. 13.2 INDEMNIFICATION. To the maximum extent permitted by applicable law, each Indemnified Party shall be fully protected and indemnified by the Company out of Company assets against all liabilities and losses (including amounts paid in respect of judgments, fines, penalties or settlement of litigation, and legal fees and expenses reasonably incurred in connection with any pending or threatened litigation or proceeding) suffered by virtue of its serving as an Indemnified Party with respect to any action or omission suffered or taken that is not in material violation of this Agreement and does not constitute fraud, gross negligence or willful misconduct, and with respect to any criminal action or proceeding, without reasonable cause to believe its conduct was unlawful. The Company may, with the consent of a Voting Majority, advance expenses, including legal fees, for which any Indemnified Party would be entitled by this Agreement to be indemnified upon receipt of an unsecured undertaking by such -27- Indemnified Party to repay such advances if it is ultimately determined by a court of proper jurisdiction that indemnification for such expenses is not permitted by law or authorized by this Agreement. Each Indemnified Party may consult with recognized, outside legal counsel selected by the Company, and any action or omission taken or suffered in good faith in reliance and accordance with the opinion or advice of such counsel shall be conclusive evidence that such action or omission did not materially violate this Agreement, did not constitute fraud, gross negligence or willful misconduct, and with respect to any criminal action or proceeding, was suffered or taken without reasonable cause to believe its conduct was unlawful. Unless there is a specific finding of fraud, gross negligence, willful misconduct or reasonable cause to believe that its conduct was unlawful (or where such a finding is an essential element of a judgment or order), the termination of any action, suit or proceeding by judgment, order or settlement, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption for the purposes of this Section 13.2 that the person or entity in question acted fraudulently, was grossly negligent or engaged in willful misconduct, or with respect to any criminal action or proceeding, had reasonable cause to believe that its conduct was unlawful. ARTICLE 14 REPRESENTATIONS BY THE MEMBERS Each Member hereby represents and warrants to, and agrees with, the other Member or Members and the Company as set forth below. 14.1 INVESTMENT INTENT. It is acquiring its Interest with the intent of holding the same for investment for its own account and without the intent or a view of participating directly or indirectly in any distribution of such Interests within the meaning of the Securities Act or any applicable state securities laws. 14.2 SECURITIES REGULATION. It is an accredited investor as such term is defined in Regulation D promulgated pursuant to Section 4(2) of the Securities Act. It acknowledges and agrees that its Interest is being issued and sold in reliance on the exemption from registration contained in Section 4(2) of the Securities Act and exemptions contained in applicable state securities laws, and that its Interest cannot and will not be sold or transferred except in a transaction that is exempt under the Securities Act and those state acts or pursuant to an effective registration statement under the Securities Act and those state acts or in a transaction that is otherwise in compliance with the Securities Act and those state acts. It understands that it has no contractual right for the registration under the Securities Act of its Interest for public sale and that, unless its Interest is registered or an exemption from registration is available, its Interests may be required to held indefinitely. 14.3 KNOWLEDGE AND EXPERIENCE. It has such knowledge and experience in financial, tax, and business matters as to enable it to evaluate the merits and risks of its investment in the Company and, through its Interest in the Company, in HF Holdings, and to make informed -28- investment decisions with respect thereto. It has, based on its own investigation of HF Holdings, made its own independent analysis of the likelihood of success of the Company's investments in HF Holdings. 14.4 INDEPENDENT INVESTMENT DECISION. It acknowledges that it has independently and without reliance upon the Administrative Members, made its own analysis and decision to enter into this Agreement and to make the investments provided for hereunder. It acknowledges that the Administrative Members have not acted as investment advisers with respect to it in connection with its investment in the Company or the investments contemplated by the Company and that the Administrative Members have provided no advice or information with respect to the value of an investment in the Company or in the investments contemplated by the Company or with respect to the advisability of investing in, purchasing or selling an Interest in the Company or in the investments contemplated by the Company. Each Member represents to the Administrative Members that such Member will continue to make its own independent analysis and other decisions in taking or not taking action under this Agreement, including without limitation decisions relating to the disposition of the Company's investments in HF Holdings. Each Member expressly acknowledges that neither the Administrative Members nor any of their officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to such Member in connection with its investment in the Company or the investments contemplated by the Company, and no act by the Administrative Members taken under this Agreement or any other document, shall be deemed to constitute any representation or warranty by the Administrative Members to such Member in connection with its investment in the Company or the investments contemplated by the Company. Except for notices, reports and other documents expressly required to be furnished to each Member by the Administrative Members under this Agreement, the Administrative Members shall not have any duty or responsibility to provide any Member with any information concerning the business, operations, property, condition, financial or otherwise, of HF Holdings which may come into the possession of the Administrative Members or any of their officers, directors, employees, agents, attorneys-in-fact or Affiliates. 14.5 ECONOMIC RISK. It is able to bear the economic risk of its investment in the Company, confirms that it has no current need for cash from its investment in the Company in order to service any of its other obligations whether such other obligations were used to finance its investment in the Company or for other purposes and recognizes that there is a reasonable possibility of the loss of all or a substantial portion of its investment in the Company. 14.6 BINDING AGREEMENT. It has all requisite power and authority to enter into and perform this Agreement and that this Agreement is and will remain its valid and binding agreement, enforceable in accordance with its terms (subject, as to the enforcement of remedies, to any applicable bankruptcy, insolvency, or other laws affecting the enforcement of creditors' rights). -29- 14.7 TAX POSITION. Unless it provides prior written notice to the Company, it will not take a position on its federal or state income tax return, in any claim for refund, or in any administrative or legal proceedings that is inconsistent with the characterization of the Company as a partnership for federal and state income tax purposes, any information return filed by the Company or the provisions of this Agreement. 14.8 INFORMATION. It has received all documents, books, and records pertaining to an investment in the Company requested by it. It has had a reasonable opportunity to ask questions of and receive answers concerning the Company, and all such questions have been answered to its satisfaction. ARTICLE 15 COMPANY REPRESENTATIONS In order to induce the Members to enter into this Agreement and to make the Capital Contributions contemplated hereby, the Company hereby represents and warrants to each Member as follows: 15.1 LEGAL EXISTENCE. The Company is a duly formed and validly existing limited liability company under the Act and the Certificate has been duly filed as required by the Act. The Company has all necessary power and authority under the Act to issue the Interests to be issued to the Members hereunder. 15.2 VALID ISSUANCE. When an Interest is issued to the Member as contemplated by this Agreement and the Capital Contributions required to be made by such Member are made, the Interest issued to the Member will be duly and validly issued and except as specifically provided in the Agreement, no liability for any additional capital contributions or for any obligations of the Company will attach thereto. 15.3 OPTIONS, ETC. Except as set forth in this Agreement, the Company does not have outstanding (a) any rights or options to subscribe for or purchase any Interests in the Company, (b) any warrants or other agreements providing for or requiring the issuance of Interests in the Company to any Person, or (c) any obligation to purchase or otherwise acquire any Interests in the Company. ARTICLE 16 MISCELLANEOUS 16.1 ADDITIONAL DOCUMENTS. At any time and from time to time after the date of this Agreement, upon the request of the Administrative Members with the consent of a Voting Majority, each Member shall do and perform, or cause to be done and performed, all such additional acts and deeds, and shall execute, acknowledge, and deliver, or cause to be -30- executed, acknowledged, and delivered, all such additional instruments and documents, as may be required to effectuate the purposes and intent of this Agreement. 16.2 GENERAL. This Agreement: (a) shall be binding upon the executors, administrators, estates, heirs, and legal successors and assigns of the Members; (b) shall be governed by and construed in accordance with the domestic substantive laws of the State of Delaware without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction; (c) may be executed in more than one counterpart as of the day and year first above written; and (d) contains the entire contract among the Members as to the subject matter hereof. The waiver of any of the provisions, terms, or conditions contained in this Agreement shall not be considered as a waiver of any of the other provisions, terms, or conditions hereof. 16.3 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or receipt (which may be evidenced by a return receipt if sent by registered mail or by signature if delivered by courier or delivery service), addressed as set forth below, or at such other address as such Person shall have furnished to the Company in writing as the address to which notices are to be sent hereunder: (a) if to any Member (other than the Administrative Members) to such Member at the address of such Member in the records of the Company, and (b) if to an Administrative Member, to such Administrative Member at ICON Health & Fitness, Inc., 875 South Main Street, Logan, Utah 84321. 16.4 APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to the conflict of laws principles thereof. 16.5 CONSENT TO JURISDICTION. Each party to this Agreement, by its execution hereof, (a) hereby irrevocably submits to the exclusive jurisdiction of the state courts of the State of New York sitting in the County of New York or the United States District Court for the Southern District of New York for the purpose of any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof, (b) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, and agrees not to allow any of its subsidiaries to assert, by way of motion, as a defense or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceeding brought in one of the above-named courts is improper, or that this Agreement or the subject matter hereof or thereof may not be enforced in or by such court and (c) hereby agrees not to commence or maintain any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof or thereof other than before one of the above-named courts nor to make any motion or take any other action seeking or intending to cause the -31- transfer or removal of any such action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation to any court other than one of the above-named courts whether on the grounds of inconvenient forum or otherwise. Notwithstanding the foregoing, to the extent that any party hereto is or becomes a party in any litigation in connection with which it may assert indemnification rights set forth in this agreement, the court in which such litigation is being heard shall be deemed to be included in clause (a) above. Each party hereto hereby consents to service of process in any such proceeding in any manner permitted by New York law, and agrees that service of process by registered or certified mail, return receipt requested, at its address specified pursuant to Section 16.3 hereof is reasonably calculated to give actual notice. The provisions of this Section 16.5 shall not restrict the ability of any party to enforce in any court any judgment obtained in the federal or state courts of the State of New York. 16.6 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION, CLAIM, CAUSE OF ACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE), INQUIRY, PROCEEDING OR INVESTIGATION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING. EACH PARTY HERETO ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE OTHER PARTIES HERETO THAT THIS SECTION 16.6 CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH THEY ARE RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 16.6 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. 16.7 GENDER AND NUMBER. Whenever required by the context, as used in this Agreement the singular number shall include the plural, the plural shall include the singular, and all words herein in any gender shall be deemed to include the masculine, feminine and neuter genders. 16.8 SEVERABILITY. If any provision of this Agreement is determined by a court to be invalid or unenforceable, that determination shall not affect the other provisions hereof, each of which shall be construed and enforced as if the invalid or unenforceable portion were not contained herein. That invalidity or unenforceability shall not affect any valid and enforceable application thereof, and each said provision shall be deemed to be effective, operative, made, entered into or taken in the manner and to the full extent permitted by law. -32- 16.9 HEADINGS. The headings used in this Agreement are used for administrative convenience only and do not constitute substantive matter to be considered in construing the terms of this Agreement. 16.10 TAX STATUS. The Members intend that the Company be treated as a partnership for federal and state income tax purposes and the Company shall file all tax returns on the basis consistent therewith. 16.11 NO THIRD PARTY RIGHTS. The provisions of this Agreement are for the benefit of the Company, the Members and permitted transferees described in Article 9, and no other Person, including creditors of the Company shall have any right or claim against the Company or any Member by reason of this Agreement or any provision hereof or be entitled to enforce any provision of this Agreement. [The remainder of this page has intentionally been left blank.] -33- [HF Investment Holdings, LLC Agreement] IN WITNESS WHEREOF, the parties have executed this Limited Liability Company Agreement as of the day and year first set forth above. BAIN CAPITAL FUND IV, L.P. By Bain Capital Partners IV, L.P., a Delaware Limited Partnership, its general partner By Bain Capital Investors, Inc., its general partner By_____________________________________ Title: BAIN CAPITAL FUND IV-B, L.P. By Bain Capital Partners IV, L.P., a Delaware Limited Partnership, its general partner By Bain Capital Investors, Inc., its general partner By______________________________________ Title: BCIP ASSOCIATES By_______________________________________ Title: a general partner BCIP TRUST ASSOCIATES, L.P. By_______________________________________ Title: a general partner [HF Investment Holdings, LLC Agreement] ____________________________________ Gary Stevenson ____________________________________ Scott Watterson [HF Investment Holdings, LLC Agreement] INVERNESS/PHOENIX CAPITAL LLC By_____________________________________ Title: Managing Director [HF Investment Holdings, LLC Agreement] ____________________________________ Stanley C. Tuttleman [HF Investment Holdings, LLC Agreement] ____________________________________ Lee Ming Tsung [HF Investment Holdings, LLC Agreement] ____________________________________ Wen-Chung Ko EXHIBIT 1 DEFINED TERMS "ACT" shall mean the Delaware Limited Liability Company Act (6 DEL. C. ss. 18-101, ET SEQ.) as amended and in effect from time to time. "ADMINISTRATIVE MEMBER" is defined in Section 8.1. "AFFILIATE" shall mean, with respect to any specified Person, any Person that directly or through one or more intermediaries controls or is controlled by or is under common control with the specified Person. As used in this definition, the term "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 ownership of voting securities, by contract or otherwise. "AFFILIATED FUND" shall mean any limited partnership or other Person formed for the purpose of investing in other companies or businesses and for which Bain Capital Investors, Inc., a Delaware corporation, or any of its Affiliates, acts as a general partner or otherwise has the right to direct the voting of shares of corporations in which such limited partnership or other Person invests. "AGREEMENT" shall mean the Amended and Restated Limited Liability Company Agreement of the Company dated as of September 27, 1999, as amended from time to time. "ASSET VALUE" of any property of the Company shall mean its adjusted basis for federal income tax purposes unless: (1) the property was accepted by the Company as a contribution to capital at a value different than its adjusted basis in which event the initial Asset Value for such property shall mean the gross fair market value of the property agreed to at the time of contribution by the Administrative Members, with the consent of a Voting Majority, and the contributing Member; (2) as a consequence of the issuance of additional Units or the redemption of all or part of the Interest of a Member, the property of the Company is revalued in accordance with Section 3.4. As of any date references to the "then prevailing Asset Value" of any property shall mean the Asset Value last determined for such property less the depreciation, amortization and cost recovery deductions taken into account in computing Net Profit or Net Loss in fiscal periods subsequent to such prior determination date. "AVAILABLE CASH" is defined in Section 5.1.1. "BAIN" shall mean Bain Capital Fund IV, L.P. "BAIN MEMBERS" shall mean Bain, Bain Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust Associates, L.P. "BHCA" shall have the meaning specified in the CSFB Warrant(s). "BUSINESS DAY" shall mean a day when national banks are open for business in Boston and New York City. "CAPITAL ACCOUNT" is defined in Section 3.3. "CAPITAL CONTRIBUTION" shall mean with respect to any Member, the amount of cash and the fair market value (as agreed upon by the contributing Member and the Administrative Members, with the consent of a Voting Majority, at the time of contribution) of any other property contributed to the Company with respect to the Interest held by such Member. "CERTIFICATE" shall mean the Certificate of Formation of the Company filed on September 1, 1999 and any and all amendments thereto and restatements thereof filed on behalf of the Company as permitted hereunder with the office of the Secretary of State of the State of Delaware. "CLASS" is defined in Section 3.1. "CLASS A PERCENTAGE" shall mean that percentage equal to the PRODUCT OF (a) a fraction, (I) the numerator of which is 4.4823% ((4.3333%/96.6667%) multiplied by (10,000,000/10,002,854)) and (II) the denominator of which is the percentage of outstanding shares of HF Holdings common stock immediately after the Closing Date represented by shares held by the Company that are not subject to either the Junior Management Option or the CSFB Option (treating as outstanding shares of HF Holdings common stock for purposes of this definition (i) all shares that would be received upon exercise of the warrants issued on the Closing Date in exchange for (A) 13% Senior Subordinated Notes due 2002 of Icon Health & Fitness, Inc., (B) 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc. and (C) 14% Senior Discount Notes due 2006 of ICON Fitness Corporation and (ii) the shares that would be received upon conversion of that certain note issued on the Closing Date by HF Holdings to CSFB and having a maturity date of September 27, 2011) AND (b) 100. "CLASS A UNIT", "CLASS B UNIT" and "CLASS C UNIT" are each defined in Section 3.1. "CLOSING DATE" shall mean September 27, 1999. -2- "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the corresponding provisions of any future federal tax law. "COMPANY" shall mean the limited liability company formed pursuant to the Act and this Agreement and by filing the Certificate in accordance with the Act. "CSFB" is defined in Section 3.7. "CSFB ACCOUNT DISTRIBUTION FRACTION" means, in respect of a CSFB Warrant Account, a fraction, the numerator of which is the number of HF Units received upon the exercise of all or a portion of the CSFB Warrant in respect of which such account was established, and the denominator of which is the aggregate number of HF Units for which the CSFB Warrant in respect of which such Account was established was exercisable as of immediately prior to such exercise. "CSFB OPTION" shall mean that certain option granted by the Company as of the Closing Date to CSFB pursuant to Section 5.2 of the Stockholders Agreement. "CSFB WARRANT" is defined in Section 3.7. "CSFB WARRANT ACCOUNT" shall mean an account of the Company established and maintained for the purpose of holding all non-cash assets allocated to such account pursuant to Section 5.1.3(b), and all earnings in respect thereof, until such time as distributions from such account are required to be made pursuant to Section 5.1.4(b) and Section 5.1.4(c). No holder of a CSFB Warrant in respect of which a CSFB Warrant Account has been established shall have any right to receive distributions from the CSFB Warrant Account except as contemplated by Section 5.1.4(b) and Section 5.1.4(c) and, until distributed in accordance with Section 5.1.4(b) or Section 5.1.4(c), all assets of such account shall constitute assets of the Company and remain fully subject to the claims of the Company's creditors. All earnings in respect of the assets of the account shall be credited to the account. "DISTRIBUTION" shall mean the amount of cash and the fair market value (as agreed upon by the Member to whom the Distribution is made and the Administrative Members, with the consent of a Voting Majority, at the time of distribution) of any other property distributed to a Member in respect of the Member's Interest in the Company. "FISCAL YEAR" shall mean the fiscal year of the Company which shall end on December 31 in each year or on such other date in each year as is required by Code Section 706 and the regulations thereunder. "FREE SHARES" is defined in Section 5.1.1. -3- "HF CLASS A UNIT", "HF CLASS B UNIT" and "HF CLASS C UNIT" are each defined in Section 3.1. "HF HOLDINGS" shall mean HF Holdings, Inc., a Delaware corporation. "HF UNITS" shall mean HF Class A Units, HF Class B Units and HF Class C Units. "HOLDER TRANSFEREE" shall have the meaning specified in the CSFB Warrant(s). "IBA" shall have the meaning specified in the CSFB Warrant(s). "IMPERMISSIBLE PORTION" is defined in Section 5.1.3(b). "INDEMNIFIED PERSONS" is defined in Section 13.2. "INTEREST" shall mean the entire interest of a Member in the capital and profits of the Company, including the right of such Member to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all the terms and provisions of this Agreement. Each Member's Interest shall be represented by Class A, Class B and/or Class C Units. "JUNIOR MANAGEMENT OPTION" shall mean each option granted by the Company as of the Closing Date to a management-level employee (other than Scott Watterson or Gary Stevenson) of ICON Health and Fitness, Inc. pursuant to Section 5.1 of the Stockholders Agreement. "LIQUIDITY EVENT" shall have the meaning set forth in the Stockholders Agreement. "MEMBERS OF THE IMMEDIATE FAMILY" shall mean, with respect to any individual, each spouse, parent, brother, sister or child of such individual, each spouse of any such Person, each child of any of the aforementioned Persons, each trust created solely for the benefit of one or more of the aforementioned Persons and each custodian or guardian of any property of one or more of the aforementioned Persons in his capacity as such custodian or guardian. "MEMBERS" (i) shall mean the Persons listed as members on the signature page to the Agreement and any other Person that both acquires an Interest in the Company and is admitted to the Company as a Member pursuant to the Agreement and (ii) for purposes of Sections 3.3, 3.4, 3.5, 3.6, 5.3, 5.4, 5.5, 5.6, 5.7, 6.2, 6.4, 6.5, 10.3, 10.4 and 11.1, shall also mean any permitted holder of a CSFB Warrant, which holder shall be treated, for purposes of these sections, as holding a number of HF Units equal to the number of HF Units for which the CSFB Warrant held by it is then exercisable and shall be treated for purposes of these Sections as having made a Capital Contribution equal to the purchase price for the CSFB Warrant held by it. -4- "NET PROFIT" and "NET LOSS" are defined in Section 5.5. "OPTION SHARES" is defined in Section 5.1.1. "ORIGINAL MEMBERS" shall mean Gary Stevenson, Scott Watterson, the Bain Members, each other Member becoming a party to this Agreement on the date hereof and, for purposes of Article 5 hereof, each transferee thereof. "PERSON" shall mean an individual, partnership, joint venture, association, corporation, trust, estate, limited liability company, limited liability partnership, or any other legal entity. "RELEASED SHARES" is defined in Section 5.1.1. "RESIDUAL PERCENTAGE" shall mean one hundred percent (100%) minus the Class A Percentage. "RIGHTS" is defined in Section 3.7. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SHORT-TERM INVESTMENTS" shall mean (i) repurchase agreements arranged by Brown Brothers Harriman & Co. on behalf of the Company and secured by direct obligations of, or obligations which are guaranteed by, the United States of America, or (ii) such other investments determined by a Voting Majority. The Administrative Members shall not have discretion with respect to the terms of, or counterparties to, any repurchase agreements entered into by the Company referred to in the foregoing clause (i). Notwithstanding anything contained herein to the contrary, in no event shall any investment in HF Holdings be deemed to be a "Short-Term Investment" for purposes of this Agreement. "STOCKHOLDERS AGREEMENT" shall mean the Stockholders Agreement dated the Closing Date among HF Holdings, ICON Health & Fitness, Inc., the Company and certain other equityholders of HF Holdings. "SUB-CAPITAL ACCOUNT" is defined in Section 3.3. "SUBSCRIPTION AGREEMENT" shall mean the Subscription Agreement dated the Closing Date to which the Company is party relating to the purchase of stock of HF Holdings. "TAX MATTERS MEMBER" is defined in Section 6.1. "TRANSFER" is defined in Section 9.1. "UNITS" is defined in Section 3.1. -5- "UNRETURNED INVESTMENT" shall mean, as to each Member as of any date, the EXCESS OF (a) (I) the aggregate amount of Capital Contributions made by such Member (or such Member's predecessor in interest) on or before such date MULTIPLIED BY (II) the percentage of outstanding shares of HF Holdings common stock held by the Company immediately after the Closing Date that is not subject to a Junior Management Option or the CSFB Option OVER (b) the amount allocated (or deemed to be allocated pursuant to Section 5.1.3) to such Member on or before such date pursuant to Section 5.1.2(b)(i). "VOTING MAJORITY" shall mean Members who, in the aggregate, hold more than 50% of the aggregate number of Class A Units and Class B Units; PROVIDED, HOWEVER, that if on the 60th day following the date of this Agreement, the Bain Members hold Units representing more than $10 million (at cost), "Voting Majority" shall mean Bain. "VOTING MEMBERS" shall mean Members holding Class A Units or Class B Units. -6- SCHEDULE I
UNITS - ------------------------------------------------------------------------------------------------------- HF HF HF Capital Class A Class B Class C Name of Member Contributions Units Units Units - ------------------------------------------------------------------------------------------------------- Bain Capital Fund IV, $6,259,929.58 -- 62,599.2958 -- L.P. - ------------------------------------------------------------------------------------------------------- Bain Capital Fund IV-B, $7,163,890.42 -- 71,638.9042 -- L.P. - ------------------------------------------------------------------------------------------------------- BCIP Associates $1,055,475.00 -- 10,554.7500 -- - ------------------------------------------------------------------------------------------------------- BCIP Trust Associates, $520,705.00 -- 5,207.0500 -- L.P. - ------------------------------------------------------------------------------------------------------- Scott Watterson $2,500,000 25,000 -- -- - ------------------------------------------------------------------------------------------------------- Gary Stevenson $2,500,000 25,000 -- -- - ------------------------------------------------------------------------------------------------------- Inverness/Phoenix $2,000,000 -- -- 20,000 - ------------------------------------------------------------------------------------------------------- Capital LLC - ------------------------------------------------------------------------------------------------------- Lee Ming Tsung $1,000,000 -- -- 10,000 - ------------------------------------------------------------------------------------------------------- Wen-Chung Ko $1,000,000 -- -- 10,000 - ------------------------------------------------------------------------------------------------------- Stanley C. Tuttleman $1,000,000 -- -- 10,000 - ------------------------------------------------------------------------------------------------------- Total $25,000,000 50,000 150,000 50,000 - -------------------------------------------------------------------------------------------------------
RIGHTS - ----------------------------------------------------------------------------------------------- Exercise Other Option Price(if Terms Premium/Purch any) Name of Holder ase Price - ----------------------------------------------------------------------------------------------- Credit Suisse First $5,000,000 $500 Warrant for purchase of 50,000 Boston Management Class C Units having the terms Corporation more fully set forth in the CSFB Warrant attached to the Agreement as Exhibit 2. - -----------------------------------------------------------------------------------------------
Effective as of: September 27, 1999 THIS NOTE WAS ISSUED IN A PRIVATE PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL, SATISFACTORY TO THE ISSUER, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. IN ADDITION, THIS NOTE IS SUBJECT TO RESTRICTIONS ON VOTING AND TRANSFER AND REQUIREMENTS OF SALE AND OTHER PROVISIONS AS SET FORTH IN THE STOCKHOLDERS AGREEMENT DATED AS OF SEPTEMBER 27, 1999, AS AMENDED AND IN EFFECT FROM TIME TO TIME, AND CONSTITUTES A CSFB SECURITY AS DEFINED IN SUCH STOCKHOLDERS AGREEMENT. THE COMPANY WILL FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER OF THIS NOTE WITHOUT CHARGE UPON WRITTEN REQUEST. HF HOLDINGS, INC. 0% CONVERTIBLE SUBORDINATED NOTE DUE SEPTEMBER 27, 2011 No. R-2 $7,500,000 September 27, 1999 HF HOLDINGS, INC. (together with its successors, the "Company"), a Delaware corporation, for value received, hereby promises to pay to CREDIT SUISSE FIRST BOSTON CORPORATION or registered assigns the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000) on September 27, 2011. Payment of principal shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts to the registered holder hereof at the address shown in the register maintained by the Company for such purpose, in the manner provided in the Note Agreement (defined below). This Note is one of an issue of Notes of the Company issued in an aggregate principal amount limited to Seven Million Five Hundred Thousand Dollars ($7,500,000) pursuant to the Amended and Restated Note Agreement (as may be amended, restated or otherwise modified from time to time, the "Note Agreement"), dated as of September 27, 1999, between the Company and the purchaser listed on Annex 1 thereto. The holder of this Note is entitled to the benefits of the Note Agreement. This Note is subject to the terms of the Note Agreement, and such terms are incorporated herein by reference. Capitalized terms used herein and not defined herein have the meanings specified in the Note Agreement. All of the principal of this Note may, under certain circumstances, be declared due and payable in the manner and with the effect provided in the Note Agreement. This Note is a registered Note and is transferable only by surrender at the principal office of the Company as specified in the Note Agreement, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of this Note or its attorney duly authorized in writing. The obligations evidenced by this Note are subordinated to the Senior Debt on the terms provided in the Note Agreement. THIS NOTE AND THE NOTE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. HF HOLDINGS, INC. By: /s/ SCOTT R. WATTERSON ---------------------------- Name: Scott R. Watterson Title: Chairman & CEO [FORM OF NOTICE OF CONVERSION] To HF HOLDINGS, INC. The undersigned elects to convert $______________________ in principal amount of the accompanying Note into the number of shares of Common Stock of HF Holdings, Inc. issuable upon the conversion of such principal amount of such Note, and requests that the certificates for such shares be issued in the name of: - ------------------------------------------------------------------------ (Please print or type name, address and zip code.) - ------------------------------------------------------------------------ (Please insert social security number or tax ID number If such principal amount of the accompanying Note shall not be the entire principal amount of the accompanying Note, a new Note or Notes for the balance remaining of such Note shall be registered in the name of and delivered to: - ------------------------------------------------------------------------ (Please print or type name, address and zip code.) - ------------------------------------------------------------------------ (Please insert social security number or tax ID number The undersigned elects that the conversion of the accompanying Note shall be deemed to have been effected upon: |_| the date of, and at the time immediately preceding, the occurrence of the "Triggering Event" giving rise to such conversion right; or |_| the Business day on which the accompanying Note shall have been surrendered to the Company. Dated: ____________________, _________ [HOLDER] By:_________________________ NOTICE The signature to the foregoing Notice of Conversion must correspond to the name as written upon the face of the accompanying Note or any prior assignment thereof in every particular, without alteration or enlargement or any change whatsoever. EX-10.5 13 EXHIBIT 10.5 Exhibit 10.5 SUBSCRIPTION AND STOCK PURCHASE AGREEMENT This Subscription and Stock Purchase Agreement (the "Agreement") is entered into as of the 27th day of September, 1999, by and between HF Holdings, Inc., a Delaware corporation (the "Company"), and HF Investment Holdings, LLC, a Delaware limited liability company ("HF LLC"). WHEREAS, the Company and ICON Health & Fitness, Inc. ("Health & Fitness") have made an exchange offer, pursuant to the Exchange Offer and Consent Solicitation, dated July 30, 1999, as supplemented (the "Exchange Offer"), for all outstanding 13% Senior Subordinated Notes due 2002 of Health & Fitness ("13% Notes"), 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc. ("15% Notes"), and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation ("14% Notes"); WHEREAS, HF LLC, as the "Non-CSFB Investors LLC" under the term sheet, dated July 8, 1999, as amended and attached to the Exchange Offer as Annex H (the "Term Sheet"), wishes to purchase from the Company, and the Company wishes to sell and issue to HF LLC, shares of the Company's common stock, par value $.001 per share ("Common Stock"), upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties to this Agreement, intending to be legally bound, mutually agree as follows: ARTICLE I Purchase and Sale of Shares 1.1 Sale and Issuance of Shares. Subject to the terms and conditions of this Agreement, HF LLC does hereby subscribe for and agrees to purchase at the Closing (as defined below), and the Company does hereby agree to sell to HF LLC at the Closing, five million one hundred sixty thousand thirty-five (5,160,035) shares (the "Shares") of Common Stock. 1.2 Purchase Price. In consideration for the sale of the Shares by the Company to HF LLC hereunder, HF LLC shall pay to the Company an amount (the "Purchase Price") equal to thirty million dollars ($30,000,000). 1.3 Closing. The purchase, sale and issuance of the Shares hereunder shall occur at a closing (the "Closing") to be held immediately prior to, and conditioned upon, the closing of the transactions contemplated by the Term Sheet (the "ICON Restructuring"). At the Closing, and upon payment of the Purchase Price, the Company shall issue and deliver to HF LLC, or its nominee, a certificate representing the Shares. Payment of the Purchase Price shall be made at the Closing by delivery of a wire transfer of same day funds denominated in U.S. dollars, unless otherwise mutually agreed in writing with the Company. ARTICLE II Representations and Warranties of the Company 2.1 Organization and Standing. The Company represents and warrants that it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. 2.2 Authorization. The Company represents and warrants that all corporate action on the part of the Company necessary for the authorization, execution, delivery and performance of this Agreement by the Company, and for the authorization, issuance and delivery of the Shares being sold under this Agreement, has been taken. This Agreement, when executed and delivered by all parties hereto, shall constitute the valid and legally binding obligation of the Company, except to the extent the enforceability thereof may be limited by bankruptcy laws, insolvency laws, reorganization laws, moratorium laws or other laws affecting creditors' rights generally or by general equitable principles. 2.3 Validity of Shares. The Company represents and warrants that the Shares, when sold, issued and delivered in accordance with the terms of this Agreement, shall be duly and validly issued, fully paid and nonassessable, and free and clear of all liens, encumbrances and restrictions of any kind, except as contemplated hereunder and under the Stockholders Agreement (the "Stockholders Agreement"), attached as Annex C to the Exchange Offer. ARTICLE III Representations, Warranties and Agreements of HF LLC 3.1 Organization and Standing. HF LLC represents and warrants that it is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted. 3.2 Authorization. HF LLC represents and warrants that all action on the part of HF LLC necessary for the authorization, execution, delivery and performance of this Agreement by HF LLC has been taken, and that this Agreement, when executed and delivered by all parties hereto, shall constitute the valid and legally binding obligation of HF LLC, -2- except to the extent the enforceability thereof may be limited by bankruptcy laws, insolvency laws, reorganization laws, moratorium laws or other laws affecting creditors' rights generally or by general equitable principles. 3.3 Investment Representations and Undertakings. (a) HF LLC hereby represents that (i) the Shares will be acquired by it for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof in violation of applicable federal and state securities laws, and (ii) it has no current intention of selling or otherwise distributing the same in violation of applicable federal and state securities laws. By executing this Agreement, HF LLC further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell or otherwise transfer to such person, or to any other person, any of the Shares in violation of applicable federal and state securities laws; (b) HF LLC understands that the Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act") on the basis that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the 1933 Act pursuant to Section 4(2) thereof and regulations issued thereunder, and that the Company's reliance on such exemption is in part predicated on representations of HF LLC set forth in this Agreement; (c) HF LLC represents that it has such knowledge in financial and business matters as to be capable of evaluating the merits and risks of its investment and that it is an "accredited investor" as such term is defined in Regulation D promulgated pursuant to Section 4(2) of the 1933 Act. HF LLC further represents that it has had access, during the course of the transactions contemplated hereby and prior to its purchase of Shares, to the same kind of information that is specified in Part I of a registration statement under the 1933 Act and that it has had, during the course of the transactions contemplated hereby and prior to its purchase of the Shares, the opportunity to ask questions of, and receive answers from, the Company (and Health & Fitness) concerning the terms and conditions of the Exchange Offer and to obtain additional information (to the extent the Company (and Health & Fitness) possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access. HF LLC understands that no federal or state agency has passed upon this investment or upon the Company, nor has any such agency made any finding or determination as to the fairness of this investment; (d) HF LLC understands that the Shares may not be sold, transferred or otherwise disposed of without registration under the 1933 Act or an exemption therefrom and, in the absence of an effective registration statement covering the Shares -3- or an available exemption from registration under the 1933 Act, that the Shares may have to be held indefinitely and, as a consequence, that HF LLC must be prepared to bear the economic risk of this investment for an indefinite period of time. In that regard, HF LLC understands and acknowledges that, except as may be provided in the Stockholders Agreement, the Company is under no duty or obligation, contractual or otherwise, to register the Shares under the 1933 Act or to comply with the terms of any exemption thereunder. In particular, HF LLC acknowledges that it is aware that the Shares may not be sold pursuant to Rule 144 promulgated under the 1933 Act unless all of the conditions of that Rule are met. Among the current conditions for use of Rule 144 by certain holders is the availability to the public of current information about the Company. Such information is not now available, and the Company has no current plans to make such information available. HF LLC represents that, in the absence of an effective registration statement covering the Shares, it will sell, transfer or otherwise dispose of the Shares only in a manner consistent with its representations set forth herein and then only in accordance with the Stockholders Agreement; and (e) HF LLC also understands and acknowledges that the Stockholders Agreement imposes certain obligations with respect to and additional restrictions on transferability of the Shares and, that as a party to the Stockholders Agreement, that the certificates issued to it evidencing the Shares will bear certain legends, restricting transferability of the Shares, all as required by the Stockholders Agreement. ARTICLE IV Conditions to Obligations of HF LLC at Closing The obligations of HF LLC under Article I of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Company contained in Article II hereof shall be true and correct on and as of the Closing with the same force and effect as if they had been made at the Closing. 4.2 Performance. 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 on or before the Closing. 4.3 Restructuring Conditions. All conditions to the obligation of HF LLC to consummate the ICON Restructuring under the Term Sheet shall have been satisfied or waived. -4- ARTICLE V Conditions to the Obligations of the Company at Closing The obligations of the Company under Article I of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 5.1 Representations and Warranties. The representations and warranties of HF LLC contained in Article III hereof shall be true and correct on and as of the Closing Date with the same force and effect as if they had been made at the Closing. 5.2 Performance. HF LLC shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it on or before the Closing. 5.3 Restructuring Conditions. HF LLC shall have executed and delivered a counterpart copy of the Stockholders Agreement, and all other conditions to the obligation of the Company to consummate the ICON Restructuring under the Term Sheet shall have been satisfied or waived. ARTICLE VI Mutual Conditions Precedent The obligations of the Company and HF LLC under Article I of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 6.1 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall have been duly obtained and shall be effective. ARTICLE VII Miscellaneous 7.1 No Waiver; Modifications in Writing. This Agreement sets forth the entire understanding of the parties, and supersedes all prior agreements, arrangements and communications, whether oral or written, with respect to the subject matter hereof. No waiver of or consent to any departure from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and HF LLC. -5- 7.2 Taxes. The Company shall pay any and all stamp, transfer and other similar taxes payable or determined to be payable in connection with the execution and delivery of this Agreement and the original issuance of the Shares, but excluding all federal, state and local income or similar taxes, and shall save and hold HF LLC harmless from and against any and all liabilities with respect to or resulting from any delay in paying, or omission to pay, such taxes. 7.3 Counterparts. This Agreement may be executed in multiple counterparts, each of which, when executed and delivered, shall be deemed to be an original, but all of which taken together shall constitute one and the same Agreement. 7.4 Binding Effect; Assignment. The rights and obligations of HF LLC under this Agreement may not be assigned to any other person. Except as expressly provided in this Agreement, this Agreement shall not be construed so as to confer any right or benefit upon any person other than the parties to this Agreement, and their respective successors and permitted assigns. This Agreement shall be binding upon the Company and HF LLC, and their respective successors and permitted assigns. 7.5 Governing Law. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of Delaware as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies, but without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. 7.6 Severability of Provisions. Any provision of this Agreement which 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 or affecting the validity or enforceability of such provision in any other jurisdiction. 7.7 Headings. The Article and Section headings used or contained in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. 7.8 Injunctive Relief. Each of the parties to this Agreement hereby acknowledges that in the event of a breach by any of them of any material provision of this Agreement, the aggrieved party may be without an adequate remedy at law. Each of the parties therefore agrees that, in the event of a breach of any material provision of this Agreement, the aggrieved party may elect to institute and prosecute proceedings to enforce specific performance or to enjoin the continuing breach of such provision, as well as to obtain damages for breach of this Agreement. By seeking or obtaining any such relief, the aggrieved party will not be precluded from seeking or obtaining any other relief to which it may be entitled. -6- 7.9 Survival of Agreements, Representations and Warranties. All agreements, representations and warranties contained herein or made in writing by or on behalf of the Company or HF LLC, as the case may be, in connection with the transactions contemplated by this Agreement shall survive the execution and delivery of this Agreement and the sale and purchase of the Shares and payment therefor. [Remainder of page intentionally left blank] -7- WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as an instrument under seal, as of the date first above written. HF HOLDINGS, INC. By: /s/ S. Fred Beck ------------------------------------- Name: S. Fred Beck Title: Chief Financial Officer, Vice President & Treasurer HF INVESTMENT HOLDINGS, LLC By: /s/ Gary E. Stevenson ------------------------------------ Name: Gary E. Stevenson Title: Administrative Member -8- EX-10.6 14 EXHIBIT 10.6 Exhibit 10.6 AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT AGREEMENT entered into as of the 27th day of September, 1999, by and between HF Holdings, Inc., a Delaware corporation (the "COMPANY"), and Credit Suisse First Boston Corporation, a Massachusetts corporation ("CSFB"). WHEREAS, the Company and ICON Healthy & Fitness, Inc. ("HEALTH & FITNESS") have made an exchange offer, pursuant to the Exchange Offer and Consent Solicitation, dated July 30, 1999, as supplemented (the "EXCHANGE Offer"), for all outstanding 13% Senior Subordinated Notes due 2002 of Health & Fitness ("13% NOTES"), 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc. ("15% NOTES"), and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation ("14% NOTES"); WHEREAS, pursuant to that certain term sheet, dated July 8, 1999, as amended and attached to the Exchange Offer as Annex C (the "TERM SHEET"), CSFB wishes to purchase from the Company, and the Company wishes to sell and issue to CSFB, (i) shares of the Company's common stock, par value $.001 per share ("COMMON STOCK"), and (ii) convertible promissory notes of the Company, in each case upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties to this Agreement, intending to be legally bound, mutually agree as follows: ARTICLE I. PURCHASE AND SALE OF SECURITIES 1.1. SALE AND ISSUANCE OF SHARES. Subject to the terms and conditions of this Agreement, CSFB does hereby subscribe for and agrees to purchase at the Closing (as defined below), and the Company does hereby agree to sell to CSFB at the Closing, 643,754 shares (the "SHARES") of Common Stock. 1.2. PURCHASE OF CONVERTIBLE NOTES. Subject to the terms and conditions of this Agreement, CSFB does hereby agree to purchase at the Closing (as defined below), and the Company does hereby agree to sell to CSFB at the Closing, $7,500,000 principal amount of the Company's 0% Convertible Subordinated Notes Due September 27, 2011 (the "NOTES"). The Notes shall have the terms and provisions prescribed by the Amended and Restated Note Agreement ("NOTE AGREEMENT"), the form of which is attached to this Agreement as Exhibit A. 1.3. PURCHASE PRICE. In consideration for the sale of the Shares and the Notes by the Company to CSFB hereunder, CSFB shall pay to the Company an amount (the "PURCHASE PRICE") equal to ten million dollars ($10,000,000). 1.4. CLOSING. The purchase, sale and issuance of the Shares and the Notes shall occur at a closing (the "CLOSING") to be held simultaneously with the closing of the transactions contemplated by the Term Sheet (the "ICON RESTRUCTURING"). At the Closing, and upon payment of the Purchase Price, the Company shall issue and deliver to CSFB, or its nominee, one or more certificates representing the Shares and one or more Notes in the form prescribed by the Note Agreement. Payment of the Purchase Price shall be made at the Closing by wire transfer of same day funds denominated in U.S. dollars, unless otherwise mutually agreed in writing with the Company. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 2.1. ORGANIZATION AND STANDING. The Company represents and warrants that it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. 2.2. AUTHORIZATION. The Company represents and warrants that all corporate action on the part of the Company necessary for the authorization, execution, delivery and performance of this Agreement by the Company, and for the authorization, issuance and delivery of the Shares and Notes being sold under this Agreement, has been taken. This Agreement, when executed and delivered by all parties hereto, shall constitute the valid and legally binding obligation of the Company, except to the extent the enforceability thereof may be limited by bankruptcy laws, insolvency laws, reorganization laws, moratorium laws or other laws affecting creditors' rights generally or by general equitable principles. 2.3. VALIDITY OF SHARES. The Company represents and warrants that the Shares, when sold, issued and delivered in accordance with the terms of this Agreement, shall be duly and validly issued, fully paid and nonassessable, and free and clear of all liens, encumbrances and restrictions of any kind, except as contemplated hereunder and under the Stockholders Agreement ("STOCKHOLDERS AGREEMENT"), attached as Annex C to the Exchange Offer. 2.4. ENFORCEABILITY OF NOTES. The Note Agreement and the Notes, when executed and delivered by the parties thereto, shall constitute the valid and legally binding obligations of the Company, except to the extent the enforceability thereof may be limited by bankruptcy laws, insolvency laws, reorganization laws, moratorium laws or other laws affecting creditors' rights generally or by general equitable principles. ARTICLE III. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF CSFB 3.1. ORGANIZATION AND STANDING. CSFB represents and warrants that it is a corporation duly organized, validly existing and in good standing under the laws of 2 the Commonwealth of Massachusetts and has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted. 3.2. AUTHORIZATION. CSFB represents and warrants that all action on the part of CSFB necessary for the authorization, execution, delivery and performance of this Agreement by CSFB has been taken, and that this Agreement, when executed and delivered by all parties hereto, shall constitute the valid and legally binding obligation of CSFB, except to the extent the enforceability thereof may be limited by bankruptcy laws, insolvency laws, reorganization laws, moratorium laws or other laws affecting creditors' rights generally or by general equitable principles. 3.3. INVESTMENT REPRESENTATIONS AND UNDERTAKINGS. (a) CSFB hereby represents that (i) the Shares and the Notes will be acquired by it for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof in violation of applicable federal and state securities laws, and (ii) it has no current intention of selling or otherwise distributing the same in violation of applicable federal and state securities laws. By executing this Agreement, CSFB further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell or otherwise transfer to such person, or to any other person, any of the Shares or the Notes in violation of applicable federal and state securities laws; (b) CSFB understands that the Shares and the Notes have not been registered under the Securities Act of 1933, as amended (the "1933 ACT") on the basis that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the 1933 Act pursuant to Section 4(2) thereof and regulations issued thereunder, and that the Company's reliance on such exemption is in part predicated on representations of CSFB set forth in this Agreement; (c) CSFB represents that it has such knowledge in financial and business matters as to be capable of evaluating the merits and risks of its investment and that it is an "ACCREDITED INVESTOR" as such term is defined in Regulation D promulgated pursuant to Section 4(2) of the 1933 Act. CSFB further represents that it has had access, during the course of the transactions contemplated hereby and prior to its purchase of Shares and the Notes, to the same kind of information that is specified in Part I of a registration statement under the 1933 Act and that it has had, during the course of the transactions contemplated hereby and prior to its purchase of the Shares and the Notes, the opportunity to ask questions of, and receive answers from, the Company (and Health & Fitness) concerning the terms and conditions of the Exchange Offer and to obtain additional information (to the extent the Company (and Health & Fitness) possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to 3 which it had access. CSFB understands that no federal or state agency has passed upon this investment or upon the Company, no has any such agency made any finding or determination as to the fairness of this investment; (d) CSFB understands that the Shares and the Notes may not be sold, transferred or otherwise disposed of without registration under the 1933 Act or an exemption therefrom and, in the absence of an effective registration statement covering the Shares and the Notes or an available exemption from registration under the 1933 Act, that the Shares and the Notes may have to be held indefinitely and, as a consequence, that CSFB must be prepared to bear the economic risk of this investment for an indefinite period of time. In that regard, CSFB understands and acknowledges that, except as may be provided in the Stockholders Agreement, the Company is under no duty or obligation, contractual or otherwise, to register the Shares or the Notes under the 1933 Act or to comply with the terms of any exemption thereunder. In particular, CSFB acknowledges that it is aware that the Shares and the Notes may not be sold pursuant to Rule 144 promulgated under the 1933 Act unless all of the conditions of that Rule are met. Among the current conditions for use of Rule 144 by certain holders is the availability to the public of current information about the Company. Such information is not now available, and the Company has no current plans to make such information available. CSFB represents that, in the absence of an effective registration statement covering the Shares, it will sell, transfer or otherwise dispose of the Shares and the Notes only in a manner consistent with its representations set forth herein and then only in accordance with the Stockholders Agreement; and (e) CSFB also understands and acknowledges that the Stockholders Agreement imposes certain obligations with respect to, and additional restrictions on transferability of, the Shares and that as a party to the Stockholders Agreement the certificates issued to it evidencing the Shares will bear certain legends restricting transferability of the Shares, all as required by the Stockholders' Agreement. ARTICLE IV. CONDITIONS TO OBLIGATIONS OF CSFB AT CLOSING The obligations of the CSFB under Article I of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 4.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Article II hereof shall be true and correct on and as of the Closing with the same force and effect as if they had been made at the Closing. 4 4.2. PERFORMANCE. 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 on or before the Closing. 4.3. RESTRUCTURING CONDITIONS. All conditions to the obligation of CSFB to consummate the ICON Restructuring under the Term Sheet shall have been satisfied or waived. ARTICLE V. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AT CLOSING The obligations of the Company under Article I of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 5.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of CSFB contained in Article III hereof shall be true and correct on and as of the Closing Date with the same force and effect as if they had been made at the Closing. 5.2. PERFORMANCE. CSFB shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it on or before the Closing. 5.3. RESTRUCTURING CONDITIONS. CSFB shall have executed and delivered a counterpart copy of the Stockholders Agreement, and all other conditions to the obligation of the Company to consummate the Icon Restructuring under the Term Sheet shall have been satisfied or waived. ARTICLE VI. MUTUAL CONDITIONS PRECEDENT The obligations of the Company and CSFB under Article I of this Agreement are subject to the fulfillment on or before the closing of each of the following conditions: 6.1. QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares and the Notes pursuant to this Agreement shall have been duly obtained and shall be effective. 5 ARTICLE VII. MISCELLANEOUS 7.1. PAYMENT OF FEES. The Company hereby agrees to: (a) pay to CSFB (or an affiliate of CSFB designated by it) a fee in the amount of $881,000 in connection with the structuring of the ICON Restructuring, such fee being payable by the Company at the Closing of the ICON Restructuring or, if the ICON Restructuring is not consummated, promptly after the time the Company has abandoned the ICON Restructuring; (b) subject to the terms of the Senior Credit Facility (as defined in the Note Agreement) from time to time in effect, during the Term (as defined in the Management Agreement (the "MANAGEMENT AGREEMENT"), dated as of September 27, 1999, entered into among Health & Fitness, the Company, Bain Capital Partners IV, L.P., IHF Holdings, Inc. and IHF Capital, Inc.), pay to CSFB (or an affiliate of CSFB designated by it) a management fee in an amount not to exceed $366,500 per annum in exchange for strategic advisory services to be provided to the Company by CSFB, such fee being payable by the Company quarterly in arrears, with each payment being made sixty (60) days after the end of each fiscal quarter of the Company; provided, however, that the management fees payable with respect to fiscal year 2000 of the Company shall be payable in one installment of $274,875 on April 30, 2000 and one installment of $91,625 on July 31, 2000; and (c) during the Term, allow CSFB to participate in the negotiation and consummation of any Liquidity Event (as defined in the Stockholders Agreement) by the Company, and pay (or cause to be paid) to CSFB (or an affiliate of CSFB designated by it) a fee in connection therewith equal to one half of one percent (0.5%) of the gross purchase price of the transaction (including all liabilities assumed or otherwise included in the transaction), such fee to be due and payable for the foregoing services at the closing of such transaction. This fee is the same fee contemplated to be paid to CSFB pursuant to Section 2(c) of the Management Agreement, and is not intended to be in addition thereto. 7.2. INDEMNITY AND LIABILITY. In consideration of the execution and delivery of this Agreement by CSFB, the Company hereby agrees to indemnify, exonerate and hold each of CSFB, and each of its affiliates, directors, officers, fiduciaries, employees and agents and each of the partners, shareholders, affiliates, directors, officers, fiduciaries, employees and agents, advisors and attorneys of each of the foregoing (collectively, the "INDEMNITEES") free and harmless from and against any and all actions, causes of action, suits, liabilities and damages, and expenses in connection therewith, including without limitation attorneys' fees and disbursements (collectively, "LIABILITIES"), incurred by the Indemnitees or any of 6 them as a result of, or arising out of, or relating to the ICON Restructuring, the execution, delivery, performance, enforcement or existence of this Agreement or the transactions contemplated hereby (including but not limited to any indemnification obligations assumed or incurred by any Indemnitee) (collectively, the "INDEMNIFIED LIABILITIES"), except for any such Indemnified Liabilities arising on account of such Indemnitee's willful misconduct, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. 7.3. NO WAIVER; MODIFICATIONS IN WRITING. This Agreement sets forth the entire understanding of the parties, and supersedes all prior agreements, arrangements and communications, whether oral or written, with respect to the subject matter hereof. No waiver of or consent to any departure from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and CSFB. 7.4. TAXES. The Company shall pay any and all stamp, transfer and other similar taxes payable or determined to be payable in connection with the execution and delivery of this Agreement and the original issuance of the Shares and the Notes, but excluding all federal, state and local income or similar taxes, and shall save and hold CSFB harmless from and against any and all liabilities with respect to or resulting from any delay in paying, or omission to pay, such taxes. 7.5. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which, when executed and delivered, shall be deemed to be an original, but all of which taken together shall constitute one and the same Agreement. 7.6. BINDING EFFECT; ASSIGNMENT. The rights and obligations of CSFB under this Agreement may not be assigned to any other person. Except as expressly provided in this Agreement, this Agreement shall not be construed so as to confer any right or benefit upon any person other than the parties to this Agreement, and their respective successor and permitted assigns. This Agreement shall be binding upon the Company and CSFB, and their respective successors and permitted assigns. 7.7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of Delaware as to all matters including but not limited to matters of validity, construction, effect, performance and remedies, but without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. 7.8. SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be 7 ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 7.9. HEADINGS. The Article and Section headings used or contained in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. 7.10. INJUNCTIVE RELIEF. Each of the parties to this Agreement hereby acknowledges that in the event of a breach by any of them of any material provision of this Agreement, the aggrieved party may be without an adequate remedy at law. Each of the parties therefore agrees that, in the event of a breach of any material provision of this Agreement, the aggrieved party may elect to institute and prosecute proceedings to enforce specific performance or to enjoin the continuing breach of such provision, as well as to obtain damages for breach of this Agreement. By seeking or obtaining any such relief, the aggrieved party will not be precluded from seeking or obtaining any other relief to which it may be entitled. 7.11. SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND WARRANTIES. All agreements, representations and warranties contained herein or made in writing by or on behalf of the Company or CSFB, as the case may be, in connection with the transactions contemplated by this Agreement shall survive the execution and delivery of this Agreement and the sale and purchase of the Shares and payment therefor. [Remainder of page left intentionally blank; Next page is the signature page.] 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. HF HOLDINGS, INC. By:________________________________ Name: Title: CREDIT SUISSE FIRST BOSTON CORPORATION By:________________________________ Name: Title: [Signature page to the Securities Purchase Agreement] EX-10.7 15 EXHIBIT 10.7 Exhibit 10.7 - -------------------------------------------------------------------------------- HF HOLDINGS, INC. ---------------------------------- AMENDED AND RESTATED NOTE AGREEMENT ---------------------------------- DATED AS OF SEPTEMBER 27, 1999 $7,500,000 0% CONVERTIBLE SUBORDINATED NOTES DUE SEPTEMBER 27, 2011 - -------------------------------------------------------------------------------- TABLE OF CONTENTS (NOT PART OF AGREEMENT) PAGE 1. PAYMENTS............................................................1 1.1 INTEREST PAYMENT............................................1 1.2 REQUIRED PRINCIPAL PAYMENTS.................................1 1.3 MANNER OF PAYMENTS..........................................1 2. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.......................2 2.1 REGISTRATION OF NOTES.......................................2 2.2 EXCHANGE OF NOTES...........................................2 2.3 REPLACEMENT OF NOTES........................................3 2.4 ISSUANCE TAXES..............................................3 3. GENERAL COVENANTS...................................................3 3.1 PAYMENT OF NOTES AND MAINTENANCE OF OFFICE..................4 3.2 MERGERS AND CONSOLIDATIONS..................................4 3.3 FINANCIAL AND BUSINESS INFORMATION..........................4 4. EVENTS OF DEFAULT...................................................5 4.1 EVENTS OF DEFAULT...........................................5 4.2 DEFAULT REMEDIES............................................6 4.3 ANNULMENT OF ACCELERATION OF NOTES..........................7 5. SUBORDINATION.......................................................7 5.1 GENERAL.....................................................7 5.2 INSOLVENCY..................................................7 5.3 PROOFS OF CLAIM.............................................8 5.4 DEFAULT IN RESPECT OF SENIOR DEBT...........................8 5.5 TURNOVER OF PAYMENTS........................................10 5.6 SUBORDINATION UNAFFECTED BY CERTAIN EVENTS.... ............10 5.7 WAIVER AND CONSENT..........................................11 5.8 REINSTATEMENT OF SUBORDINATION..............................11 5.9 OBLIGATIONS NOT IMPAIRED....................................12 5.10 PAYMENT OF SENIOR DEBT; SUBROGATION.........................12 5.11 RELIANCE OF HOLDERS OF SENIOR DEBT..........................12 5.12 IDENTITY OF HOLDERS OF SENIOR DEBT..........................13 6. INTERPRETATION OF THIS AGREEMENT....................................13 6.1 TERMS DEFINED...............................................13 6.2 ACCOUNTING PRINCIPLES.......................................24 6.3 SECTION HEADINGS AND TABLE OF CONTENTS AND CONSTRUCTION.....25 6.4 GOVERNING LAW...............................................26 7. CONVERSION AND EXCHANGE OF NOTES FOR COMMON STOCK...................26 7.1 NOTICE OF OCCURRENCE OF A TRIGGERING EVENT..................26 7.2 CONVERSION OF NOTES AT OPTION OF HOLDER.....................26 7.3 EXCHANGE OF NOTES FOR COMMON STOCK BY THE COMPANY...........28 7.4 RESERVATION OF SHARES.......................................29 7.5 ADJUSTMENT OF CONVERSION PRICE IN RESPECT OF STOCK DIVIDENDS, STOCK SPLITS, ETC................................30 7.6 DE MINIMIS CHANGES IN CONVERSION PRICE......................30 7.7 NOTICE OF CHANGE IN CONVERSION PRICE........................31 7.8 EFFECT OF CONSOLIDATION, MERGER, SALE OR RECLASSIFICATION...31 7.9 COMMON STOCK SUBJECT TO STOCKHOLDERS AGREEMENT..............32 7.10 INTEREST IN EXCESS OF 24.9%.................................32 7.11 AUTOMATIC CONVERSION UPON INSOLVENCY.... ...................33 8. MISCELLANEOUS.......................................................34 8.1 COMMUNICATIONS..............................................34 8.2 REPRODUCTION OF DOCUMENTS...................................35 8.3 ENTIRE AGREEMENT............................................35 8.4 SUCCESSORS AND ASSIGNS......................................35 8.5 AMENDMENT AND WAIVER........................................36 8.6 EXPENSES....................................................37 8.7 WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; ETC..........37 8.8 EXECUTION IN COUNTERPART....................................39 Annex 1 -- Address of Purchaser; Payment Instructions Annex 2 -- Addresses for Notices Attachment A -- Form of Note AMENDED AND RESTATED NOTE AGREEMENT AMENDED AND RESTATED NOTE AGREEMENT, dated as of September 27, 1999, among HF HOLDINGS, INC., a Delaware corporation (together with its successors and assigns, the "COMPANY"), and CREDIT SUISSE FIRST BOSTON CORPORATION, a Massachusetts corporation (together with its affiliates and their respective successors and assigns, the "PURCHASER"). RECITALS WHEREAS, pursuant to the Securities Purchase Agreement, the Purchaser has agreed to purchase from the Company, and the Company has agreed to sell to the Purchasers, Seven Million Five Hundred Thousand Dollars ($7,500,000) in aggregate principal amount of the Notes; and WHEREAS, the Company and the Purchaser wish to enter into this Agreement to govern the terms of the Notes; AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein, the parties to this Agreement hereby agree as follows: 1. PAYMENTS 1.1 NO INTEREST PAYMENTS. No interest shall accrue or be payable on the Notes. 1.2 PAYMENT UPON MATURITY. The entire principal of the Notes outstanding on September 27, 2011 shall become due and payable on such date. 1.3 MANNER OF PAYMENTS. (a) MANNER OF PAYMENT. The Company shall pay all amounts payable with respect to each Note (without any presentment of such Notes and without any notation of such payment being made thereon) by crediting, by federal funds bank wire transfer, the account of the holder thereof in any bank in the United States of America as may be designated in writing by such holder, or in such other manner as may be reasonably directed or to such other address in the United States of America as may be reasonably designated in writing by such holder. Annex 1 shall be deemed to constitute notice, direction or designation (as appropriate) by the Purchaser to the Company with respect to payments to be made to the Purchaser as aforesaid. In the absence of such written direction, all amounts payable with respect to each Note shall be paid by check mailed and addressed to the registered holder of such Note at the address shown in the register maintained by the Company pursuant to Section 2.1. (b) PAYMENTS DUE ON HOLIDAYS. If any payment due on, or with respect to, any Note shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due. (c) PAYMENTS, WHEN RECEIVED. Any payment to be made to the holders of Notes hereunder or under the Notes shall be deemed to have been made on the Business Day such payment actually becomes available at such holder's bank prior to the close of business of such bank. 2. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES With respect to any transfer of Notes under this Agreement, the respective rights and obligations of the holders of the Notes and the Company under this Section 2 are, notwithstanding the provisions of this Section 2, subject to, and shall be construed consistent with, the terms of the Stockholders Agreement. 2.1 REGISTRATION OF NOTES. The Company will keep at its office, maintained pursuant to Section 3.1, a register for the registration and transfer of Notes. The name and address of each holder of one or more Notes, each transfer thereof made in accordance with Section 2.2 and the name and address of each transferee of one or more Notes shall be registered in such register. 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 contrary, other than in accordance with Section 2.2. 2.2 EXCHANGE OF NOTES. (a) EXCHANGE OF NOTES. Upon surrender of any Note at the office of the Company maintained pursuant to Section 3.1, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or such holder's attorney duly authorized in writing, the Company will execute and deliver, at the Company's expense (except as provided in Section 2.2(b)), a new Note or Notes in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be registered in the name of such Person as such holder may request and shall be substantially in the form of Attachment A. Each such new Note shall be dated the date of 2 the surrendered Note. Each such new Note shall carry the same rights that were carried by the Note so exchanged or transferred. Notes shall not be transferred in denominations of less than One Hundred Thousand Dollars ($100,000), PROVIDED that a holder of Notes may transfer its entire holding of Notes regardless of the principal amount of such holder's Notes. (b) COSTS. The Company will pay the cost of delivering to or from such holder's home office or custodian bank from or to the Company, insured to the reasonable satisfaction of such holder, the surrendered Note and any Note issued in substitution or replacement for the surrendered Note. 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. 2.3 REPLACEMENT OF NOTES. Upon receipt by the Company from the registered holder of a Note of evidence reasonably satisfactory to the Company of 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 loss, theft, destruction or mutilation), and: (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company; PROVIDED, HOWEVER, that if the holder of such Note is a Purchaser, an institutional investor or a nominee of either, the unsecured agreement of indemnity of such Purchaser or such institutional investor (but not of any nominee therefor) shall be deemed to be satisfactory; or (b) in the case of mutilation, upon surrender and cancellation thereof; the Company at its own expense will execute and deliver, in lieu thereof, a replacement Note, dated the date of such lost, stolen, destroyed or mutilated Note. 2.4 ISSUANCE TAXES. The Company will pay all taxes (if any) due in connection with and as the result of the initial issuance and sale of the Notes. 3. COVENANTS The Company covenants that on and after the Closing Date and so long as any of the Notes shall be outstanding: 3 3.1 PAYMENT OF NOTES AND MAINTENANCE OF OFFICE. The Company will punctually pay, or cause to be paid, the principal of the Notes, as and when the same shall become due according to the terms hereof and of the Notes, and will maintain an office at the address of the Company as provided in Section 8.1 where notices, presentations and demands in respect hereof or the Notes may be made upon it. Such office will be maintained at such address until such time as the Company notifies the holders of the Notes of any change of location of such office, which will in any event be located within the United States of America. 3.2 MERGERS AND CONSOLIDATIONS. The Company will not merge into, consolidate with, or Transfer all or substantially all of its Property to, any other Person or permit any other Person to consolidate with or merge into it; PROVIDED, HOWEVER, that the foregoing restriction does not apply to the merger or consolidation of the Company with, or the Transfer by the Company of all or substantially all of its Property to, another corporation, so long as: (a) the Person (the "SUCCESSOR CORPORATION") that results from such merger or consolidation or that purchases, leases, or acquires all or substantially all of such Property is a corporation duly incorporated under the laws of the United States of America or a jurisdiction thereof; and (b) if the Company is not the Successor Corporation, the Successor Corporation shall expressly assume in writing, pursuant to such agreements and instruments as shall be reasonably satisfactory to the Required Holders, the due and punctual payment of the principal of the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants in the Notes, this Agreement and the other Financing Documents to be performed or observed by the Company. 3.3 FINANCIAL AND BUSINESS INFORMATION. The Company shall deliver to each holder of Notes: (a) SEC AND OTHER REPORTS -- promptly upon their becoming available: (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to stockholders generally; (ii) each regular or periodic report (including, without limitation, each Form 10-K, Form 10-Q and Form 8-K), any registration statement which shall have become effective, and each final prospectus 4 and all amendments thereto filed by the Company or any Subsidiary with the SEC; and (iii) all press releases and other statements made available by the Company or any Subsidiary to the public concerning material developments in the business of the Company or the Subsidiaries; (b) NOTICE OF DEFAULT OR EVENT OF DEFAULT -- within five (5) Business Days of becoming aware: (i) of the existence of any condition or event which constitutes a Default or an Event of Default; or (ii) that the holder of any Note, or of any Debt, shall have given notice or taken any other action with respect to a claimed Default, Event of Default or default or event of default; a notice specifying the nature of the claimed Default, Event of Default or default or event of default and the notice given or action taken (if any) by such holder and what action the Company is taking or proposes to take with respect thereto; (c) REQUESTED INFORMATION -- with reasonable promptness, such other data and information as from time to time may be reasonably requested by any holder of Notes. 4. EVENTS OF DEFAULT 4.1 EVENTS OF DEFAULT. An "EVENT OF DEFAULT" exists at any time if any of the following both occurs and is continuing thereafter for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (a) PAYMENTS ON NOTES -- the Company fails to make the required payment of principal on any Note on or before the date such payment is due; or (b) INSOLVENCY -- (i) INVOLUNTARY BANKRUPTCY PROCEEDINGS -- (a) a receiver, liquidator, custodian or trustee of the Company or any Subsidiary, or of all or any substantial part of the Property of any of them, is appointed by court order; or an order for relief is entered with respect the Company or any 5 Subsidiary, or the Company or any Subsidiary is adjudicated a bankrupt or insolvent; (b) all or any substantial part of the Property of the Company or any Subsidiary is sequestered by court order; or (C) a petition is filed against the Company or any Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within sixty (60) days after such filing; (ii) VOLUNTARY PETITIONS - the Company or any Subsidiary files a petition in voluntary bankruptcy or seeks relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law; or (iii) ASSIGNMENTS FOR BENEFIT OF CREDITORS, ETC. - the Company or any Subsidiary makes an assignment for the benefit of its creditors, or consents to the appointment of a receiver, liquidator or trustee of an Obligor or Subsidiary or of all or a substantial part of its Property; or 4.2 DEFAULT REMEDIES. (a) ACCELERATION OF MATURITY OF NOTES. (i) AUTOMATIC. If any Event of Default specified in Section 4.1(b) shall exist, all of the Notes at the time outstanding shall automatically become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. (ii) BY ACTION OF HOLDERS. Subject to the next succeeding sentence, if any Event of Default (other than an Event of Default specified in Section 4.1(b)) shall exist, the holder or holders of twenty-five percent (25%) or more in principal amount of the Notes at the time outstanding may exercise any right, power or remedy permitted to such holder or holders by law, and shall have, in particular, without limiting the generality of the foregoing, the right to declare, the entire principal of all the Notes then outstanding to be due and payable, and such Notes shall thereupon become forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith pay to 6 the holder or holders of all the Notes then outstanding the entire principal of the Notes. (b) NONWAIVER; REMEDIES CUMULATIVE. No course of dealing on the part of any holder of Notes nor any delay or failure on the part of any holder of Notes to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. All rights and remedies of each holder of Notes hereunder and under applicable law are cumulative to, and not exclusive of, any other rights or remedies any such holder of Notes would otherwise have. 4.3 ANNULMENT OF ACCELERATION OF NOTES. If a declaration is made pursuant to Section 4.2(a)(ii), then and in every such case, the Required Holders may, in their sole discretion, by written instrument filed with the Company, rescind and annul such declaration, and the consequences thereof; PROVIDED, HOWEVER, that at the time such declaration is annulled and rescinded: (a) no judgment or decree shall have been entered for the payment of any moneys due on or pursuant hereto or the Notes; (b) all sums payable hereunder and under the Notes (except any principal of the Notes which shall have become due and payable by reason of such declaration under Section 4.2(a)(ii)) shall have been duly paid; and (C) each and every other Default and Event of Default shall have been waived pursuant to Section 8.5 or otherwise made good or cured; and PROVIDED FURTHER that no such rescission and annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereon. 5. SUBORDINATION 5.1 GENERAL. The Subordinated Debt is subordinate and junior in right of payment to all Senior Debt to the extent provided in this Section 5. 5.2 INSOLVENCY. In the event of: (a) any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment, composition or other similar proceeding relating to the Company, its creditors or its Property; 7 (b) any proceeding for the liquidation, dissolution or other winding-up of the Company, voluntary or involuntary, whether or not involving insolvency or bankruptcy proceedings; (C) any assignment by the Company for the benefit of creditors; or (D) any other marshalling of the assets of the Company; all Senior Debt shall first be paid in full, in cash or cash equivalents, before any payment or distribution, whether in cash, Securities or other Property (other than Reorganization Securities), shall be made to any holder of any Subordinated Debt on account of any Subordinated Debt. Any payment or distribution, whether in cash, Securities or other Property (other than Reorganization Securities), which would otherwise (but for this Section 5) be payable or deliverable in respect of Subordinated Debt shall be paid or delivered directly to the holders of Senior Debt in accordance with the priorities then existing among such holders until all Senior Debt shall have been paid in full, in cash or cash equivalents. 5.3 PROOFS OF CLAIM. If any holder of Subordinated Debt does not file a proper claim or proof of debt therefor prior to twenty (20) days before the expiration of the time to file such claim or proof, then each Senior Agent is hereby authorized and empowered (but not obligated) as the agent and attorney-in-fact for such holder for the specific and limited purpose set forth in this paragraph, to file such claim or proof for or on behalf of such holder; PROVIDED, HOWEVER, that such Senior Agent shall have, prior to taking any such action, given fifteen (15) days prior written notice (which notice may be given up to sixty (60) days prior to the expiration of the time to file such claim) to such holder of Subordinated Debt and each other Senior Agent that they intend to file such claim or proof of debt. In no event may any Senior Agent or any holder of the Senior Debt vote any claim on behalf of any holder of the Subordinated Debt, and such agency and appointment of attorney-in-fact shall not extend to any such right to vote any such claim. 5.4 DEFAULT IN RESPECT OF SENIOR DEBT; STANDSTILL. In the event that a Senior Debt Default shall occur, then, unless and until such Senior Debt Default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash, Property or Securities or by set-off or otherwise) shall be made or agreed to be made on account of any Subordinated Debt, or as a sinking fund for any Subordinated Debt, or in respect of any redemption, retirement, purchase, prepayment or other acquisition or payment of any Subordinated Debt. Notwithstanding anything contained in this Agreement or any other Financing Document to the contrary, for so long as any Senior Debt is outstanding, no holder of any Subordinated Debt may take any action (other than giving the notice of 8 acceleration referred to herein) to accelerate all or any portion of the Subordinated Debt (and no acceleration or purported acceleration pursuant to Section 4.2(a)(ii) shall become effective) or exercise any other remedies in respect thereof during any period (a "STANDSTILL PERIOD") commencing on the occurrence of an Event of Default and ending upon the earliest of: (a) the date such Event of Default shall have been cured or waived or shall have ceased to exist; (b) the date three hundred sixty-five (365) days after the commencement of such Standstill Period; (c) the date upon which any holder or holders of any Debt of the Company (other than Subordinated Debt) in an aggregate amount exceeding One Million Dollars ($1,000,000), or any holder or holders of any Senior Debt, accelerate or declare such Debt to be due and payable prior to its stated maturity or prior to the regularly scheduled date or dates of payment, commence any action or proceeding to collect any such Debt or otherwise commence the exercise of any remedies against the Company; (d) the first date upon which any Event of Default described in Section 4.1(b) shall have occurred and be continuing beyond any period of grace specified therein; and, in such event, the automatic acceleration of the Notes contemplated in respect of such Event of Default pursuant to Section 4.2(a)(i) shall occur immediately upon the termination of the Standstill Period; or (e) the commencement of any foreclosure of any Lien upon Property of the Company the proceeds of which are applied, or may be applied, to the payment of any Debt of the Company in an aggregate amount exceeding One Million Dollars ($1,000,000). Notwithstanding the foregoing, any holder or holders of Subordinated Debt seeking to accelerate all or a portion of the Subordinated Debt or exercise any remedies in respect thereof shall give the Senior Agent at least ten (10) days advance written notice of its intent to take such action and such action may not in any event be taken by such holder or holders until the later of the expiration of the applicable Standstill Period and the expiration of such ten (10) day period. The Company shall, and each Senior Agent may, give prompt written notice to each holder of Subordinated Debt of its knowledge of facts which would give rise to any Senior Debt Default. 9 5.5 TURNOVER OF PAYMENTS. If: (a) any payment or distribution shall be paid to or collected or received by any holders of Subordinated Debt in contravention of any of the terms of this Section 5; and (b) any Senior Agent shall have notified the holders of Subordinated Debt, within thirty (30) days of any such payment or distribution, of the facts by reason of which such payment or collection or receipt so contravenes this Section 5; then such holders of Subordinated Debt will deliver such payment or distribution, to the extent necessary to pay all such Senior Debt in full, in cash or cash equivalents, to such Senior Agent, on behalf of the holders of the Senior Debt, and, until so delivered, the same shall be held in trust by such holders of Subordinated Debt as the property of the holders of such Senior Debt. If any amount is delivered to such Senior Agent pursuant to this Section 5.5, whether or not such amounts have been applied to the payment of Senior Debt, and the outstanding Senior Debt shall thereafter be paid in full, in cash or cash equivalents, by the Company or otherwise other than pursuant to this Section 5.5, the holders of Senior Debt shall return to such holders of Subordinated Debt an amount equal to the amount delivered to such holders of Senior Debt pursuant to this Section 5.5, so long as after the return of such amounts the Senior Debt shall remain paid in full, in cash or cash equivalents. Notwithstanding the foregoing, in the event that the holders of the Subordinated Debt reasonably believe that there is more than one holder of Senior Debt and the holders of the Subordinated Debt shall not have received reasonably satisfactory evidence that such Senior Agent is both entitled to accept such payment on behalf of all holders of Senior Debt and required to deliver payment to the other holders of the Senior Debt in the respective amounts, if any, due such holders of Senior Debt, then the holders of the Subordinated Debt may turn over such payment or distribution, rather than to the Senior Agent, to a court of competent jurisdiction in an appropriate interpleader proceeding pending determination by such court of the holders of Senior Debt entitled to receive all or any portion of such payment or distribution, and, from and after the date of such payment into court, the holders of the Subordinated Debt shall have no further liability therefor. 5.6 SUBORDINATION UNAFFECTED BY CERTAIN EVENTS. The rights set forth in this Section 5 of the holders of the Senior Debt as against each holder of Subordinated Debt shall remain in full force and effect without regard to, and shall not be impaired by: (a) any act or failure to act on the part of the Company; 10 (b) any extension or indulgence in respect of any payment or prepayment of the Senior Debt or any part therefor in respect of any other amount payable to any holder of Senior Debt; (c) any amendment, modification, restatement, refinancing or waiver of, or addition or supplement to, or deletion from, or compromise, release, consent or other action in respect of, any of the terms of any Senior Debt or any other agreement which may be relating to any Senior Debt, other than such as would cause all or any portion of such Debt to fail to meet the definition of "Senior Debt;" (d) any exercise or non-exercise by any holder of Senior Debt of any right, power, privilege or remedy under or in respect of any Senior Debt or Subordinated Debt or any waiver of any such right, power, privilege or remedy or any default in respect of any Senior Debt or the Subordinated Debt, any dealing with or action against any collateral security therefor or any receipt by any holder of Senior Debt of any security, or any failure by any holder of Senior Debt to perfect a security interest in, or any release by any such of Senior Debt of, any security for the payment of any Senior Debt; (e) any merger or consolidation of the Company or any of its Subsidiaries into or with any of its Subsidiaries or into or with any Person, or any Transfer of any or all of the Property of the Company or any of its Subsidiaries to any other Person; or (f) the absence of any notice to, or knowledge by, any holder of Subordinated Debt of the existence or occurrence of any of the matters or events set forth in the foregoing clauses (a) through (e). 5.7 WAIVER AND CONSENT. Each holder of Subordinated Debt waives any and all notices of the acceptance of the provisions of this Section 5 or of the creation, renewal, extension or accrual, now or at any time in the future, of any Senior Debt. 5.8 REINSTATEMENT OF SUBORDINATION. The obligations of each holder of Subordinated Debt under the provisions set forth in this Section 5 shall continue to be effective, or be reinstated, as the case may be, as to any payment in respect of any Senior Debt that is rescinded or must otherwise be returned by the holder of such Senior Debt upon the occurrence or as a result of any bankruptcy or judicial proceeding, all as though such payment had not been made. 11 5.9 OBLIGATIONS NOT IMPAIRED. Nothing contained in this Section 5 shall impair, as between the Company and any holder of Subordinated Debt, the obligation of the Company to pay to such holder the principal thereof as and when the same shall become due and payable in accordance with the terms thereof and to comply with each and every provision of the Notes and this Agreement or prevent any holder of any Subordinated Debt from exercising all rights, powers and remedies otherwise permitted by applicable law or under this Agreement, all subject to the rights of the holders of the Senior Debt to receive cash, Securities or other Property otherwise payable or deliverable to the holders of Subordinated Debt. 5.10 PAYMENT OF SENIOR DEBT; SUBROGATION. Upon the payment in full of all Senior Debt, the holders of Subordinated Debt shall be subrogated to all rights of any holder of Senior Debt to receive any further payments or distributions applicable to the Senior Debt until the Subordinated Debt shall have been paid in full, and such payments or distributions received by the holders of Subordinated Debt by reason of such subrogation, of cash, Securities or other Property which otherwise would be paid or distributed to the holders of Senior Debt, shall, as between the Company and its creditors other than the holders of Senior Debt, on the one hand, and the holders of Subordinated Debt, on the other hand, be deemed to be a payment by the Company on account of Senior Debt and not on account of Subordinated Debt. 5.11 RELIANCE OF HOLDERS OF SENIOR DEBT. Each holder of Subordinated Debt by its acceptance thereof shall be deemed to acknowledge and agree that the foregoing subordination provisions are, and are intended to be, an inducement to and a consideration of each holder of any Senior Debt, whether such Senior Debt was created or acquired before or after the creation of Subordinated Debt, to acquire and hold, or to continue to hold, such Senior Debt, and such holder of Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and holding, or in continuing to hold, such Senior Debt. Each such holder of Senior Debt is intended to be, and is, a third party beneficiary of this Section 5. Each holder of Subordinated Debt acknowledges and agrees that the provisions set forth in this Section 5 shall be enforceable against such Persons by the holders of the Senior Debt. Notwithstanding anything contained in this Agreement or any other Financing Document to the contrary, no amendment, modification or supplement of the provisions of this Section 5 (including, without limitation, this Section 5.11) shall be effective as to any holder of Senior Debt without the consent of such holder. 12 5.12 IDENTITY OF HOLDERS OF SENIOR DEBT. Upon the request of any holder of Subordinated Debt, the Company shall deliver to such holder a list of all holders of Senior Debt outstanding at such time, providing the name and address of each such holder of Senior Debt and the principal amount of Senior Debt held by each such holder; PROVIDED, HOWEVER, that, if any holder of Senior Debt shall have appointed an agent or other representative with respect to the Senior Debt held by it, the Company may provide the name and address of such agent or representative in lieu of the name and address of such holder of Senior Debt. 6. INTERPRETATION OF THIS AGREEMENT 6.1 TERMS DEFINED. As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: AFFILIATE -- means and includes, at any time, each Person (other than a Subsidiary): (a) that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company; (b) that beneficially owns or holds five percent (5%) or more of any class of the Voting Stock of the Company; (c) five percent (5%) or more of the Voting Stock (or in the case of a Person that is not a corporation, five percent (5%) or more of the equity interest) of which is beneficially owned or held by the Company; or (d) that is an officer or director of the Company; at such time; PROVIDED, HOWEVER, that none of the Purchasers nor any affiliate of any Purchaser shall be deemed to be an "Affiliate," and no Person holding any one or more of the Notes shall be deemed to be an "Affiliate" solely by virtue of the ownership of such securities. 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. AGREEMENT, THIS -- and references thereto shall mean this Amended and Restated Note Agreement as it may from time to time be amended or supplemented. BANKING LAWS - means and includes the BHCA and the IBA. 13 BANKRUPTCY CODE -- means Title 11, United States Code, sections 1 ET SEQ., as amended from time to time, and all rules promulgated thereunder. BHCA - the Bank Holding Company Act of 1956, as amended, and the rules, regulations and official or staff interpretations promulgated thereunder, all as from time to time in effect. BUSINESS DAY -- means a day other than a Saturday, a Sunday or a day on which banks in the State of New York are required or permitted by law (other than a general banking moratorium or holiday for a period exceeding four (4) consecutive days) to be closed. CAPITAL LEASE -- means, at any time, a lease with respect to which the lessee is required to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. CAPITAL STOCK -- means any class of preferred, common or other capital stock, share capital or similar equity interest of a Person including, without limitation, any partnership interest in any partnership or limited partnership and any membership interest in any limited liability company. CLOSING DATE -- means the date any Notes are first sold. COMMON STOCK -- means the Common Stock, par value $0.001 per share, of the Company. COMPANY -- the introductory paragraph. CONVERSION PRICE - means, per share of Common Stock, Three and Eighty-Eight Thousand Three Hundred Forty Seven Hundred-Thousandths Dollars ($3.88347), as adjusted and readjusted from time to time in accordance with Section 7. CONVERTIBLE NOTE SHARES - Section 6.1 (in the definition of Tentative Purchaser Ownership Level. DEBT -- with respect to any Person, means, without duplication, the liabilities of such Person with respect to: (a) BORROWED MONEY -- borrowed money; (b) DEFERRED PURCHASE PRICE OF PROPERTY -- the deferred purchase price of Property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such Property); 14 (c) SECURED LIABILITIES -- borrowed money secured by any Lien existing on Property owned by such Person (whether or not such liabilities have been assumed); (d) CAPITAL LEASES -- Capital Leases of such Person; (e) LETTERS OF CREDIT -- letters of credit, bankers' acceptances or instruments serving a similar function issued or accepted by banks and other financial institutions for the account of such Person, other than undrawn trade letters of credit in the ordinary course of business; (e) SWAPS -- Swaps of such Person; and (g) GUARANTEES -- any Guaranty of such Person of any obligation or liability of another Person of obligations of the type listed in clause (a) through clause (f) of this definition of Debt. As used in this definition, SWAPS -- means, with respect to any Person, obligations with respect to interest rate swaps and currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency, except that if any agreement relating to such obligation provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligations shall be the net amount thereof. The aggregate net obligation of Swaps at any time shall be the aggregate amount of the obligations of such Person under all Swaps assuming all such Swaps had been terminated by such Person as of the end of the then most recently ended fiscal quarter of such Person. If such net aggregate obligation shall be an amount owing to such Person, then the amount shall be deemed to be Zero Dollars ($0). Unless the context otherwise requires, "Debt" means Debt of the Company or of a Subsidiary. DEFAULT -- means any event which, with the giving of notice or the passage of time, or both, would become an Event of Default. EVENT OF DEFAULT -- Section 4.1. EXCHANGE ACT -- means the Securities Exchange Act of 1934, as amended, together with the rules and regulations of the SEC thereunder. EXCESS SHARES - means, at any time: 15 (a) for purposes of Section 7.10(a)(i), a number of LLC Shares equal to the lesser of (a) all LLC Shares and (b) the minimum number of LLC Shares, Convertible Note Shares and Option Shares that, when subtracted from both the numerator and denominator of the Tentative Purchaser Ownership Level, will cause the Tentative Purchaser Ownership Level not to exceed the Permissible Purchaser Ownership Level; (b) for purposes of Section 7.10(a)(ii) and Section 7.10(b), a number of Convertible Note Shares equal to the lesser of (a) all Convertible Note Shares and (b) the minimum number of LLC Shares, Convertible Note Shares and Option Shares that, when subtracted from both the numerator and denominator of the Tentative Purchaser Ownership Level, will cause the Tentative Purchaser Ownership Level not to exceed the Permissible Purchaser Ownership Level; and (c) for purposes of Section 7.10(a)(iii), a number of Option Shares equal to the lesser of (a) all Option Shares and (b) the minimum number of LLC Shares, Convertible Note Shares and Option Shares that, when subtracted from both the numerator and denominator of the Tentative Purchaser Ownership Level, will cause the Tentative Purchaser Ownership Level not to exceed the Permissible Purchaser Ownership Level. EXCHANGE DATE -- Section 7.3(b). EXEMPT TRANSFEREE - Section 6.1 (in the definition of "Purchaser Transferee"). FINANCING DOCUMENTS -- means and includes this Agreement, the Securities Purchase Agreement, the Notes, the Stockholders Agreement and the other agreements, certificates and instruments to be executed pursuant to the terms of each of the foregoing, as each may be amended, restated or otherwise modified from time to time. GAAP -- means accounting principles as promulgated from time to time in statements, opinions and pronouncements by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board and in such statements, opinions and pronouncements of such other entities with respect to financial accounting of for-profit entities as shall be accepted by a substantial segment of the accounting profession in the United States of America. GUARANTY -- means with respect to any Person (for the purposes of this definition, the "Guarantor") 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 indebtedness, dividend or other obligation of any other Person (the "Primary Obligor") in any manner, whether directly or 16 indirectly, including, without limitation, obligations incurred through an agreement, contingent or otherwise, by the Guarantor: (a) to purchase such indebtedness or obligation or any Property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness, dividend or obligation; or (ii) to maintain working capital or other balance sheet condition or any income statement condition of the Primary Obligor or otherwise to advance or make available funds for the purchase or payment of such indebtedness, dividend or obligation; (c) to lease Property or to purchase securities or other Property or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of the Primary Obligor to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of the indebtedness or obligation of the Primary Obligor against loss in respect thereof. For purposes of computing the amount of any Guaranty, in connection with any computation of indebtedness or other liability: (i) in each case where the obligation that is the subject of such Guaranty is in the nature of indebtedness for money borrowed it shall be assumed that the amount of the Guaranty is the amount of the direct obligation then outstanding; and (ii) in each case where the obligation that is the subject of such Guaranty is not in the nature of indebtedness for money borrowed it shall be assumed that the amount of the Guaranty is the amount (if any) of the direct obligation that is then due. IBA - the International Banking Act of 1978, as amended, and the rules, regulations and official or staff interpretations promulgated thereunder, all as from time to time in effect. ICON -- means ICON Health & Fitness, Inc., a Delaware corporation and Subsidiary of the Company, together with its successors and assigns. ICON RESTRUCTURING -- means the closing of the issuance and sale of the Notes and the other transactions contemplated by the Term Sheet. 17 INITIAL PUBLIC OFFERING - means "Initial Public Offering" as defined in the Stockholders Agreement. LENDER -- means "Lender" as defined in the Senior Credit Agreement. LIEN -- means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property (for purposes of this definition, the "Owner"), whether such interest is based on the common law, statute or contract, and includes but is not limited to: (a) the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes, and the filing of any financing statement under the Uniform Commercial Code of any jurisdiction, or an agreement to give any of the foregoing; (b) reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting real Property; (c) stockholder agreements, voting trust agreements, buy-back agreements and all similar arrangements affecting the Owner's rights in stock owned by the Owner; and (d) any interest in any Property held by the Owner evidenced by a conditional sale agreement, Capital Lease or other arrangement pursuant to which title to such Property has been retained by or vested in some other Person for security purposes. The term "Lien" does not include negative pledge clauses in loan agreements and equal and ratable security clauses in loan agreements. LIQUIDITY EVENT - means "Liquidity Event" as defined in the Stockholders Agreement. LLC - means HF Investment Holdings, LLC, a Delaware limited liability company. LLC AGREEMENT - means the Amended and Restated Limited Liability Company Agreement of the LLC, dated as of September 27, 1999, by and among Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust Associates, L.P., each a Delaware limited partnership, Gary Stevenson, an individual residing in Riverheight, Utah, Scott Watterson, an individual residing in Providence, Utah, and such other Persons as may from time to time be admitted as Members (as defined therein), as amended, restated or otherwise modified from time to time. 18 LLC SHARES - Section 6.1 (in the definition of Tentative Purchaser Ownership Level). NOTE -- means and includes each 0% Convertible Subordinated Note due September 27, 2011 issued pursuant to this Agreement. OPTION SHARES - Section 6.1 (in the definition of Tentative Purchaser Ownership Level). OWNERSHIP BASE - Section 6.1 (in the definition of Tentative Purchaser Ownership Level). PERMISSIBLE PURCHASER OWNERSHIP LEVEL - means at any time the greater of (a) twenty-four and nine-tenths percent (24.9%) of the Shares, and (b) the amount of Shares in a portfolio company that the Purchaser is allowed to own or control under the Banking Laws and other applicable law. PERSON -- means an individual, partnership, corporation, limited liability company, joint venture, trust, unincorporated organization, or a government or agency or political subdivision thereof. PROPERTY -- means any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible. PURCHASER -- the introductory paragraph. PURCHASER TRANSFEREE - means any direct or indirect purchaser from, or transferee or assignee of, the Purchaser OTHER THAN: (a) a purchaser, transferee or assignee to which Shares or any portion of this Note representing the right to receive Shares is sold, transferred or assigned from the Purchaser either (i) in a widely dispersed public distribution, or (ii) in one or more private transactions that do not result in one purchaser, transferee or assignee obtaining more than four and nine-tenths percent (4.9%) of the Shares, or that portion of this NOTE representing the right to receive more than four and nine-tenths percent (4.9%) of the Shares, which purchaser, transferee or assignee purchases such Shares or such portion of this NOTE in the normal course of its business for investment purposes only, and with no intention of influencing control over the Company; and (b) any other purchaser, transferee or assignee to which the Company (in the case of this clause (b) only) consents, in the Company's sole discretion. A purchaser, transferee or assignee referred to in either clause (a) or clause (b) above is referred to herein as an "EXEMPT TRANSFEREE". REORGANIZATION SECURITIES -- means Securities of the Company or any other Person provided for by a plan of reorganization or readjustment the payment of which is subordinated, at least to the extent provided in Section 5 with respect to Subordinated Debt, to the payment of all Senior Debt at the time outstanding and to 19 any Securities issued in respect thereof under any such plan of reorganization or readjustment. REQUIRED HOLDERS -- means, at any time, the holders of fifty-one percent (51%) in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by any one or more of the Company, any Subsidiary or any Affiliate). SEC -- means, at any time, the Securities and Exchange Commission or any other federal agency at such time administering the Securities Act. SECURITIES ACT -- means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. SECURITIES PURCHASE AGREEMENT -- means the Amended and Restated Securities Purchase Agreement, dated as of the date hereof, between the Company and the Purchaser, relating to the offering and sale of the Notes and shares of the Common Stock. SECURITY -- means "security" as defined by section 2(1) of the Securities Act. SENIOR AGENT -- means and includes: (d) for so long as the Senior Credit Agreement remains outstanding, General Electric Capital Corporation, as agent under the Senior Credit Agreement; and (e) thereafter, any one agent or lender in respect of a successor revolving credit or similar agreement which is designated as a Senior Credit Facility, or representative of either, designated in writing to each holder of Notes by both the predecessor Senior Agent and the Company as being a "Senior Agent." SENIOR CREDIT AGREEMENT -- means the Credit Agreement, dated as of September 24, 1999, among ICON, the other "Credit Parties" signatory thereto, General Electric Capital Corporation, a New York corporation, for itself, as "Lender," and as Agent for "Lenders," Fleet National Bank, as "Lender" and as Syndication Agent, and the other "Lenders" signatory thereto from time to time, as such agreement is from time to time amended, restated or otherwise modified. SENIOR CREDIT FACILITY -- means and includes: (a) the Senior Credit Agreement; or (b) any one revolving credit agreement or similar agreement permitting the Company, subject to the conditions therein, to obtain loans or advances of cash, trade credits (including without limitation, letters of credit or 20 bankers acceptances) or both, which agreement has refinanced, renewed, replaced or extended the Senior Debt governed by the terms of a Senior Credit Facility which both the Company and the Senior Agent under the predecessor Senior Credit Facility (or, if no such other agreement is then in effect, by the Company) have designated in writing to each holder of Notes as being a "Senior Credit Facility;" PROVIDED, HOWEVER, that, by making such designation, the predecessor Senior Credit Facility shall cease to be the Senior Credit Facility (but any Debt outstanding or incurred thereunder shall continue to be Senior Debt for so long as such Debt meets the definition thereof). SENIOR DEBT -- means and includes all obligations, liabilities and indebtedness of the Company now or hereafter existing, whether fixed or contingent, and whether for principal, interest (including interest accruing after the filing of a petition under the Bankruptcy Code, whether or not allowed), fees, expenses, indemnification or otherwise, in respect of Debt for borrowed money of the Company or any Subsidiary, whether currently existing or hereinafter incurred; PROVIDED, HOWEVER, that "Senior Debt" shall not include any Debt that, by its terms or the terms of any ancillary agreement with the holders of such Debt, is expressed to be subordinated in right of payment to, or PARI PASSU with, the Subordinated Debt. For the avoidance of doubt, trade indebtedness, the deferred purchase price of Property (including accounts payable arising in the ordinary course of business and all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such Property) and all other Debt other than Debt for borrowed money of the Company or any Subsidiary (whether or not secured by any Lien or Guarantied by the Company) shall not be "Senior Debt" hereunder. SENIOR DEBT DEFAULT -- means any default by the Company in the payment of the principal of or any sinking fund installments, if any, due with respect to, fees in respect of or interest on, any Senior Debt, or any default, or any event which, with notice or lapse of time or both, would constitute a default, in any other agreement, term or condition contained in any agreement under which any Senior Debt is issued or secured, which, in any such case, would cause, or would permit the holder thereof to cause, the acceleration of such Senior Debt . SENIOR OFFICER -- means any one or more of the chairman of the board of directors, the chief executive officer, the chief operating officer, the chief financial officer, and the president, of the Company. SHARES - means shares of the Common Stock. STANDSTILL PERIOD - Section 5.4. STOCKHOLDERS AGREEMENT -- means the Stockholders Agreement, dated as of the Closing Date, among the Company, ICON, HF Investment Holdings, LLC, each 21 Person listed on the signature pages thereto as a "Junior Management Initial Investor," Scott Watterson, Gary Stevenson and the Purchaser. SUBSIDIARY -- means, at any time, each corporation, association, limited liability company or other business entity which qualifies as a subsidiary of the Company that is properly included in a consolidated financial statement of the Company and its subsidiaries in accordance with GAAP at such time. SUBORDINATED DEBT -- means and includes all obligations, liabilities and indebtedness of the Company now or hereafter existing, whether fixed or contingent, and whether for principal, interest (including interest accruing after the filing of a petition under the Bankruptcy Code, to the extent allowed), fees, expenses, indemnification or otherwise, in respect of this Agreement and the Notes. SUCCESSOR CORPORATION -- Section 4.1. SUCCESSOR PROPERTY --means, in the case of any consolidation, merger, sale, conveyance or reclassification described in Section 7.8, the shares of Capital Stock, other securities, cash, Property or rights, warrants or options receivable upon such consolidation, merger, sale, conveyance or reclassification in respect of the shares of Common Stock held by a holder thereof. TENTATIVE PURCHASER OWNERSHIP LEVEL - means, at any time, a fraction (expressed as a percentage): (i) the NUMERATOR of which shall be the sum of: (a) the aggregate amount of Shares then held by the Purchaser and any Purchaser Transferees (which, for purposes of this definition, shall be deemed to include all Shares then outstanding and held by or for the benefit of the Purchaser or any Purchaser Transferees PLUS, those Shares that are not then outstanding, which are subject to options, warrants or other conversion privileges that are held by or for the benefit of the Purchaser or any Purchaser Transferee and that are then exercisable (but shall be deemed not to include any Shares that are not outstanding, which are subject to options, warrants or other conversion privileges that are held by or for the benefit of any other Person)), (b) the aggregate number of Shares to which the Purchaser and any Purchaser Transferee would otherwise then be entitled or required to own pursuant to Section 7.2(a) or Section 7.3(a) (the "CONVERTIBLE NOTE SHARES"), (c) the aggregate number of Shares to which the Purchaser and any Purchaser Transferee would otherwise then be entitled or required to own pursuant to the LLC Agreement and the Warrant (the "LLC SHARES"), and (d) any Shares to which the Purchaser and any Purchaser Transferee would otherwise then be entitled or required to own upon exercise of the CSFB Option (as such 22 term is defined in Section 5.2 of the Stockholders Agreement) (the "OPTION SHARES"); and (ii) the DENOMINATOR of which shall be the sum of: (a) the aggregate number of Shares then outstanding (which, for purposes of this definition, shall be deemed to include all Shares then outstanding PLUS, those Shares that are not then outstanding, which are subject to options, warrants or other conversion privileges that are held by or for the benefit of the Purchaser or any Purchaser Transferee and that are then exercisable (but shall be deemed not to include any Shares that are not outstanding, which are subject to options, warrants or other conversion privileges that are held by or for the benefit of any other Person)), (b) the Convertible Note Shares, (c) the LLC Shares, and (d) the Option Shares (such sum, the "OWNERSHIP BASE"); PROVIDED, that no specific Shares (including the LLC Shares, the Convertible Note Shares and the Option Shares) shall be counted more than once in calculating either the numerator or the denominator set forth in clause (i) or clause (ii) above. TERM SHEET --means the term sheet, dated July 8, 1999, as amended and attached to the Exchange Offer and Consent Solicitation, dated July 30, 1999, as supplemented, for all outstanding 13% Senior Subordinated Notes due 2002 of ICON, 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc., and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation. TRANSFERS -- means and includes, with respect to any Property, any sales, leases, transfers or other dispositions of such Property; the term "TRANSFER," when used as a verb with respect to any Property, means to sell, lease as lessor, transfer or otherwise dispose of such Property; and the term "TRANSFERRED" has a correlative meaning. TRIGGERING EVENT -- means and includes: (a) the occurrence of an event which would constitute a "Liquidity Event" under the definition of "Liquidity Event" set forth in the Stockholders Agreement; (b) the liquidation, dissolution or winding-up of the Company or ICON; the commencement by the Company, ICON or any Subsidiary of any proceedings therefor; the commencement of any proceedings therefor by any other Person which the Company or ICON does not oppose; or the commencement of any proceedings therefor by any other Person which the Company and ICON oppose in which either any order for relief is granted to such other Person or which remains unstayed for a period of sixty (60) days; and 23 (c) the occurrence of an Event of Default referred to in Section 4.1(b). TRIGGERING EVENT NOTICE DATE -- Section 7.1(b). TRIGGERING EVENT NOTICE EVENT -- means any event which, with the giving of notice or the passage of time, or both, would become, or result in, a Triggering Event, including, without limitation, the execution of any written agreement which, when fully performed by the parties thereto, would result in a Triggering Event. VALUATION AGENT -- means a firm of independent certified public accountants, an investment banking firm or appraisal firm (which firm shall own no Securities of, and shall not be an Affiliate, Subsidiary or a related Person of, the Company) of recognized national standing retained by the Company and reasonably acceptable to the Required Holders. VOTING STOCK -- means, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time any stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency), and, in the case of the Company, shall include the Common Stock. WARRANT - means the HF Class C Units Purchase Warrant, dated September 27, 1999, issued by HF Investment Holdings, LLC, a Delaware limited liability company, to the Purchaser, as amended, restated or otherwise modified from time to time. 6.2 ACCOUNTING PRINCIPLES. (a) GENERALLY. Unless otherwise provided herein, all financial statements delivered in connection herewith will be prepared in accordance with GAAP. Where the character or amount of any asset or liability or item of income or expense, or any consolidation or other accounting computation is required to be made for any purpose hereunder, it shall be done in accordance with GAAP; PROVIDED, HOWEVER, that if any term defined herein includes or excludes amounts, items or concepts that would not be included in or excluded from such term if such term were defined with reference solely to GAAP, such term will be deemed to include or exclude such amounts, items or concepts as set forth herein. (b) CONSOLIDATION. Whenever accounting amounts of a group of Persons are to be determined "on a consolidated basis" it shall mean that, as to balance sheet amounts to be determined as of a specific time, the amount that would appear on a consolidated balance sheet of such Persons prepared as of such time, and as to income statement amounts to be determined for a specific 24 period, the amount that would appear on a consolidated income statement of such Persons prepared in respect of such period, in each case with all transactions among such Persons eliminated, and prepared in accordance with GAAP except as otherwise required hereby. (c) CURRENCY. With respect to any determination, consolidation or accounting computation required hereby, any amounts not denominated in the currency in which this Agreement specifies shall be converted to such currency in accordance with the requirements of GAAP (as such requirements relate to such determination, consolidation or computation) and, if no such requirements shall exist, converted to such currency in accordance with normal banking procedures, at the closing rate as reported in THE WALL STREET JOURNAL published most recently as of the date of such determination, consolidation or computation or, if no such quotation shall then be available, as quoted on such date by any bank or trust company reasonably acceptable to the Required Holders. 6.3 SECTION HEADINGS AND TABLE OF CONTENTS AND CONSTRUCTION. (a) SECTION HEADINGS AND TABLE OF CONTENTS, ETC. The titles of the Sections of this Agreement and the Table of Contents of this Agreement appear as a matter of convenience only, do not constitute a part hereof and shall not affect the construction hereof. The words "herein," "hereof," "hereunder" and "hereto" refer to this Agreement as a whole and not to any particular Section or other subdivision. References to Sections are, unless otherwise specified, references to Sections of this Agreement. References to Annexes and Exhibits are, unless otherwise specified, references to Annexes and Exhibits attached to this Agreement. (b) CONSTRUCTION. Each covenant contained herein shall be construed (absent an express contrary provision herein) as being independent of each other covenant contained herein, and compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with one or more other covenants. 6.4 GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. 25 7. CONVERSION AND EXCHANGE OF NOTES FOR COMMON STOCK 7.1 NOTICE OF OCCURRENCE OF A TRIGGERING EVENT. (a) NOTICE OF TRIGGERING EVENT NOTICE EVENT. In the event of the obtaining of knowledge of a Triggering Event Notice Event by any Senior Officer, the Company will, within five (5) Business Days after the occurrence of such event, give notice of such Triggering Event Notice Event to each holder of Notes. Each such notice shall: (i) be dated the date of the sending of such notice; (ii) be executed by a Senior Officer; (iii) refer to this Section 7.1(a); and (iv) specify, in reasonable detail, the nature and date of the Triggering Event Notice Event and the Triggering Event which would result therefrom. (b) TRIGGERING EVENT NOTICE. In the event of a Triggering Event, the Company will, within five (5) Business Days after the occurrence of such event, or in the case of any Triggering Event the consummation or finalization of which would involve any action of the Company, at least ten (10) Business Days prior to such Triggering Event (the "TRIGGERING EVENT NOTICE DATE"), give notice of such Triggering Event to each holder of Notes. Each such notice shall: (i) be dated the date of the sending of such notice; (ii) be executed by a Senior Officer; (iii) refer to this Section 7.1(b); (iv) specify, in reasonable detail, the nature and date (or anticipated date) of the Triggering Event; and (V) describe in detail the right of the holder of Notes described in Section 7.2 hereof and the right of such holder pursuant to Section 7.2(c) to specify the date that any conversion of the Notes elected by such holder shall be deemed to be effected. 7.2 CONVERSION OF NOTES AT OPTION OF HOLDER. (a) CONVERSION RIGHT. Subject to Section 7.10 and Section 7.11, each holder of a Note may, not later than fifteen (15) days following the occurrence of a Triggering Event, at its option and election, convert the 26 unpaid principal amount of such Note or any portion thereof, at the Conversion Price, into that number of fully paid and nonassessable shares of Common Stock which equals the quotient of: (i) the principal amount to be so converted; DIVIDED BY (ii) the Conversion Price in effect at the time of such conversion. At the time of such conversion, the holder shall elect the time at which such conversion shall become effective in accordance with Section 7.2(c) and, if no such election is made, such holder shall be deemed to have elected the earliest date upon which such conversion could have become effective in accordance with Section 7.2(c). (b) MANNER OF CONVERSION; PARTIAL CONVERSION, ETC. Any Note may be converted in full or in part by the holder thereof by surrender of such Note, with a notice of conversion (a form of which is attached to each Note) attached thereto duly executed by such holder (specifying the portion of the principal amount thereof to be converted in the case of a partial conversion), to the Company on any Business Day following the Triggering Event Notice Date (but not later than fifteen (15) days following the occurrence of the related Triggering Event) at its principal office maintained in accordance with Section 3.1 of this Agreement; PROVIDED, HOWEVER, that in no case shall any conversion of Notes become effective unless the Triggering Event giving rise thereto shall have occurred. Upon any partial conversion of a Note, the Company at its expense will forthwith issue and deliver to or upon the order of the holder thereof a new Note or Notes in an aggregate principal amount equal to the unpaid and unconverted principal amount of such surrendered Note. (c) WHEN CONVERSION EFFECTIVE. Each conversion shall be deemed to have been effected, at the option of the holder of Notes making such election, upon either: (i) the date of, and at the time immediately preceding, the occurrence of the Triggering Event giving rise to such conversion right; and (ii) if such Business Day follows the date of such Triggering Event, the Business Day on which such Note shall have been surrendered to the Company as provided in Section 7.2(b) of this Agreement; PROVIDED, HOWEVER, that in no case shall any conversion of Notes become effective unless the Triggering Event giving rise thereto shall have occurred. 27 In either the case of clause (i) or clause (ii) above, at such time the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock (or Successor Property) shall be issuable upon such conversion shall be deemed to have become the holder or holders of record thereof. (d) DELIVERY OF STOCK CERTIFICATES, ETC. As soon as practicable after the conversion of any Note, in whole or in part, and in any event within five (5) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder of such Note or as such holder (upon payment by such holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Successor Property) to which such holder shall be entitled upon such conversion, rounded up to the nearest whole share; and (ii) in case such conversion is in part only, a new Note or Notes in an aggregate principal amount equal to the unpaid and unconverted principal amount of such converted Note. 7.3 EXCHANGE OF NOTES FOR COMMON STOCK BY THE COMPANY. (a) EXCHANGE RIGHT. Subject to Section 7.10 and Section 7.11, the Company may, not later than fifteen (15) days following the occurrence of a Triggering Event, at its option and election, convert all, but not less than all, the unpaid principal amount of all Notes, at the Conversion Price, into that number of fully paid and nonassessable shares of Common Stock which equals the quotient of: (i) the principal amount to be so converted; DIVIDED BY (ii) the Conversion Price in effect at the time of such conversion. (b) NOTICE OF EXCHANGE. In order to exercise its option pursuant to Section 7.3(a), the Company shall furnish, not later than fifteen (15) days after the occurrence of any Triggering Event, written notice to each holder of Notes. Such notice shall: (i) be dated the date of the sending of such notice; (ii) be executed by a Senior Officer; 28 (iii) refer to the right of the Company pursuant to this Section 7.3; (iv) state that the Company has exercised such right; (v) state the date (the "EXCHANGE DATE") on which such exchange shall become effective (which date shall be not earlier than the date of, and immediately preceding, the occurrence of the Triggering Event and not later than fifteen (15) days following the date of the occurrence of the Triggering Event; PROVIDED, HOWEVER, that in no case shall any exchange of Notes pursuant to this Section 7.3 become effective unless the Triggering Event giving rise thereto shall have occurred); (vi) state that, on the Exchange Date and after giving effect to the occurrence of the relevant Triggering Event and the effectiveness of the exchange, all rights of the holders of the Notes (other than the right to receive shares of Common Stock in accordance with this Section 7.3), including the right to receive the principal amount of the Notes at maturity, shall cease; and (vii) state that the holder may receive certificates for the shares of Common Stock into which the Notes held by such holder were exchanged pursuant to Section 7.3(c) by surrender of such Note to the Company on any Business Day following the effective date of such exchange at its principal office maintained in accordance with Section 3.1 of this Agreement. (c) DELIVERY OF SHARE CERTIFICATES. As soon as practicable after the surrender of any Note following the exchange thereof pursuant to this Section 7.3, and in any event within five (5) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder of such Note or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Successor Property) to which such holder shall be entitled upon such conversion, rounded up to the nearest whole share. (d) In the case of exercises under both Section 7.2 and Section 7.3, Section 7.3 shall control. 7.4 RESERVATION OF SHARES. The Company shall at all times reserve and keep available out of its authorized but unissued Common Stock, solely for the purpose of effecting the 29 conversion or exchange of the Notes, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Notes. The Company covenants that all shares of Common Stock which may be issued upon conversion or exchange of the Notes will upon issue be fully paid and non-assessable by the Company and free from all taxes, liens, and charges with respect to the issue thereof, and free of preemptive rights in favor of other Persons. At and after the effective time of any conversion or exchange, the Notes subject thereto shall evidence only the shares of Common Stock issuable in respect thereof. 7.5 ADJUSTMENT OF CONVERSION PRICE IN RESPECT OF STOCK DIVIDENDS, STOCK SPLITS, ETC. In the event that the Company shall, on or after the date hereof: (a) PAY a dividend in shares of additional Common Stock or make a distribution in shares of additional Common Stock in respect of shares of Common Stock; (a) reclassify by subdivision its outstanding shares of Common Stock into a greater number of shares; or (b) reclassify by combination its outstanding shares of Common Stock into a smaller number of shares; then, and in each such case, the Conversion Price in effect at the time of the record date for such dividend or of the effective date of such subdivision or combination shall be adjusted to that price determined by multiplying the Conversion Price in effect immediately prior to such event by the quotient of: (i) the total number of outstanding shares of Common Stock immediately prior to such event; DIVIDED BY (ii) the total number of outstanding shares of Common Stock immediately after such event. 7.6 DE MINIMIS CHANGES IN CONVERSION PRICE. No adjustment in the Conversion Price shall be required pursuant to Section 7.5 unless such adjustment would require an increase or decrease of at least one cent (1(cent)); PROVIDED that any adjustments that, at the time of the calculation thereof, are less than one cent (1(cent)) at such time and by reason of this Section 7.6 are not required to be made at such time shall be carried forward and added to any subsequent adjustment or adjustments for purposes of determining whether such subsequent adjustment or adjustments, as so supplemented, exceed one cent (1(cent)) and, if any such subsequent adjustment, as so supplemented or otherwise, should 30 exceed one cent (1(cent)), all adjustments deferred prior thereto and not previously made shall then be made. In any case, all such adjustments being carried forward pursuant to this Section 7.6 shall be given effect upon the conversion or exchange of the Notes for purposes of determining the Conversion Price applicable thereto. All calculations shall be made to the nearest cent. 7.7 NOTICE OF CHANGE IN CONVERSION PRICE. The Company shall give prompt written notice of any change in the Conversion Price to each holder of Notes. Each such notice shall set forth: (a) the Conversion Price both before and after the event; (b) a brief statement of the facts requiring such adjustments; and (c) the computation by which such adjustments were made. 7.8 EFFECT OF CONSOLIDATION, MERGER, SALE OR RECLASSIFICATION. In the event that there shall be: (a) any consolidation of the Company with, or merger of the Company with or into, another Person (other than a merger in which the Company is the surviving corporation and that does not result in any reclassification or change of shares of Common Stock outstanding immediately prior to such merger); (b) any sale or conveyance to another Person of the Property of the Company or ICON substantially as an entirety; or (c) any reclassification of the Common Stock that results in the issuance of Successor Property to the holders thereof; then, in each such case, lawful provision shall be made as a part of the terms of such transaction so that the holders of the Notes shall thereafter have the right to purchase the amount and kind of Successor Property receivable upon such consolidation, merger, sale, conveyance or reclassification by a holder of such number of shares of Common Stock as the holder of such Notes would have had the right to acquire upon the conversion or exchange thereof immediately prior to such consolidation, merger, sale, conveyance or reclassification, at the Conversion Price then in effect; and, without further action on the part of any Person, each Note will thereafter represent the right to receive, upon conversion or exchange thereof, such Successor Property as is so receivable. At the time of each such consolidation, merger or sale, the Person surviving such merger or consolidation or the Person to whom such sale or conveyance is made, as the case may be, shall expressly assume the due and punctual observance and performance of each and every provision of 31 this Section 7 and all obligations and liabilities of the Company hereunder (subject to the foregoing sentence). 7.9 COMMON STOCK SUBJECT TO STOCKHOLDERS AGREEMENT. Subject to Section 7.10, the Notes, and all Common Stock issued upon conversion or exchange of the Notes pursuant to this Section 7, and the rights and obligations of the Company and the holders of the Notes and the Common Stock issued upon conversion or exchange of the Notes pursuant to this Section 7, shall be subject to the provisions of the Stockholders Agreement and the holders of the Notes and such Common Stock shall be entitled to all of the benefits thereof. 7.10 INTEREST IN EXCESS OF 24.9%. Notwithstanding any other provision of this Agreement (other than Section 7.11), any other Financing Document, the LLC Agreement or the Warrant, in the event and to the extent that the Tentative Purchaser Ownership Level would at any time at or after the occurrence of a Triggering Event that this Note is owned by or for the benefit of the Purchaser or any Purchaser Transferee thereof, exceed the Permissible Purchaser Ownership Level, the following provisions shall apply: (a) GENERAL. (i) FIRST, that portion of the Warrant which would otherwise represent Excess Shares will not be exercisable, in which event the number of Excess Shares will be recomputed such that the LLC Shares which are not issuable as a result of this Section 7.10(a)(i) are subtracted from both the numerator and the denominator of the Tentative Purchaser Ownership Level definition; (ii) SECOND, that portion of the conversion right and the exchange right in Section 7.2(a) and Section 7.3(a) of this Agreement, which would otherwise result in the issuance of Excess Shares, will not be exercisable and, accordingly, shall not permit or require (as applicable) the Purchaser or any Purchaser Transferee to acquire any Excess Shares, in which event the number of Excess Shares will be recomputed by subtracting the Convertible Note Shares which are not issuable as a result of this Section 7.10(a)(ii) from both the numerator and denominator of the Tentative Purchaser Ownership Level definition (as previously recalculated pursuant to Section 7.10(a)(i)); and (iii) THIRD, that portion of the Option Shares which would otherwise represent Excess Shares will not be exercisable, in which event the number of Excess Shares will be recomputed such that the Option Shares which are not issuable as a result of this Section 32 7.10(a)(iii) are subtracted from both the numerator and the denominator of the Tentative Purchaser Ownership Level definition (as previously recalculated pursuant to Sections 7.10(a)(i) and 7.10(a)(ii)). EXCESS SHARE TRANSFER RIGHTS. At the request of the Purchaser, to the extent there has been a change in law or enforcement of the Banking Laws, the Company shall (i) use its best efforts to assist the Purchaser in locating one or more Exempt Transferees for that portion of the Note representing the right to receive Excess Shares (determined, solely, for this purpose, (x) immediately after giving effect to any transfer of the LLC Shares to an Exempt Transferee (as defined in Section 11 of the Warrant) pursuant to and in accordance with Section 1.5(b) of the Warrant, to the extent such transfer occurs prior to or simultaneously with any transfer pursuant to this Section 7.10(b), and (y) without giving effect to the recomputation of the number of Excess Shares as contemplated by Section 7.10(a)(i), Section 7.10(a)(ii) and Section 7.10(a)(iii) of this Agreement), and (ii) consent to the Purchaser effecting such transfer(s); PROVIDED, HOWEVER, that no such transfer shall be effective until the transferee has delivered to the Company a written acknowledgement and agreement in form and substance reasonably satisfactory to the Company that any shares of stock of the Company to be distributed by the Company to such transferee, following exercise by such transferee of the Note, shall be subject to all the provisions of the Stockholders Agreement and that such transferee is bound thereby and a party thereto to the same extent as the holder from whom the transfer was made. (b) In the event that any portion of the Warrant, of the conversion and exchange rights under Section 7.2(a) or 7.3(a) of this Agreement, or of the CSFB Option becomes not exercisable by virtue of clause (a) above (or in the case of the Warrant, by virtue of Section 1.5(a) thereof), the right to exercise (or in the case of the Company, the right to cause the exercise of) such unexercisable portion shall be suspended until, and become effective upon, the earliest time and to the maximum extent consistent with the Tentative Purchaser Ownership Level not exceeding, at the time of the effectiveness of any right to exercise (or to cause an exercise), the Permissible Ownership Level, such effectiveness to be allocated among the Option Shares, the Note and the Warrant in the reverse order of clauses (iii), (ii) and (i) of clause (a) of this Section 7.10. 7.11 AUTOMATIC CONVERSION UPON INSOLVENCY. Notwithstanding any other provision of this Agreement, any other Financing Document, the LLC Agreement or the Warrant, upon the occurrence of an Event of Default referred to in Section 4.1(b), the entire unpaid principal amount of the 33 Notes shall automatically convert, at the Conversion Price, into that number of fully paid and nonassessable shares of Common Stock which equals the quotient of: (i) the principal amount so converted; DIVIDED BY (ii) the Conversion Price in effect at the time of such conversion. As soon as practicable after the surrender of any Note following the occurrence of such conversion pursuant to this Section 7.11, and in any event within five (5) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder of such Note or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Successor Property) to which such holder shall be entitled upon such conversion, rounded up to the nearest whole share. 8. MISCELLANEOUS 8.1 COMMUNICATIONS. (a) METHOD; ADDRESS. All communications hereunder or under the Notes shall be in writing and shall be delivered either by nationwide overnight courier or by facsimile transmission (confirmed by delivery by nationwide overnight courier sent on the day of the sending of such facsimile transmission). Communications to the Company shall be addressed as set forth on Annex 2, or at such other address of which the Company shall have notified each holder of Notes. Communications to the Senior Agent shall be addressed as set forth on Annex 2, or at such other one address of which the Senior Agent and the Company both shall have notified each holder of Notes. Communications to the holders of the Notes shall be addressed as set forth on Annex 1 by such holder, or at such other address of which such holder shall have notified the Company (and the Company shall record such address in the register for the registration and transfer of Notes maintained pursuant to Section 3.1. (b) WHEN GIVEN. Any communication addressed and delivered as herein provided shall be deemed to be received when actually delivered to the address of the addressee (whether or not delivery is accepted) or received by the telecopy machine of the recipient. Any communication not so addressed and delivered shall be ineffective. (c) SERVICE OF PROCESS. Notwithstanding the foregoing provisions of this Section 8.1, service of process in any suit, action or proceeding arising out of or relating to this agreement or any document, agreement or transaction 34 contemplated hereby, or any action or proceeding to execute or otherwise enforce any judgment in respect of any breach hereunder or under any document or agreement contemplated hereby, shall be delivered in the manner provided in Section 8.7(c). 8.2 REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating hereto, including, without limitation, consents, waivers and modifications that may hereafter be executed, documents received by you at the closing of your purchase of the Notes (except the Notes themselves), and financial statements, certificates and other information previously or hereafter furnished to any holder of Notes, may be reproduced by the Company or any holder of Notes by any photographic, photostatic, microfilm, micro-card, miniature photographic, digital or other similar process and each holder of Notes may destroy any original document so reproduced. 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 the Company or such holder of Notes in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. Nothing in this Section 8.2 shall prohibit the Company or any holder of Notes from contesting the accuracy or validity of any such reproduction. 8.3 ENTIRE AGREEMENT. This Agreement, the Notes and the other Financing Documents embody the entire agreement and understanding among the Company and the Purchasers, and supersede all prior agreements and understandings, relating to the subject matter hereof. 8.4 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. The provisions hereof are intended to be for the benefit of all holders, from time to time, of Notes, and shall be enforceable by any such holder whether or not an express assignment to such holder of rights hereunder shall have been made by you or your successor or assign. Anything contained in this Section 8.4 notwithstanding, the Company may not assign any of its respective rights, duties or obligations hereunder or under any of the other Financing Documents without the prior written consent of all holders of Notes. For purposes of the avoidance of doubt, any holder of a Note shall be permitted to pledge or otherwise grant a Lien in and to such Note (including, without limitation, pledging such Note to a trustee for the benefit of certain secured noteholders pursuant to documents relating to the financing of such holder or to one or more banks or other institutions providing financing in connection with the purchase by such holder of 35 such Note); PROVIDED, HOWEVER, that any such pledgee or holder of a Lien shall not be considered a holder hereunder until it shall have foreclosed upon such Note in accordance with applicable law and informed the Company, in writing, of the same. Notwithstanding the foregoing, if any conflict exists between the terms of this Section 8.4 and the terms of the Stockholders Agreement, the terms of the Stockholders Agreement shall control. 8.5 AMENDMENT AND WAIVER. (a) REQUIREMENTS. This Agreement may be amended, and the observance of any term hereof may be waived, with (and only with) the written consent of the Company and the Required Holders; PROVIDED, HOWEVER, that no such amendment or waiver shall, without the written consent of the holders of all Notes (exclusive of Notes held by the Company, any Subsidiary or any Affiliate) at the time outstanding; (i) change the amount or time of the required payment of principal; (ii) amend or waive the provisions of Section 5, or amend or waive any defined term to the extent used therein; (iii) amend or waive the definition of "Required Holders;" or (iv) amend or waive this Section 8.5 or amend or waive any defined term to the extent used herein. The holder of any Note may specify that any such written consent executed by it shall be effective only with respect to a portion of the Notes held by it (in which case it shall specify, by dollar amount, the aggregate principal amount of Notes with respect to which such consent shall be effective) and in the event of any such specification such holder shall be deemed to have executed such written consent only with respect to the portion of the Notes so specified. No amendment, supplement or modification of the provisions of Section 5, or any defined term to the extent used therein, shall be effective as to any holder of Senior Debt who has not consented to such amendment, supplement or modification. (b) BINDING EFFECT. Any amendment or waiver consented to as provided in this Section 8.5 shall apply equally to all holders of Notes and shall be binding upon them and upon each future holder of any Note and upon the Company whether or not such Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. 36 8.6 EXPENSES. (a) AMENDMENTS AND WAIVERS. The Company shall pay when billed the reasonable costs and expenses (including reasonable attorneys' fees) incurred by the holders of the Notes in connection with the consideration, negotiation, preparation or execution of any amendments, waivers, consents, standstill agreements and other similar agreements with respect to this Agreement or any other Financing Document (whether or not any such amendments, waivers, consents, standstill agreements or other similar agreements are executed). (b) RESTRUCTURING AND WORKOUT, INSPECTIONS. At any time when the Company and the holders of Notes are conducting restructuring or workout negotiations in respect hereof, or a Default or Event of Default exists, the Company shall pay when billed the reasonable costs and expenses (including reasonable attorneys' fees and the fees of professional advisors) incurred by the holders of the Notes in connection with the assessment, analysis or enforcement of any rights or remedies that are or may be available to the holders of Notes, including, without limitation, in connection with inspections of any of the Properties, books of account, records, reports and other papers of the Company or any of the Subsidiaries; PROVIDED, HOWEVER, that at all times during which no restructuring or workout negotiations are continuing and no Default or Event of Default exists, inspections will be at the expense of the inspecting holder of Notes. (c) COLLECTION. If the Company shall fail to pay when due the principal of any Note, the Company shall pay to each holder of Notes, to the extent permitted by law, such amounts as shall be sufficient to cover the costs and expenses, including but not limited to reasonable attorneys' fees, incurred by such holder in collecting any sums due on such Note. 8.7 WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; ETC. (a) WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION, CLAIM, CAUSE OF ACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE), INQUIRY, PROCEEDING OR INVESTIGATION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING. EACH 37 PARTY HERETO ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE OTHER PARTIES HERETO THAT THIS SECTION 8.7(A) CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH THEY ARE RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 8.7(A) WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. (b) CONSENT TO JURISDICTION. Each party to this Agreement, by its execution hereof, (a) hereby irrevocably submits to the exclusive jurisdiction of the state courts of the State of New York sitting in the County of New York or the United States District Court for the Southern District of New York for the purpose of any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof, (b) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, and agrees not to allow any of its subsidiaries to assert, by way of motion, as a defense or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceeding brought in one of the above-named courts is improper, or that this Agreement or the subject matter hereof or thereof may not be enforced in or by such court and (c) hereby agrees not to commence or maintain any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof or thereof other than before one of the above-named courts nor to make any motion or take any other action seeking or intending to cause the transfer or removal of any such action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation to any court other than one of the above-named courts whether on the grounds of inconvenient forum or otherwise. Notwithstanding the foregoing, to the extent that any party hereto is or becomes a party in any litigation in connection with which it may assert indemnification rights, the court in which such litigation is being heard shall be deemed to be included in clause (a) above. (c) SERVICE OF PROCESS. Each party hereto hereby consents to service of process in any such proceeding in any manner permitted by New York law, and agrees that service of process by registered or certified mail, return receipt requested, at its address specified pursuant to Section 8.1 is reasonably calculated to give actual notice. The provisions of this Section 8.7(c) shall not restrict the ability of any party to enforce in any court any judgment obtained in the federal or state courts of the State of New York. 38 8.8 EXECUTION IN COUNTERPART. This Agreement may be executed in one or more counterparts and shall be effective when at least one counterpart shall have been executed by each party hereto, and each set of counterparts that, collectively, show execution by each party hereto shall constitute one duplicate original. [Remainder of page left intentionally blank; Next page is the signature page.] 39 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed and delivered by one of its duly authorized officers or representatives. HF HOLDINGS, INC. By:_________________________________ Name: Title: CREDIT SUISSE FIRST BOSTON CORPORATION By:_________________________________ Name: Title: [Signature page to the Note Agreement] ANNEX 1 ADDRESS OF PURCHASER; PAYMENT INSTRUCTIONS
================================================================================ PURCHASER NAME CREDIT SUISSE FIRST BOSTON CORPORATION - -------------------------------------------------------------------------------- Name in which Note is Registered CREDIT SUISSE FIRST BOSTON CORPORATION ================================================================================ Note Registration Number; Principal R-1; $7,500,000 Amount of Note - -------------------------------------------------------------------------------- Payments on Account of Note Method Federal Funds Wire Transfer Account Information Citibank New York, NY ABA No.: 021-000-089 Acct. Name: Credit Suisse First Boston-Distressed Acct. No.: 4080-4716 Re: HF Holdings, Inc. Attn.: Demetri Catis - -------------------------------------------------------------------------------- Accompanying Information Name of Company: HF HOLDINGS, INC. Description of Security: 0% Convertible Subordinated Notes due September 27, 2011 Due Date and Application (as among principal) of the payment being made: ================================================================================ ================================================================================ Address for Notices Related Credit Suisse First Boston Corporation to Payments Eleven Madison Avenue New York, NY 10010-3629 Attn: Christopher Pechock Fax: 212.325.8290 - -------------------------------------------------------------------------------- Address for All Other Notices Credit Suisse First Boston Corporation Eleven Madison Avenue New York, NY 10010-3629 Attn: Christopher Pechock Fax: 212.325.8290 WITH A COPY TO: Bingham Dana LLP One State Street Hartford, CT 06103-3178 Attn: Evan D. Flaschen Fax : 860.240.2800 - -------------------------------------------------------------------------------- Other Instructions Signature Page Format: CREDIT SUISSE FIRST BOSTON CORPORATION By___________________________ Name: Title: - -------------------------------------------------------------------------------- Tax Identification Number 13-5659485 ================================================================================
Annex 1-2 ANNEX 2 ADDRESSES FOR NOTICES ADDRESS OF COMPANY FOR NOTICES: HF Holdings, Inc. c/o ICON Health & Fitness, Inc. 875 South Main Street Logan, Utah 84321 Telephone: 435 750-4000 Facsimile: 435 753-3665 Attn: President ADDRESS OF SENIOR AGENT FOR NOTICES: General Electric Capital Corporation 10 South LaSalle Street, Suite 2700 Chicago, Illinois 60603 Attention: ICON Health & Fitness, Account Manager Telephone: 312 419-0985 Facsimile: 312 419-5992 Annex 2-1 ATTACHMENT A [FORM OF NOTE] THIS NOTE WAS ISSUED IN A PRIVATE PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL, SATISFACTORY TO THE ISSUER, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. IN ADDITION, THIS NOTE IS SUBJECT TO RESTRICTIONS ON VOTING AND TRANSFER AND REQUIREMENTS OF SALE AND OTHER PROVISIONS AS SET FORTH IN THE STOCKHOLDERS AGREEMENT DATED AS OF SEPTEMBER 27, 1999, AS AMENDED AND IN EFFECT FROM TIME TO TIME, AND CONSTITUTES A CSFB SECURITY AS DEFINED IN SUCH STOCKHOLDERS AGREEMENT. THE COMPANY WILL FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER OF THIS NOTE WITHOUT CHARGE UPON WRITTEN REQUEST. HF HOLDINGS, INC. 0% CONVERTIBLE SUBORDINATED NOTE DUE SEPTEMBER 27, 2011 No. R-__ $_______ __________ __, ____ HF HOLDINGS, INC. (together with its successors, the "Company"), a Delaware corporation, for value received, hereby promises to pay to ______ or registered assigns the principal sum of ______ DOLLARS ($______) on September 27, 2011. Payment of principal shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts to the registered holder hereof at the address shown in the register maintained by the Company for such purpose, in the manner provided in the Note Agreement (defined below). This Note is one of an issue of Notes of the Company issued in an aggregate principal amount limited to Seven Million Five Hundred Thousand Dollars ($7,500,000) pursuant to the Amended and Restated Note Agreement (as may be amended, restated or otherwise modified from time to time, the "Note Agreement"), dated as of September 27, 1999, between the Company and the purchaser listed on Annex 1 thereto. The holder of this Note is entitled to the benefits of the Note Agreement. This Note is subject to the terms of the Note Agreement, and such terms are incorporated herein by reference. Capitalized terms used herein and not defined herein have the meanings specified in the Note Agreement. All of the principal of this Note may, under certain circumstances, be declared due and payable in the manner and with the effect provided in the Note Agreement. -1- This Note is a registered Note and is transferable only by surrender at the principal office of the Company as specified in the Note Agreement, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of this Note or its attorney duly authorized in writing. The obligations evidenced by this Note are subordinated to the Senior Debt on the terms provided in the Note Agreement. THIS NOTE AND THE NOTE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. HF HOLDINGS, INC. By:_________________________ Name: Title: -2- [FORM OF NOTICE OF CONVERSION] To HF HOLDINGS, INC. The undersigned elects to convert $______________________ in principal amount of the accompanying Note into the number of shares of Common Stock of HF Holdings, Inc. issuable upon the conversion of such principal amount of such Note, and requests that the certificates for such shares be issued in the name of: - ------------------------------------------------------------------------ (Please print or type name, address and zip code.) - ------------------------------------------------------------------------ (Please insert social security number or tax ID number If such principal amount of the accompanying Note shall not be the entire principal amount of the accompanying Note, a new Note or Notes for the balance remaining of such Note shall be registered in the name of and delivered to: - ------------------------------------------------------------------------ (Please print or type name, address and zip code.) - ------------------------------------------------------------------------ (Please insert social security number or tax ID number The undersigned elects that the conversion of the accompanying Note shall be deemed to have been effected upon: |_| the date of, and at the time immediately preceding, the occurrence of the "Triggering Event" giving rise to such conversion right; or |_| the Business day on which the accompanying Note shall have been surrendered to the Company. Dated: ____________________, _________ [HOLDER] By:_________________________ NOTICE The signature to the foregoing Notice of Conversion must correspond to the name as written upon the face of the accompanying Note or any prior assignment thereof in every particular, without alteration or enlargement or any change whatsoever. -3- EX-10.8 16 EXHIBIT 10.8 Exhibit 10.8 JOINDER AND SUPPLEMENT TO STOCKHOLDERS AGREEMENT This JOINDER AND SUPPLEMENT TO STOCKHOLDERS AGREEMENT is made as of ________, 1999, among HF Holdings, Inc., a Delaware corporation (the "Company"), ICON Health & Fitness, Inc., a Delaware corporation ("ICON"), and each of the persons designated as an Employee Stockholder on the signature pages of this Agreement (each an "Employee Stockholder" and, collectively, the "Employee Stockholders"). RECITALS 1. The Company, ICON and certain other parties thereto have entered into a Stockholders Agreement dated as of September 27, 1999 ("Stockholders Agreement"); 2. The Company granted options to each Employee Stockholder, and each Employee Stockholder received from the Company, Options to purchase Common Stock, par value $0.001, of the Company ("Common Stock"); and 3. The parties believe that it is in the best interests of the Company and the Stockholders (i) to provide that shares of Common Stock purchased upon the exercise of Plan Options, as hereinafter defined, shall be transferable only upon compliance with the terms hereof; (ii) to provide the Company with certain rights with respect to the purchase of shares of Common Stock from time to time held or to be held by the Employee Stockholders or any subsequent holder of Employee Shares, as hereinafter defined, under certain circumstances; and (iii) to set forth their agreements on certain other matters. AGREEMENT NOW, THEREFORE, the parties hereto hereby agree as follows: 1. DEFINITIONS. Capitalized Terms defined in the Stockholders Agreement and not otherwise defined herein are used herein as so defined, and the following terms shall have the following respective meanings: 1.1. "Call Note" shall mean a promissory note of the Company (a) which shall bear interest at the rate of interest at which United States Treasury debt obligations having a two-year maturity (or as close thereto as reasonably possible) bear interest on the date of issuance of such note; (b) the principal of, and all accrued and unpaid interest on, which shall be payable, subject to clauses (c), (d), and (e) of this Section 1.1, in equal installments, the first of which shall be due upon issuance of the note, and the second and third of which shall be due on each of the first and second anniversaries of such issuance, respectively; (c) payment of which shall not be due unless and until each of the Company and any of its subsidiaries, including without limitation ICON, shall be entitled to pay funds for the repurchase of shares of the Company under the terms of any substantial debt obligation, to which the Company and each subsidiary is, respectively, a party; (d) which shall be subordinated to all other indebtedness of the Company, and shall otherwise contain terms and conditions satisfactory to the lenders of the Company; and (e) all or any part of which the Company may, at its option, prepay. 1.2. "Call Option Price" shall mean the fair market value of such Employee Shares as of the date of the Call Notice, as determined by the Board of Directors of the Company (the "Board") in its discretion. The fair market value determined by the Board shall be binding upon the Company, each Employee Stockholder, and their respective successors and assigns. 1.3. "Employee Shares" shall mean all shares of Common Stock acquired upon the exercise of Plan Options held at any time by any Employee Stockholder or any subsequent holder thereof. 1.4. "Employee Stockholders" shall mean all persons designated as such on the signature pages of this Agreement and each other Person who hereafter agrees to become subject to this Agreement as an Employee Stockholder. 1.5. "Estate" shall mean, as to each Employee Stockholder, the estate thereof. 1.6. "Lien" shall mean any mortgage, pledge, lien, security interest, charge, claim, equity, encumbrance, restriction on transfer or voting, conditional sale or other title retention device, transfer for the purpose of subjection to the payment of any obligation, or restriction on the creation of any of the foregoing; provided, however, that the term "Lien" shall not include restrictions on transfer of securities imposed by applicable state and federal securities laws. 1.7. "Plan Options" shall mean all options to purchase Common Stock of the Company at any time granted to an Employee Stockholder. 1.8. "Significant Public Float" shall be deemed to exist on and after (i) the date of closing of the Initial Public Offering of Common Stock of the Company if as of such date there shall be outstanding shares having an aggregate market value (calculated on the basis of the offering price to the public in such Public Offering) of $200,000,000 or more and (ii) if a Significant Public Float (as defined in clause (i) above) shall not have existed as of the date of closing of the Initial Public Offering, the first date thereafter on which there shall be outstanding shares having an aggregate market value (calculated on the basis of the average of the published best bid and ask or published closing price, through NASDAQ or on a registered exchange, on the five immediately preceding trading days) of $200,000,000 or more. 1.9. "Termination Event" shall mean, with respect to any Employee Stockholder, (i) the termination of the employment of such Person with the Company and each of its Subsidiaries, whether by reason of death, disability, retirement, resignation, discharge with or without cause or for any other reason whatsoever, voluntary or involuntary, or (ii) the failure of any Employee Stockholder to sell his Employee Shares on the terms and pursuant to the provisions of Section 6 of the Stockholders Agreement, or, after having executed a written commitment, on the terms and pursuant to the provisions of Section 7 thereof. -2- 2. JOINDER TO STOCKHOLDERS AGREEMENT. On the terms and subject to the conditions hereof, the parties hereto agree for themselves and for the benefit of all persons now or hereafter parties to the Stockholders Agreement, that all of the Employee Stockholders shall be deemed Junior Management Investors for purposes of the Stockholders Agreement and that Plan Options and all Shares of Company Common Stock now or hereafter held by the Employee Stockholders shall be subject to the Stockholders Agreement, as amended and in effect from time to time, and shall be subject to all the obligations and entitled to all the rights applicable to Junior Management Securities thereunder; provided, however, that if and to the extent that provisions applicable to Junior Management Securities conflict with provisions applicable hereunder to Employee Shares, such conflict will be resolved by applying to Employee Shares the provisions applicable hereunder. 3. OPTIONS TO PURCHASE COMMON STOCK. 3.1. Call Option. Each holder of Employee Shares hereby grants the Company an option (the "Call Option") to purchase all or any part of the Employee Shares held by such holder at a price per share equal to the Call Option Price, exercisable by the Company within 455 days after the occurrence of a Termination Event other than death of the Employee Stockholder, or within 575 days in the event of death of the Employee Stockholder, with respect to the Employee Stockholder to whom or to whose Estate the Employee Shares held by such holder were originally issued. 3.2. Manner of Exercise of Call Option. The Call Option may be exercised by sending of written notice thereof (the "Call Notice") to all holders of Employee Shares originally issued to the Employee Stockholder or such Employee Stockholder's Estate or Legal Representative with respect to which Employee Stockholder the Termination Event has occurred (the "Call Employee Stockholder Group"). The Call Notice shall state that the Company has elected to exercise the Call Option and the number of Employee Shares with respect to which the Call Option is being exercised. 3.3. Closing. The closing of the purchase of the Employee Shares pursuant to the exercise of the Call Option shall take place 20 business days from the date the Call Notice was sent, at the principal office of the Company, or at such other time and location as the parties to such purchase may mutually determine. At the closing the Company shall pay to the Call Employee Stockholder Group the aggregate Call Option Price for the Employee Shares to be purchased pursuant to the Call Option (i) by delivery of a Call Note or (ii) at the Company's option, in cash by wire transfer or check. At such time, the Call Employee Stockholder Group shall deliver to the Company the certificate or certificates representing the Employee Shares so purchased, each duly endorsed for transfer and with signature guaranteed, free and clear of any Liens, with any necessary stock transfer tax stamps affixed. 3.4. Termination. No Call Notice may be sent from and after the existence of a Significant Public Float. -3- 4. LEGENDS. 4.1. Employee Shares. Each certificate representing Employee Shares shall, in addition to any other legends prescribed by law or by the Stockholders Agreement, have the following legend endorsed conspicuously thereupon: The shares of stock represented by this certificate are also subject to certain call rights as provided in the Joinder and Supplement to Stockholders Agreement dated as of September 27, 1999, as amended and in effect from time to time, and were originally issued to, or were issued in respect of shares originally issued to, the following Junior Management Investor: ____________. 4.2. Removal. Any person who acquires Common Stock which is not subject to all or part of the terms of this Agreement shall have the right to have such legends (or the inapplicable portion thereof) removed from certificates representing such Common Stock. 5. EFFECT ON EMPLOYMENT. As an inducement to the Company to issue the Employee Shares to the Employee Stockholders, and as a condition thereto, each Employee Stockholder acknowledges and agrees that: (i) neither the issuance of the Employee Shares to any Employee Stockholder nor anything contained herein shall give any Employee Stockholder any right to be retained in the employ of the Company, affect the right of the Company to discharge or discipline such Employee Stockholder at any time or affect any right of such Employee Stockholder to terminate his or her employment at any time; and (ii) neither the Company nor any Affiliate of the Company shall have any duty or obligation to affirmatively disclose to any Employee Stockholder, and no Employee Stockholder shall have any right to be advised of, any material information regarding the Company or otherwise at any time prior to, upon or in connection with the purchase of Employee Shares from such Employee Stockholder in accordance with the provisions hereof. 6. MISCELLANEOUS. 6.1. Notices. Notices and other communications provided for in this Agreement shall be in writing and shall be sent by certified mail, return receipt requested, addressed to the party or parties sought to be charged with notice of the same at the respective addresses set forth below, subject to written notice of change of address given by any party to the other parties. If to the Company, to the address set forth in the Stockholders Agreement, as in effect from time to time. -4- If to any holder of Plan Options, to such holder at his, her, or its address in the Company's personnel records (which address the Company agrees to furnish to any holder of shares of Common Stock for use in connection with this Agreement upon written request). Notice to the holder of record of any Plan Options shall be deemed to be notice to the holder of such options for all purposes hereunder. If to any holder of Common Stock, to such holder at his, her, or its address in the stock register maintained by the Company (which address the Company agrees to furnish to any holder of shares of Common Stock for use in connection with this Agreement upon written request). Notice to the holder of record of any shares of Common Stock shall be deemed to be notice to the holder of such shares for all purposes hereunder. 6.2. Change and Modifications; Termination; Actions under this Agreement. This Agreement may not be orally changed, modified, extended or terminated, nor shall any oral waiver of any of its terms be effective. This Agreement may be terminated, changed, modified or extended (i) insofar as it makes the provisions of the Stockholders Agreement binding upon and inuring to the benefit of the parties hereto, by amendment or termination of the Stockholders Agreement in accordance with the provisions thereof; or (ii) insofar as it provides for different rights and obligations for Employee Shares from those applicable to Junior Management Securities, by an agreement in writing signed by the Company and by the holders of at least a majority of the Employee Shares, but not otherwise. Copies of any such termination, change, extension or modification shall be sent by the Company to, and be binding upon, each party hereto and each holder of Employee Shares. 6.3. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns, and shall inure to the benefit of persons now or hereafter parties to the Stockholders Agreement. 6.4. Gender and Number. With respect to words used in this Agreement, the singular form shall include the plural form, the neuter gender shall include the feminine or masculine gender, and vice versa, as the context requires. 6.5. Descriptive Headings. The descriptive headings of this Agreement are for convenience of reference only, are not to be considered a part hereof and shall not be construed to define or limit any of the terms or provisions hereof. 6.6. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an executed original enforceable as against each party signing such counterpart, but all of which taken together shall constitute one instrument. 6.7. Severability. In the event that any provision hereof would, under applicable law, be invalid or unenforceable, such provision shall, to the extent permitted under applicable law, be construed by modifying or limiting it so as to be valid and enforceable to the maximum extent possible under applicable law. The provisions of this Agreement are severable, and in the -5- event that any provisions hereof should be held invalid or unenforceable in any respect, it shall not invalidate, render unenforceable or otherwise affect any other provision hereof. 6.8. Governing Law, Arbitration. This Agreement shall be construed, its validity determined and disputes arising under it resolved as provided in Section 15 of the Stockholders Agreement. 6.9. Remedies. The parties hereto shall have all remedies for breach of this Agreement available to them provided by law or equity. Without limiting the generality of the foregoing, the parties agree that in addition to all other rights and remedies available at law or in equity, the parties shall be entitled to obtain specific performance of the obligations of each party to this Agreement and immediate injunctive relief, and that in the event any action or proceeding is brought in equity to enforce the same, no holder of Shares will urge, as a defense, that there is an adequate remedy at law. [THIS SPACE INTENTIONALLY LEFT BLANK] -6- [Jr. Management Stock Option Plan] IN WITNESS WHEREOF, the parties hereto have hereunto set their hands under seal, as of the date first above written. HF HOLDINGS, INC. By_______________________ Title: ICON HEALTH & FITNESS, INC. By_______________________ Title: [Jr. Management Stock Option Plan] EMPLOYEE STOCKHOLDERS _____________________________ _____________________________ _____________________________ _____________________________ _____________________________ EX-10.9 17 EXHIBIT 10.9 Exhibit 10.9 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION FROM SUCH REQUIREMENT UNDER SUCH ACT. AMENDED AND RESTATED HF INVESTMENT HOLDINGS, LLC HF CLASS C UNITS PURCHASE WARRANT as of September 27, 1999 THIS CERTIFIES that, for value received, Credit Suisse First Boston Management Corporation, a Delaware corporation ("CSFB"), is the owner of this Warrant to purchase from HF INVESTMENT HOLDINGS, LLC, a Delaware limited liability company (the "Company"), fifty thousand (50,000) of the Company's HF Class C Units (the "Units"). This warrant (the "Warrant") has been issued to CSFB in exchange for five million dollars ($5,000,000). Except as otherwise provided in Section 2.1 hereof, the aggregate exercise price of this Warrant is equal to five hundred dollars ($500) (the "Full Exercise Price"). In the event that this Warrant is exercised in part, and not in full, and except as otherwise provided in Section 2.1 hereof, the aggregate exercise price in respect of such partial exercise shall be (a) one cent ($0.01) MULTIPLIED BY (b) the number of Units as to which this Warrant is being exercised (the "Partial Exercise Price"). Each of the Full Exercise Price and the Partial Exercise Price is sometimes referred to herein as an "Exercise Price." 1. EXERCISE OF WARRANT. 1.1 NOTICE OF OCCURRENCE OF A LIQUIDITY EVENT. (a) NOTICE OF LIQUIDITY EVENT NOTICE EVENT. In the event of the obtaining of knowledge of a Liquidity Event Notice Event by any Administrative Member, the Company will, within five (5) Business Days after the occurrence of such event, give notice of such Liquidity Event Notice Event to the holder of this Warrant. Each such notice shall: (i) be dated the date of the sending of such notice; (ii) be executed by an Administrative Member; (iii) refer to this Section 1.1(a); and (iv) specify, in reasonable detail, the nature and date of the Liquidity Event Notice Event and the Liquidity Event which would result therefrom. (b) LIQUIDITY EVENT NOTICE. In the event of a Liquidity Event, the Company will, within five (5) Business Days after the occurrence of such event, or in the case of any Liquidity Event the consummation or finalization of which would involve any action of the Company, at least thirty (30) days prior to such Liquidity Event (the "Liquidity Event Notice Date"), give notice of such Liquidity Event to the holder of this Warrant. Each such notice shall: (i) be dated the date of the sending of such notice; (ii) be executed by an Administrative Member; (iii) refer to this Section 1.1(b); (iv) specify, in reasonable detail, the nature and date (or anticipated date) of the Liquidity Event; and (v) describe in detail the right of the holder of this Warrant to exercise as described in Section 1.2 hereof and the right of such holder pursuant to Section 1.3 to specify the date that any exercise of the Warrant elected by such holder shall be deemed to be effected. 1.2 EXERCISE. Subject to the provisions of Section 1.5 hereof, this Warrant may be exercised by the registered holder hereof at any time within thirty (30) days following the occurrence of a Liquidity Event, but in no event after September 26, 2024 (the "Expiration Date"), in whole or in part, by the surrender on any Business Day following the Liquidity Event Notice Date of this Warrant, duly endorsed (unless endorsement is waived by the Company), at the principal office of the Company (or at such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at such holder's last address appearing on the books of the Company) and payment of the Exercise Price. At the time of any such exercise, the holder shall elect the time at which such exercise shall be effective in accordance with Section 1.3 hereof, and if no such election is made, such holder shall be deemed to have elected the earliest date upon which such exercise could have become effective in accordance with Section 1.3. Upon the partial exercise of this Warrant, the Company at its expense will forthwith issue and deliver to the holder of this Warrant a new Warrant exercisable for a number of Units equal to (x) the maximum number of Units for which, immediately prior to such partial exercise, this Warrant could be exercised MINUS (y) the number of Units issued by the Company to the holder as a result of such partial exercise. -2- 1.3 WHEN EXERCISE EFFECTIVE. Exercise of this Warrant shall be deemed to have been effected, at the option of the holder of the Warrant, upon either: (a) the date of, and at the time immediately preceding, the occurrence of the Liquidity Event giving rise to such exercise right; or (b) if such Business Day follows the date of such Liquidity Event, the Business Day on which the Warrant shall have been surrendered to the Company as provided in Section 1.2 of this Warrant; PROVIDED, HOWEVER, that in no case shall any exercise of the Warrant become effective unless the Liquidity Event giving rise to the right to exercise the Warrant shall have occurred. At such time as exercise of this Warrant shall be deemed to have been effected, the holder hereof shall be deemed to be owner of the Units issuable upon such exercise. 1.4 DEEMED EXERCISE UPON INSOLVENCY EVENT. This Warrant shall automatically be deemed to have been exercised in full by the registered holder hereof upon the occurrence of an Insolvency Event, without any action on the part of the registered holder (including, without limitation, the surrender at such time of this Warrant or the payment at such time of any Exercise Price), and following such deemed exercise, this Warrant shall cease to be of any further force or effect. 1.5 INTEREST IN EXCESS OF PERMISSIBLE PURCHASER OWNERSHIP LEVEL. Notwithstanding any other provision of this Warrant (other than Section 1.4) or the Company Agreement, in the event and to the extent that the Tentative Purchaser Ownership Level would, at any time at or after a Liquidity Event that this Warrant is owned by or for the benefit of CSFB, any Affiliate of CSFB or any Holder Transferee thereof, exceed the Permissible Purchaser Ownership Level, the following provisions shall apply: (a) GENERAL. That the portion of this Warrant which would otherwise represent Excess Shares will not be exercisable, in which event the number of Excess Shares will be recomputed such that the Excess Shares which are not issuable as a result of this Section 1.5(a) are subtracted from both the numerator and the denominator of the Tentative Purchaser Ownership Level definition; (b) EXCESS SHARE TRANSFER RIGHTS. At the request of the holder of this Warrant, to the extent there has been a change in law or enforcement of the BHCA or the IBA, the Company shall (i) use its best efforts to assist such holder in locating one or more Exempt Transferees for that portion of this Warrant representing the right to receive Excess Shares (determined, solely for this purpose, (x) immediately after giving effect to any transfer of the Convertible Note Shares to an Exempt Transferee (as defined in Section 6.1 of the Note Agreement) pursuant to and in accordance with Section 7.10(b) of the Note Agreement, to the exent such transfer occurs prior to or simultaneously with any -3- transfer pursuant to this Section 1.5(b), and (y) without giving effect to the recomputation of the number of Excess Shares as contemplated by Section 1.5(a) of this Warrant), and (ii) consent to such holder effecting such transfer(s); PROVIDED, HOWEVER, that no such transfer shall be effective until the transferee has delivered to the Company a written acknowledgement and agreement in form and substance reasonably satisfactory to the Company that any shares of stock of HF Holdings to be distributed by the Company to such transferee, following exercise by such transferee of the Warrant, shall be subject to all the provisions of the Stockholders Agreement and that such transferee is bound thereby and a party thereto to the same extent as the holder from whom the transfer was made. (c) In the event that any portion of the Warrant becomes not exercisable by virtue of clause (a) above, the right to exercise such unexercisable portion shall be suspended until, and become effective upon, the earliest time and to the maximum extent consistent with the Tentative Purchaser Ownership Level not exceeding, at the time of the effectiveness of any right to exercise, the Permissible Ownership Level. 1.6 DELIVERY OF CERTIFICATES. If the Units are represented by certificates, as soon as practicable after exercise of this Warrant, and in any event within five (5) Business Days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, a certificate or certificates for the number of duly authorized and validly issued Units to which such holder shall be entitled upon such exercise. 2. ADJUSTMENT OF UNIT EXERCISE PRICE AND NUMBER OF UNITS. 2.1 IN GENERAL. In the event that the Company shall, on or after the date hereof: (a) make a distribution of additional HF Units in respect of HF Units; (b) reclassify by subdivision its outstanding HF Units into a greater number of HF Units; or (c) reclassify by combination its outstanding HF Units into a smaller number of HF Units; then, and in each such case, the Unit Exercise Price in effect at the time of the record date for such distribution or of the effective date of such subdivision or combination shall be adjusted to that price determined by multiplying the Unit Exercise Price in effect immediately prior to such event by the quotient of: (i) the total number of outstanding HF Units immediately prior to such event; DIVIDED BY -4- (ii) the total number of outstanding HF Units immediately after such event. Upon each adjustment of the Unit Exercise Price, the holder of this Warrant shall thereafter be entitled to purchase, at a price per Unit equal to the Unit Exercise Price resulting from such adjustment, the number of HF Units obtained by dividing the product of the number of HF Units purchasable pursuant hereto immediately prior to such adjustment and the Unit Exercise Price immediately preceding such adjustment by the Unit Exercise Price resulting from such adjustment. 2.2 NOTICE OF CHANGE IN UNIT EXERCISE PRICE. The Company shall give prompt written notice of any change in the Unit Exercise Price to the holder of this Warrant. Each such notice shall set forth: (a) the Unit Exercise Price both before and after the event; (b) a brief statement of the facts requiring such adjustments; and (c) the computation by which such adjustments were made. 2.3 EFFECT OF CONSOLIDATION, MERGER, SALE OR RECLASSIFICATION. In the event that there shall be: (a) any consolidation of the Company with, or merger of the Company with or into, another Person (other than a merger in which the Company is the surviving entity and that does not result in any reclassification or change of HF Units outstanding immediately prior to such merger); (b) any sale or conveyance to another Person of the Property of the Company substantially as an entirety; or (c) any reclassification of the HF Units that results in the issuance of Successor Property to the holder thereof; then, in each such case, lawful provision shall be made as a part of the terms of such transaction so that the holder of the Warrant shall thereafter have the right to purchase the amount and kind of Successor Property receivable upon such consolidation, merger, sale, conveyance or reclassification by a holder of such number of HF Units as the holder of such Warrant would have had the right to acquire upon the conversion or exchange thereof immediately prior to such consolidation, merger, sale conveyance or reclassification, at the Exercise Price then in effect; and, without further action on the part of any Person, the Warrant will thereafter represent the right to receive, upon exercise thereof, such Successor Property as is so receivable. At the time of each such consolidation, merger or sale, the Person surviving such merger or consolidation or -5- the Person to whom such sale or conveyance is made, as the case may be, shall expressly assume the due and punctual observance and performance of each and every provision of Section 1.5 and this Section 2 and all obligations and liabilities of the Company hereunder and thereunder (subject to the foregoing sentence). 3. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its limited liability company agreement or through any merger, reorganization, transfer of assets, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and the taking of all such action. 4. COMPANY TO PROVIDE UNITS. The Company covenants and agrees that all the Units which may be issued upon the exercise of this Warrant will be duly authorized, validly issued, and free from all taxes, liens, and charges with respect to the issue thereof to the registered holder hereof, other than those which the Company shall promptly pay or discharge. The Company further covenants and agrees that during the period within which this Warrant may be exercised, the Company will at all times reserve such number of Units as may be sufficient to permit the exercise in full of the Warrant. 5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and in the case of any such loss, theft or destruction of this Warrant, on delivery of the affidavit of the holder, or its duly authorized representative, setting forth the circumstances with respect to such loss, theft, or destruction, together with the holder's written agreement to indemnify the Company with respect thereto unless the Company has received notice that any such Warrant has been acquired by a bona fide purchaser, or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 6. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the holder hereof as follows: 6.1 DUE ORGANIZATION. The Company is a limited liability company duly organized and validly existing and in good standing under the laws of Delaware. 6.2 DUE AUTHORIZATION. The Company has the power to execute and deliver this Warrant, and any other document or agreement contemplated by or in furtherance of the purposes of this Warrant, and to perform its obligations under each thereof, and has taken all necessary action to authorize such execution, delivery and performance. The issuance, sale, or delivery of this Warrant is not subject to any preemptive right of holders of membership interests of the Company or to any right of first refusal or other right in favor of any person. -6- 6.3 NONCONTRAVENTION. Such execution, delivery, and performance do not violate or conflict in any material respect with any law applicable to the Company, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets, or any contractual restriction binding on or affecting it or any of its assets. 6.4 CONSENTS. All governmental and other consents that are required to have been obtained by the Company with respect to the Warrant and the performance thereof have been obtained and are in full force and effect and all conditions of any such consents have been complied with. 6.5 ENFORCEABILITY. This Warrant constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject to the laws of general application relating to bankruptcy, insolvency and relief of debtors and other laws of general application, the enforcement of creditors' rights generally, rules of law governing specific performance, injunctive relief and equitable remedies. The Units issued upon exercise of this Warrant will be duly authorized and validly issued. 7. REGISTERED HOLDER. The registered holder of this Warrant shall be deemed the owner hereof for all purposes. The registered holder of this Warrant shall not be entitled by virtue of ownership of this Warrant to any rights whatsoever as a member of the Company. 8. AMENDMENTS AND WAIVERS. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by each of the Company and the registered holder of this Warrant. 9. TRANSFER. (a) This Warrant may not be sold, assigned, pledged, encumbered, hypothecated, mortgaged, exchanged, given away, disposed of or otherwise transferred, voluntarily or involuntarily, pursuant to judicial process or otherwise (whether used as a verb or noun, each a "Transfer"), except that this Warrant may be Transferred in whole or in part: (i) to the Company in one or more transactions approved by a Voting Majority; (ii) to any holder of Class B Units of the Company in a transaction approved by a Voting Majority; (iii) pursuant to the terms of Section 1.5(b); and (iv) in the case of a holder that is an institutional investor, to any Person under common control with such holder in a bona fide Transfer not part of a -7- transaction or series of transactions that results in the direct or indirect Transfer of the Warrant to a Person not under common control with such holder; PROVIDED, HOWEVER, that no such Transfer shall be effective until such transferee under common control has delivered to the Company a written acknowledgement and agreement in form and substance reasonably satisfactory to the Company that any shares of stock of HF Holdings to be distributed by the Company to such transferee, following exercise by such transferee of the Warrant, shall be subject to all the provisions of the Stockholders Agreement and that such transferee is bound thereby and a party thereto to the same extent as the holder from whom the Transfer was made. (b) Notwithstanding the foregoing Section 9(a) or Section 1.5(b), this Warrant may not be Transferred unless and until: (i) the transferor shall have notified the Company of the proposed Transfer and shall have furnished the Company with a statement of the circumstances surrounding the proposed Transfer; (ii) if reasonably requested by the Company, such transferor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such Transfer will not require registration of such Warrant under the Securities Act of 1933, as amended, and that all requisite action has been or will, on a timely basis, be taken under any applicable state securities laws in connection with such Transfer; and (iii) the proposed transferee shall have agreed in writing to be bound by the terms and provisions of this Section 9. (c) Upon a permitted Transfer of a portion of this Warrant (that is, the Transfer of the right to receive, upon payment of the Exercise Price to the Company, a number of Units less than the maximum number of Units for which, immediately prior to such Transfer, this Warrant could be exercised), the Company at its expense will forthwith issue and deliver to each of the transferor and transferee a new Warrant exercisable for the number of Units specified by the transferor; PROVIDED, HOWEVER, THAT, the aggregate number of Units for which the Warrant issued to the transferor and the Warrant issued to the transferee will be exercisable will not exceed the maximum number of Units for which, immediately prior to the Transfer, this Warrant could be exercised. 10. GOVERNING LAW. This Warrant shall be construed and enforced in accordance with and governed by the laws (other than the choice of law rules) of the State of New York. -8- 11. DEFINITIONS. As used herein, the following terms have the respective meanings indicated below. "ADMINISTRATIVE MEMBER" shall have the meaning specified in the Company Agreement. "AFFILIATE" shall have the meaning specified in the Company Agreement. "BHCA" means the Bank Holding Company Act of 1956, as amended, and the rules, regulations and official or staff interpretations promulgated thereunder, all as from time to time in effect. "BUSINESS DAY" means a day other than a Saturday, a Sunday or a day on which banks in the Sate of New York are required or permitted by law (other than a general banking moratorium or holiday for a period exceeding four (4) consecutive days) to be closed. "CAPITAL STOCK" means any class of preferred common or other capital stock, share capital or similar equity interest of a Person including, without limitation, any partnership interest in any partnership or limited partnership and any membership interest in any limited liability company. "COMPANY" is defined in the preamble hereto. "COMPANY AGREEMENT" means the amended and restated limited liability company agreement of the Company dated as of the date hereof. "COMPANY SHARES" is defined in this Section 11 (in the definition of "Tentative Purchaser Ownership Level"). "CONVERTIBLE NOTE SHARES" is defined in this Section 11 (in the definition of "Tentative Purchaser Ownership Level"). "CSFB" is defined in the preamble hereto. "EXCESS SHARES" means, at any time, a number of Company Shares equal to the lesser of (a) all Company Shares and (b) the minimum number of Company Shares that, when subtracted from both the numerator and denominator of the Tentative Purchaser Ownership Level, will cause the Tentative Purchaser Ownership Level not to exceed the Permissible Purchaser Ownership Level. "EXERCISE PRICE" is defined in the preamble hereto. "EXEMPT TRANSFEREE" is defined in this Section 11 (in the definition of "Holder Transferee"). -9- "FULL EXERCISE PRICE" is defined in the preamble hereto. "HF CLASS C UNITS" shall have the meaning specified in the Company Agreement. "HF HOLDINGS" means HF Holdings, Inc., a Delaware corporation. "HF HOLDINGS SHARES" means shares of the common stock of HF Holdings, par value $0.001 per share. "HF UNITS" shall have the meaning specified in the Company Agreement. "HOLDER TRANSFEREE" means any direct or indirect purchaser from, or transferee or assignee of, the holder of this Warrant, or any Affiliate of such purchaser, transferee or assignee, OTHER THAN: (a) a purchaser, transferee or assignee to which HF Holdings Shares or any portion of this Warrant representing the right to receive HF Holdings Shares is sold, transferred or assigned from the holder of this Warrant either (i) in a widely dispersed public distribution, or (ii) in one or more private transactions that do not result in one purchaser, transferee or assignee obtaining more than four and nine-tenths percent (4.9%) of the HF Holdings Shares, or that portion of this Warrant representing the right to receive more than four and nine-tenths percent (4.9%) of the HF Holdings Shares, which purchaser, transferee or assignee purchases such HF Holdings Shares or such portion of the Warrant in the normal course of its business for investment purposes only, and with no intention of influencing control over HF Holdings; and (b) any other purchaser, transferee or assignee to which HF Holdings (in the case of this clause (b) only) consents, in HF Holdings' sole discretion. A purchaser, transferee or assignee referred to in either clause (a) or clause (b) above is referred to herein as an "Exempt Transferee." "IBA" means the International Banking Act of 1978, as amended, and the rules, regulations and official or staff interpretations promulgated thereunder, all as from time to time in effect. "ICON" means ICON Health & Fitness, Inc., a Delaware corporation. "ICON RESTRUCTURING" means the completion by HF Holdings and ICON of the exchanges of 13% Senior Subordinated Notes due 2002 of ICON, 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc. and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation for the consideration specified in the Exchange Offer and Consent Solicitation of HF Holdings and ICON, dated July 30, 1999, as supplemented. "INSOLVENCY EVENT" means an Event of Default described in Section 4.1(b) of the Note Agreement. "LIQUIDITY EVENT" shall have the meaning specified in the Stockholders Agreement. -10- "LIQUIDITY EVENT NOTICE EVENT" means any event which, with the giving of notice or the passage of time, or both, would become, or result in, a Liquidity Event, including, without limitation, the execution of any written agreement which, when fully performed by the parties thereto, would result in a Liquidity Event. "NOTE" shall have the meaning specified in the Note Agreement. "NOTE AGREEMENT" shall mean the Amended and Restated Note Agreement dated as of the date hereof between HF Holdings and Credit Suisse First Boston Corporation, a Massachusetts corporation. "OPTION SHARES" is defined in this Section 11 (in the definition of "Tentative Purchaser Ownership Level"). "OWNERSHIP BASE" is defined in this Section 11 (in the definition of "Tentative Purchaser Ownership Level"). "PARTIAL EXERCISE PRICE" is defined in the preamble hereto. "PERMISSIBLE PURCHASER OWNERSHIP LEVEL" means at any time the greater of (a) twenty-four and nine-tenths percent (24.9%) of the HF Holdings Shares, and (b) the amount of shares in a portfolio company that the holder of this Warrant, together with its Affiliates, is allowed to own or control under the BHCA, the IBA and other applicable law. "PERSON" means an individual, partnership, corporation, limited liability company, joint venture, trust, unincorporated organization, or a government or agency or political subdivision thereof. "PROPERTY" means any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible. "STOCKHOLDERS AGREEMENT" shall mean the Stockholders Agreement dated as of the date hereof among HF Holdings, ICON, the Company and certain other equityholders of HF Holdings. "SUCCESSOR PROPERTY" means, in the case of any consolidation, merger, sale, conveyance or reclassification described in Section 2.3, the shares of Capital Stock, other securities, cash, Property or rights, warrants or options receivable upon such consolidation, merger, sale, conveyance or reclassification in respect of the HF Units held by a holder thereof. "TENTATIVE PURCHASER OWNERSHIP LEVEL" means, at any time, a fraction (expressed as a percentage): -11- (i) the NUMERATOR of which shall be the sum of: (a) the aggregate amount of HF Holdings Shares then held by the holder of this Warrant and its Affiliates and any Holder Transferees (which, for purposes of this definition, shall be deemed to include all HF Holdings Shares then outstanding and held by or for the benefit of the holder of this Warrant or its Affiliates or any Holder Transferees PLUS, those HF Holdings Shares that are not then outstanding, which are subject to options, warrants or other conversion privileges that are held by or for the benefit of the holder of this Warrant and its Affiliates and any Holder Transferee and that are then exercisable (but shall be deemed not to include any HF Holdings Shares that are not outstanding, which are subject to options, warrants or other conversion privileges that are held by or for the benefit of any other Person)), (b) the aggregate number of HF Holdings Shares to which the holder of this Warrant and its Affiliates and any Holder Transferee would otherwise then be entitled or required to own pursuant to Section 7.2(a) or Section 7.3(a) of the Note Agreement (the "Convertible Note Shares"), (c) the aggregate number of HF Holdings Shares to which such holder and its Affiliates and any Holder Transferee would otherwise then be entitled or required to own pursuant to the Company Agreement and this Warrant (the "Company Shares"), and (d) any HF Holdings Shares to which such holder and its Affiliates and any Holder Transferee would otherwise then be entitled or required to own upon exercise of the CSFB Option (as such term is defined in Section 5.2 of the Stockholders Agreement (the "Option Shares"); (ii) the DENOMINATOR of which shall be the sum of: (a) the aggregate number of HF Holdings Shares then outstanding (which, for purposes of this definition, shall be deemed to include all HF Holdings Shares then outstanding PLUS, those HF Holdings Shares that are not then outstanding, which are subject to options, warrants or other conversion privileges that are held by or for the benefit of the holder of this Warrant or its Affiliates or any Holder Transferee and that are then exercisable (but shall be deemed not to include any HF Holdings Shares that are not outstanding, which are subject to options, warrants or other conversion privileges that are held by or for the benefit of any other Person)), (b) the Convertible Note Shares, (c) the Company Shares, and (d) the Option Shares (such sum, the "Ownership Base"); PROVIDED, THAT, no specific HF Holdings Shares (including the Company Shares, the Convertible Note Shares and the Option Shares) shall be counted more than once in calculating either the numerator or the denominator set forth in clause (i) or clause (ii) above. "TRANSFER" has the meaning specified in Section 9. "UNITS" is defined in the preamble hereto. "UNIT EXERCISE PRICE" means one cent ($0.01) as adjusted pursuant to the terms of Section 2.1. -12- "VOTING MAJORITY" has the meaning specified in the Company Agreement. "WARRANT" is defined in the preamble hereto. -13- IN WITNESS WHEREOF, HF INVESTMENT HOLDINGS, LLC has caused this Warrant to be signed by a duly authorized Administrative Member as of the date first above written. HF INVESTMENT HOLDINGS, LLC By: /s/ SCOTT R. WATTERSON ----------------------------------- Name: Scott R. Watterson Title: Administrative Member -14- EX-10.10 18 EXHIBIT 10.10 Exhibit 10.10 - -------------------------------------------------------------------------------- HF HOLDINGS, INC. ------------------------ STOCKHOLDERS AGREEMENT ------------------------ Dated as of September 27, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS 1. DEFINITIONS..............................................................2 1.1. Certain Definitions..............................................2 1.2. Certain Matters of Construction..................................9 1.3. Cross Reference Table...........................................10 2. [RESERVED]..............................................................11 3. VOTING AGREEMENT........................................................12 3.1. Election of Directors...........................................12 3.2. Removal of Directors............................................12 3.3. Successors......................................................12 3.4. Certain Transactions............................................13 3.5. Committees......................................................13 3.6. Special Rule for Fund Designated Directors......................13 3.7. Proxy; the Company..............................................14 3.8. Period..........................................................15 4. CERTAIN TRANSFER RIGHTS AND RESTRICTIONS................................16 4.1. Securities......................................................16 4.2. Period..........................................................17 4.3. Status in Hands of Certain Transferees..........................18 4.4. Lock-Up.........................................................18 5. CSFB AND JUNIOR MANAGEMENT OPTIONS......................................18 5.1. Junior Management...............................................18 5.2. CSFB............................................................21 6. "TAKE ALONG" RIGHTS.....................................................23 6.1. Procedure.......................................................23 6.2. Certain Legal Requirements......................................24 6.3. Further Assurances; Management Roll-over........................25 6.4. Closing.........................................................26 6.5. Fairness Opinions in Certain Circumstances......................26 6.6. Special Approval Right..........................................27 6.7. Period..........................................................27 -i- 7. CO-SALE RIGHTS..........................................................28 7.1. Tag Along.......................................................28 7.2. Certain Legal Requirements......................................30 7.3. Further Assurances; Management Roll-Over........................31 7.4. Closing.........................................................32 7.5. Excluded Transactions...........................................32 7.6. Period..........................................................33 8. REGISTRATION RIGHTS.....................................................33 8.1. Piggyback Registration Rights...................................33 8.2. Demand Registration Rights......................................35 8.3. Certain Other Provisions........................................38 8.4. Indemnification and Contribution................................40 8.5. Lock-up. ......................................................43 9. CERTAIN FUTURE EQUITY FINANCINGS OF THE COMPANY.........................43 9.1. Right of Participation..........................................44 9.2. Termination.....................................................47 10. DETERMINATION OF FAIR MARKET VALUE.....................................47 11. REMEDIES...............................................................48 11.1. Generally......................................................48 11.2. Deposit........................................................48 12. LEGENDS................................................................48 12.1. Securities Act Legend..........................................49 12.2. Stockholders Agreement Legend..................................49 12.3. Option-Eligible Shares Legend..................................49 13. AMENDMENT, TERMINATION, ETC............................................50 13.1. No Oral Modifications..........................................50 13.2. Written Modifications..........................................50 14. MISCELLANEOUS..........................................................51 14.1. Authority; Effect..............................................51 14.2. Notices........................................................51 14.3. Binding Effect, etc............................................53 14.4. Descriptive Headings...........................................53 -ii- 14.5. Counterparts...................................................53 14.6. Severability...................................................54 14.7. Joint and Several Liability of the Company and ICON............54 14.8. Third Party Beneficiaries......................................54 14.9. Termination of Equity Commitment Letter........................54 14.10. Limitation on CSFB Acquisitions................................54 15. GOVERNING LAW..........................................................55 15.1. Governing Law..................................................55 15.2. Consent to Jurisdiction........................................55 15.3. WAIVER OF JURY TRIAL...........................................55 15.4. Reliance.......................................................56 -iii- STOCKHOLDERS AGREEMENT This Stockholders Agreement (the "Agreement") is made as of September 27, 1999 by and among: (i) HF Holdings, Inc., a Delaware corporation (the "Company"), (ii) ICON Health & Fitness, Inc. a Delaware corporation ("ICON"), (iii) each of Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates and BCIP Trust Associates, L.P. (collectively, the "Bain Initial Investors," and each a "Bain Initial Investor"), (iv) HF Investment Holdings, LLC, a Delaware limited liability company (the "LLC"), (v) Credit Suisse First Boston Corporation, a Massachusetts corporation (together with its affiliates, "CSFB"), (vi) each of Gary Stevenson and Scott Watterson (together, the "Senior Management Initial Investors," and each a "Senior Management Initial Investor"), and (vii) each of Inverness/Phoenix Capital LLC, a Delaware limited liability company, Stanley C. Tuttleman and any other parties signing a counterpart signature page hereto as of the date hereof (collectively, the "Other Initial Investors," and each an "Other Initial Investor"). Recitals 1. Pursuant to a Subscription and Stock Purchase Agreement dated as of the date hereof, as listed on Schedule I hereto (the "LLC Purchase Agreement"), the LLC has agreed to purchase shares of Common Stock, par value $.001 per share (the "Common Stock") of the Company. Simultaneously therewith, the Bain Initial Investors, CSFB, the Senior Management Initial Investors and the Other Initial Investors have agreed to purchase membership units in the LLC. 2. Pursuant to a Securities Purchase Agreement dated as of the date hereof, as listed on Schedule I hereto (the "CSFB Purchase Agreement"), CSFB has agreed to purchase shares of Common Stock and notes convertible into shares of Common Stock. In addition, pursuant to the Exchange Offers (as defined herein), CSFB is acquiring warrants to purchase shares of Common Stock. For the avoidance of doubt, such warrants shall not constitute Non-CSFB Warrants (as defined below) and shall constitute CSFB Securities (as defined below) for all purposes of this Agreement. 3. Pursuant to the Exchange Offers, the former bondholders of ICON, IHF Holdings, Inc. and ICON Fitness Corporation who participate in the Exchange Offers (the "Non-CSFB Initial Warrantholders") are acquiring warrants to purchase shares of Common Stock (the "Non-CSFB Warrants"). 4. Concurrent with the closings under the LLC Purchase Agreement and CSFB Purchase Agreement, the Senior Management Initial Investors are receiving shares of Common Stock. In addition, subsequent to the closings under the LLC Purchase Agreement and CSFB Purchase Agreement, certain members of the junior management of ICON who execute a Joinder and Supplement to this Stockholders Agreement (the "Junior Management Initial Investors") will be granted options to purchase shares of Common Stock under the Company's 1999 Junior Management Stock Option Plan. 5. The parties believe that it is in the best interests of the Company and the Investors to: (i) provide that certain shares of Common Stock shall be transferable only upon compliance with the terms hereof; (ii) provide the Company with certain rights and obligations with respect to the purchase of shares of Common Stock under certain circumstances; (iii) provide for certain rights and obligations of the Bain Investors and the Other Investors with respect to the election of directors of the Company; and (iv) set forth their agreements on certain other matters. Agreement Now therefore, in consideration of the foregoing and the mutual agreements set forth below, the parties hereto, each intending to be legally bound, hereby agree as follows: 1. DEFINITIONS. For purposes of this Agreement: 1.1. Certain Definitions. The following terms shall have the following meanings: 1.1.1. "Affiliate" shall mean, with respect to any specified Person, any Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with, the Person specified. 1.1.2. "Affiliated Buyer" shall mean any Proposed Buyer which is (i) any Bain Investor or Affiliated Fund or (ii) any Person in which any Bain Investor or Affiliated -2- Fund holds any shares of stock (or in the case of a Person which is not a corporation, equivalent class of beneficial interest), other than shares of stock (or equivalent beneficial interest) to be received in exchange for Securities pursuant to the Sale. 1.1.3. "Affiliated Fund" shall mean any limited partnership or other Person formed for the purpose of investing in other companies or businesses and for which Bain Capital Investors, Inc., a Delaware corporation, or any of its Affiliates, acts as a general partner or otherwise has the right to direct the voting of shares of corporations in which such limited partnership or other Person invests. 1.1.4. "Bain Investor" shall mean (i) after the LLC Liquidation, any Bain Initial Investor and any Affiliated Fund, any transferee pursuant to Section 7.5(a) or (b) or any holder of Class B Units of the LLC which, from time to time, acquires Shares or Options and becomes party to this Agreement by executing and delivering to the Company an instrument in form satisfactory to the Company pursuant to which such stockholder agrees to be bound by the terms of this Agreement to the same extent as a Bain Initial Investor and (ii) prior to the LLC Liquidation, the LLC. 1.1.5. "Bain Majority Holders" shall mean, as of any date, the holders of a majority of the Bain Securities outstanding on such date. 1.1.6. "Bain Securities" shall mean (a) all shares of Common Stock originally issued to, or issued with respect to shares originally issued to, or held by, the Bain Investors, whenever issued, including, without limitation, all shares of Common Stock issued pursuant to the exercise or conversion of any Options and (b) all Options originally granted or issued to a Bain Investor (treating such Options as a number of Shares equal to the number of Equivalent Shares represented by such Options for all purposes of this Agreement except as otherwise specifically set forth herein). 1.1.7. "Board" shall mean the Board of Directors of the Company. 1.1.8. "CSFB Investors" shall mean CSFB and any transferee pursuant to Section 4.1.5 which, from time to time, acquires Shares or Options and becomes party to this Agreement by executing and delivering to the Company an instrument in form satisfactory to the Company pursuant to which such person agrees to be bound by the terms of this Agreement to the same extent as CSFB. 1.1.9. "CSFB Majority Holders" shall mean, as of any date, the holders of a majority of the CSFB Securities outstanding on such date. -3- 1.1.10. "CSFB Securities" shall mean (a) all shares of Common Stock originally issued to, or issued with respect to shares originally issued to, or held by, CSFB, whenever issued, including, without limitation, all shares of Common Stock issued pursuant to the exercise or conversion of any Options and (b) all Options originally granted or issued to CSFB (treating such Options as a number of Shares equal to the number of Equivalent Shares represented by such Options for all purposes of this Agreement except as otherwise specifically set forth herein). 1.1.11. "Equivalent Shares" shall mean as to any outstanding shares of Common Stock, such number of shares of Common Stock, and as to any outstanding Options, the maximum number of shares of Common Stock for which or into which such Options may at the time be exercised or converted. 1.1.12. "Exchange Act" shall mean Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as from time to time in effect. 1.1.13."Exchange Offers" shall mean the exchange offers effected with respect to ICON's 13% Senior Subordinated Notes due 2002, IHF Holdings, Inc.'s 15% Senior Secured Discount Notes due 2004 and ICON Fitness Corporation's 14% Senior Discount Notes due 2006 as described in the Company's and ICON's Exchange Offer and Consent Solicitation Statement, dated July 30, 1999, as amended and supplemented from time to time. 1.1.14. "Fair Market Value" shall mean, as of any date, the fair value of any Security or other securities as of the applicable date, as determined pursuant to Section 10. 1.1.15. "Financial Buyer" shall mean an entity controlled directly or indirectly by one or more institutional investors. 1.1.16. "Independent Investment Banking Firm" means any nationally recognized investment banking firm listed on Schedule 1.1.18 hereto which is not the Beneficial Owner of any equity interest in (i) the Company, (ii) any shareholder of the Company, (iii) any Bain Investor or Affiliated Fund or (iv) any Affiliate of any Bain Investor or Affiliated Fund. 1.1.17. "Initial Public Offering" shall mean the first public offering of shares of Common Stock registered on form S-1, S-2 or S-3 (or any successor form) under the Securities Act. -4- 1.1.18. "Investor" shall mean any Bain Investor or Other Investor. 1.1.19. "Junior Management Investor" shall mean any Junior Management Initial Investor and any other officer or employee of the Company or any of its subsidiaries designated by the Board to be a Junior Management Investor hereunder and any transferee pursuant to Section 4.1.2, 4.1.3 or 4.1.4 who, from time to time, acquires Shares or Options and becomes party to this Agreement by executing and delivering to the Company an instrument in form satisfactory to the Company pursuant to which such person agrees to be bound by the terms of this Agreement to the same extent as a Junior Management Investor. 1.1.20. "Junior Management Securities" shall mean (a) all shares of Common Stock originally issued to, or issued with respect to shares originally issued to, or held by, the Junior Management Investors, whenever issued, including, without limitation, all shares of Common Stock issued pursuant to the exercise or conversion of any Options and (b) all Options originally granted or issued to a Junior Management Investor (treating such Options as a number of Shares equal to the number of Equivalent Shares represented by such Options for all purposes of this Agreement except as otherwise specifically set forth herein). 1.1.21. "Liquidity Event" shall mean the occurrence of (i) the consummation by the Company of an Initial Public Offering with gross proceeds greater than $50 million, (ii) the merger or consolidation of the Company or ICON with or into another entity, or sale of stock of the Company or ICON, in which the holders of outstanding voting securities of the Company as of the date hereof (including for such purpose the holders of membership interests in the LLC) cease to own, directly or indirectly, greater than 51% of the outstanding voting securities of the entity surviving such merger or consolidation or sale or (iii) the sale of all or substantially all of the assets of the Company or ICON. 1.1.22. "LLC Liquidation" shall mean the distribution of substantially all of the assets of the LLC to its members. 1.1.23. "Management Initial Investor" shall mean any Senior Management Initial Investor or Junior Management Initial Investor. 1.1.24. "Management Investor" shall mean any Senior Management Investor or Junior Management Investor. -5- 1.1.25. "Management Majority Holders" shall mean, as of any date, the holders of a majority of the Management Securities outstanding on such date. 1.1.26. "Management Securities" shall mean the Senior Management Securities and the Junior Management Securities. 1.1.27. "Members of the Immediate Family" shall mean, with respect to any individual, each spouse, parent, brother, sister or child of such individual, each spouse of any such Person, each child of any of the aforementioned Persons, each trust created solely for the benefit of one or more of the aforementioned Persons and each custodian or guardian of any property of one or more of the aforementioned Persons in his capacity as such custodian or guardian. 1.1.28. "Non-CSFB Warrantholder" shall mean the Non-CSFB Initial Warrantholders, and any other Person which, from time to time, acquires Non-CSFB Warrant Securities and thereby becomes entitled to the benefits of certain provisions of this Agreement. 1.1.29. "Non-CSFB Majority Warrantholders" shall mean, as of any date, the holders of a majority of the Non-CSFB Warrant Securities outstanding on such date. 1.1.30. "Non-CSFB Warrant Securities" shall mean all Non-CSFB Warrants originally issued to the Non-CSFB Warrantholders (treating such Non-CSFB Warrants as a number of Shares equal to the number of Equivalent Shares represented by such Non-CSFB Warrants for all purposes of this Agreement except as otherwise specifically set forth herein) and all Shares issued upon exercise or conversion of Non-CSFB Warrants (or issued upon conversion of or otherwise with respect to Shares issued upon exercise or conversion of Non-CSFB Warrants), whenever issued. 1.1.31. "Option-Eligible Shares" shall mean the Shares originally issued to (or issued upon conversion of or otherwise with respect to the Shares originally issued to) the LLC on the date hereof, which Shares shall remain Option-Eligible Shares in the hands of any transferee until termination of the Junior Management Options and the CSFB Option set forth in Section 5. -6- 1.1.32. "Options" shall mean (i) any options or warrants or other rights to subscribe for, purchase or otherwise acquire Common Stock, other than rights to acquire Shares pursuant to this Agreement, and (ii) any evidence of indebtedness, shares of stock (other than Common Stock) or other securities which are directly or indirectly convertible or exchangeable for shares of Common Stock, but shall exclude the Non-CSFB Warrants, the Junior Management Options, the CSFB Option and any call rights in respect of shares issued to employees of the Company or its subsidiaries. 1.1.33. "Other Investor" shall mean any Other Initial Investor, CSFB Investor, Management Investor, or any other holder of Class C Units of the LLC who receives Shares from the LLC upon the LLC Liquidation and any other Person which, from time to time, acquires Shares and becomes party to this Agreement by executing and delivering to the Company an instrument in form satisfactory to the Company pursuant to which such Person agrees to be bound by the terms of this Agreement to the same extent as an Other Investor. 1.1.34. "Other Majority Holders" shall mean, as of any date, the holders of a majority of the Other Securities outstanding on such date. 1.1.35. "Other Securities" shall mean (a) all shares of Common Stock originally issued to, or issued with respect to shares originally issued to, or held by, the Other Investors, whenever issued, including, without limitation, all shares of Common Stock issued pursuant to the exercise or conversion of any Options and (b) all Options originally granted or issued to an Other Investor (treating such Options as a number of Shares equal to the number of Equivalent Shares represented by such Options for all purposes of this Agreement except as otherwise specifically set forth herein). For avoidance of doubt, the Other Securities shall not include the Non-CSFB Warrant Securities. 1.1.36. "Permitted Management Transferee" shall mean, as to each Management Security, a transferee of such Management Security in compliance with Section 4.1.2, 4.1.3 or 4.1.4. 1.1.37. "Person" shall mean any individual, partnership, corporation, company, association, trust, joint venture, unincorporated organization or entity, or any government, governmental department or agency or political subdivision thereof. 1.1.38. "Registrable Securities" shall mean (i) all shares of Common Stock, (ii) all shares of Common Stock issuable upon exercise or conversion of any Option or of any Non-CSFB Warrant, and (iii) all shares of Common Stock directly or indirectly issued or -7- issuable with respect to the securities referred to in clauses (i) or (ii) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization, in each case included in the Securities or the Non-CSFB Warrant Securities. As to any particular Registrable Securities, such shares shall cease to be Registrable Securities when (a) they have been effectively registered under the Securities Act and disposed of in accordance with the registration statement covering them, (b) they have been distributed to the public through a broker, dealer or market maker pursuant to Rule 144 or (c) the holder thereof may sell all of its Shares under Rule 144 within a three month period, provided such holder owns less than 1% of the outstanding shares of Common Stock, in each case in compliance with any applicable provisions of this Agreement. 1.1.39. "Rule 144" shall mean Rule 144, as from time to time in effect, promulgated by the Securities and Exchange Commission under the Securities Act (including without limitation clause (k) thereof). 1.1.40. "Securities" shall mean all Shares and all Options included in the Bain Securities or the Other Securities, but shall not include the Non-CSFB Warrant Securities. 1.1.41. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, all as from time to time in effect. 1.1.42. "Senior Management Investor" shall mean any Senior Management Initial Investor, any transferee pursuant to Section 4.1.2, 4.1.3 or 4.1.4 or any holder of Class A Units of the LLC who, from time to time, acquires Shares or Options and becomes party to this Agreement by executing and delivering to the Company an instrument in form satisfactory to the Company pursuant to which such person agrees to be bound by the terms of this Agreement to the same extent as a Senior Management Initial Investor. 1.1.43. "Senior Management Majority Holders" shall mean, as of any date, the holders of a majority of the Senior Management Securities outstanding on such date. 1.1.44. "Senior Management Securities" shall mean (a) all shares of Common Stock originally issued to, or issued with respect to shares originally issued to, or held by, the Senior Management Investors, whenever issued, including, without limitation, all shares of Common Stock issued pursuant to the exercise or conversion of any Options and (b) all Options originally granted or issued to a Senior Management Investor (treating such Options as a number of Shares equal to the number of Equivalent Shares represented by -8- such Options for all purposes of this Agreement except as otherwise specifically set forth herein). 1.1.45. "Shares" shall mean all shares of Common Stock. 1.1.46. "Significant Public Float" shall be deemed to exist on and after (i) the date of closing of the Initial Public Offering of Common Stock of the Company if as of such date there shall be outstanding shares having an aggregate market value (calculated on the basis of the offering price to the public in such Public Offering) of $200,000,000 or more and (ii) if a Significant Public Float (as defined in clause (i) above) shall not have existed as of the date of closing of the Initial Public Offering, the first date thereafter on which there shall be outstanding shares having an aggregate market value (calculated on the basis of the average of the published best bid and ask or published closing price, through NASDAQ or on a registered exchange, on the five immediately preceding trading days) of $200,000,000 or more. 1.1.47. "Transfer" shall mean any sale, pledge, assignment, encumbrance or other transfer or disposition of any Securities to any other Person, whether directly, indirectly, voluntarily, involuntarily, by operation of law, pursuant to judicial process or otherwise. 1.1.48. "Voting Shares" shall mean, with respect to any matter to be voted upon, all Shares included in the Securities entitled to vote with respect to such matter. 1.2. Certain Matters of Construction. In addition to the definitions referred to as set forth in the Section 1.1: (a) The words "hereof", "herein", "hereunder" and words of similar import shall refer to this Agreement as a whole and not to any particular Section or provision of this Agreement, and reference to a particular Section of this Agreement shall include all subsections thereof; (b) References to a Section, Schedule or Exhibit are to a Section of, or Schedule or Exhibit to, this Agreement; (c) Definitions shall be equally applicable to both the singular and plural forms of the terms defined; (d) The masculine, feminine and neuter genders shall each include the other; -9- (e) Except as otherwise provided herein, any Person who holds Options or Non-CSFB Warrants shall be deemed to be the holder of the Registrable Securities obtainable upon exercise or conversion of the Options or Non-CSFB Warrants in connection with the transfer thereof or otherwise regardless of any restriction or limitation on the exercise or conversion of the Options or Non-CSFB Warrants; and (f) Whenever a percentage of one or more types of Securities is specified, such percentage shall be calculated on the basis on the number of Registrable Securities represented by such one or more types. 1.3. Cross Reference Table. The following terms defined elsewhere in this Agreement in the Sections set forth below shall have the respective meanings therein defined: Term Definition "Agreement" Preamble "Bain Designated Director" Section 3.1 "Bain Initial Investor" Preamble "Come Along Notice" Section 6.1 "Common Stock" Recitals "Company" Preamble "Covered Person" 8.4.1 "CSFB" Preamble "CSFB Closing" Section 5.2.3 "CSFB Designated Directors" Section 3.1 "CSFB Option" Section 5.2 "CSFB Option-Eligible Shares" Section 5.2 "CSFB Purchase Agreement" Recitals "Exercising Purchaser" Section 5.1.3 "Fair Market Value" Section 10 "General Representations" Section 6.3 "ICON" Preamble "Individual Representations" Section 6.3 "Individual Underwriting Agreement Representations" Section 8.1.1 "Initiating Holders" Section 8.2. "Investor" Preamble "Issuance" Section 9 "Junior Management Closing" Section 5.1.5 "Junior Management Initial Investor" Preamble -10- "Junior Management Option" Section 5.1 "Junior Management Option-Eligible Shares" Section 5.1 "Liquidity Event Notice" Section 5.1.1; 5.2.1 "LLC" Preamble "LLC Designated Directors" Section 3.1 "LLC Purchase Agreement" Recitals "Majority Initiating Holders" Section 8.2.3 "Management Designated Directors" Section 3.1 "Non-Complying Investor" Section 11.2 "Non-CSFB Warrant" Recitals "Non-CSFB Initial Warrantholders" Recitals "Option-Eligible Share Sellers" Section 5.1.3; 5.2.2 "Other Offered Securities" Section 9.1.4 "Participating Buyer" Section 9.1.2 "Participating Seller" Section 6.1; 7.1.2 "Preemption Notice" Section 9.1 "Preemptive Portion" Section 9.1 "Preemptive Purchaser Offerees" Section 9.1 "Proposed Bain Seller" Section 6; 7.1 "Proposed Buyer" Section 6; 7.1; 9.1 "Public Offering" Section 8.1.1 "Purchase Price" Section 5.1; 5.2 "Sale" Section 6; 7.1 "Sale Percentage" Section 6; 7.1 "Section 382" Section 2 "Section 6.5 Opinion" Section 6.5.1 "Section 6.5 Request Date" Section 6.5.1 "Senior Management Initial Investor" Preamble "Subject Securities" Section 9 "Tag Along Notice" Section 7.1 "Tag Along Offerees" Section 7.1 "Transfer" Section 4.1 2. [RESERVED]. -11- 3. VOTING AGREEMENT. 3.1. Election of Directors. Each holder of Voting Shares hereby agrees to cast all votes to which such holder is entitled in respect of the Voting Shares now or hereafter owned by such holder, whether at any annual or special meeting of stockholders, by written consent or otherwise, to: (i) fix the number of directors constituting the Board at nine (9); (ii) elect as a director of the Company each of two individuals (the "CSFB Designated Directors") that may be designated by the CSFB Majority Holders for election; (iii) if an LLC Liquidation has not occurred, elect as the other members of the Board such other individuals as may be designated by the LLC for election (the "LLC Designated Directors"); (iv) if an LLC Liquidation has occurred, (A) and so long as they are employed as the Chief Executive Officer and the President and Chief Operating Officer of the Company, respectively, elect as a director of the Company each of Scott Watterson and Gary Stevenson (the "Management Designated Directors"), notwithstanding anything to the contrary contained in Section 3.8, and (B) elect as the other members of the Board such other individuals as may be designated by the Bain Majority Holders for election (the "Bain Designated Directors"). 3.2. Removal of Directors. Any director may be removed with or without cause by decision of two-thirds (2/3) of the other directors; provided, however, that no director shall be removed without cause except with the consent of the holders of a majority of the Shares held by the class of Investors entitled to designate such director pursuant to Section 3.1. 3.3. Successors. In the event a director shall cease to serve for any reason, then, (i) in the case of a CSFB Designated Director, the CSFB Majority Holders shall have the right to nominate a successor CSFB Designated Director, (ii) in the case of an LLC Designated Director, the LLC shall have the right to nominate a successor LLC Designated Director, (iii) in the case of a Management Designated Director, the Senior Management Majority Holders shall have the right to nominate a successor Management Designated Director, and (iv) in the case of any Bain Designated Director, the Bain Majority Holders shall have the right to nominate a successor Bain Designated Director; provided, however, that no director removed for cause shall be renominated or reelected. Each holder of Voting Shares shall, upon receipt of notice identifying such nominee, promptly take all action necessary to cause the appointment of such nominee to the Board pursuant -12- to the Company's By-laws and Certificate of Incorporation, each as amended and in effect from time to time. 3.4. Certain Transactions. Each holder of Other Securities agrees to vote, or consent with respect to, the Shares included in such Other Securities, and, subject to fiduciary obligations imposed by applicable law, to cause any directors designated by such Investor pursuant to Section 3.1 or 3.3 to vote, or consent with respect to, in the manner specified by the Bain Majority Holders with respect to: (i) any offering of securities of the Company; (ii) any sale of a substantial portion of the assets of the Company or any of its subsidiaries to a Person which is not an Affiliate of any Bain Investor; (iii) any merger or consolidation involving the Company or any of its subsidiaries with a Person which is not an Affiliate of any Bain Investor; (iv) any transaction constituting a change in control of the Company to a Person not an Affiliate of any Bain Investor; any merger or consolidation of the Company with any one or more of its direct and indirect subsidiaries and no other Person; and (v) any transaction to which Section 6 (subject to Section 6.6) or Section 7 applies. 3.5. Committees. Each committee of the Board shall be composed so that the representation thereon of CSFB Designated Directors, LLC Designated Directors, Management Designated Directors and Bain Designated Directors shall be in the same proportion, as nearly as may be, as the representation of such directors on the whole Board, except as consented to by the Majority Holders entitled to designate the directors to be excluded; provided, however, that no Management Designated Director shall sit on the audit committee or any committee charged with the consideration of matters related to compensation, employee stock options, or the like; and provided, further, that the Bain Designated Directors (or the LLC Designated Directors, if an LLC Liquidation has not occurred) shall at all time constitute a majority of all of the directors on each such committee. 3.6. Special Rule for Fund Designated Directors. In the case of Bain Designated Directors, the holders of a majority of the shares specified below shall be entitled to designate the portion specified below of the number of Bain Designated Directors then to be designated: Shares Number Shares Originally Issued One half of the number to be To Bain Capital Fund IV, L.P. designated plus one half, rounded up to the nearest whole number. -13- Shares Originally Issued One half of the number to be to Bain Capital Fund IV-B, L.P. designated minus one half, rounded down to the nearest whole number. 3.7. Proxy; the Company. 3.7.1. Proxy. In order to assist in the implementation of the foregoing provisions of this Section 3, each holder of Voting Shares hereby constitutes and appoints: (i) Robert Gay and Ron Mika, and each of them, as attorneys and proxies, with full power of substitution, to receive all notices, and to represent, vote and consent, with respect to all Voting Shares held by such holder, without any notice to such holder (such notice being expressly waived by such holder), whether or not said representation, vote or consent benefits the interests of any of said proxies, but only with respect to any and all of the matters specified in, and only in the manner contemplated by, clauses (i) and (iii) of Section 3.1, clause (ii) of Section 3.3 and Section 3.4; (ii) Robert Gay and Ron Mika, and each of them, as attorneys and proxies, with full power of substitution, to receive all notices, and to represent, vote and consent, with respect to all Voting Shares held by such holder, without any notice to such holder (such notice being expressly waived by such holder), whether or not said representation, vote or consent benefits the interests of any of said proxies, but only with respect to any and all of the matters specified in, and only in the manner contemplated by, clauses (i) and (iv)(B) of Section 3.1, clause (iv) of Section 3.3 and Section 3.4; (iii) [insert names of initial CSFB directors], and each of them, as attorneys and proxies, with full power of substitution, to receive all notices, and to represent, vote and consent, with respect to all Voting Shares held by such holder, without any notice to such holder (such notice being expressly waived by such holder), whether or not said representation, vote or consent benefits the interests of any of said proxies, but only with respect to any and all of the matters specified in, and only in the manner contemplated by, clause (ii) of Section 3.1 and clause (i) of Section 3.3; and -14- (iv) Scott Watterson and Gary Stevenson, and each of them, as attorneys and proxies, with full power of substitution, to receive all notices, and to represent, vote and consent, with respect to all Voting Shares held by such holder, without any notice to such holder (such notice being expressly waived by such holder), whether or not said representation, vote or consent benefits the interests of any of said proxies, but only with respect to any and all of the matters specified in, and only in the manner contemplated by, clause (iv)(A) of Section 3.1 and clause (iii) of Section 3.3. The foregoing proxy is irrevocable, is coupled with an interest in the Company generally and shall remain in full force and effect notwithstanding the passage of time (including without limitation the three-year period specified in Section 212(b) of the Delaware Corporation Law) until terminated in accordance with the provisions of Section 3.8. 3.7.2. Company to Allow no Inconsistent Action. The Company agrees not to give effect to any action by any holder of Shares which is in contravention of this Section 3. 3.8. Period. The foregoing provisions of this Section 3 shall expire on the earliest of: (i) the date of termination of this Agreement; (ii) prior to the LLC Liquidation, the first date on which the LLC owns less than fifty percent (50%) of all Securities owned by it immediately after the closing under the LLC Purchase Agreement; (iii) after the LLC Liquidation, the first date on which the Bain Investors own less than fifty percent (50%) of all Securities owned by them immediately following the LLC Liquidation; (iv) upon the closing of the Initial Public Offering if, in the written opinion of the managing underwriter for the Initial Public Offering, the continued effectiveness of this Section 3 would be detrimental to the sale of securities in the Initial Public Offering or the price to be received for such securities; (v) one year after the date, if any, after the Initial Public Offering on which the Bain Investors shall distribute all Bain Securities pursuant to Section 7.5(b) or (vi) the date on which there shall exist a Significant Public Float; provided, however, that (a) the provisions of clause (ii) of Section 3.1, clause (i) of the first sentence of Section 3.3 and clause (iii) of the first sentence of Section 3.7.1 shall expire on any earlier date that the CSFB Investors own less than fifty percent (50%) of all Securities owned by them immediately after the closing under the CSFB Purchase Agreement, (b) the provisions of clause (iv)(A) of Section 3.1, clause (iii) of the first sentence of Section 3.3, and clause (iv) of the first sentence of Section 3.7.1. shall expire on any earlier date that the Senior Management Investors own less than fifty percent (50%) of all Securities owned by them immediately after the LLC Liquidation and (c) the provisions of Section 3.4 (other than clause (v) thereof) shall expire upon -15- the LLC Liquidation if on the sixtieth (60th) day following the date of this Agreement the Bain Initial Investors own membership interests in the LLC representing less than $10 million (at cost). 4. CERTAIN TRANSFER RIGHTS AND RESTRICTIONS. 4.1. Securities. No holder of any Other Security shall sell, pledge, assign, grant a participation interest in, encumber or otherwise transfer or dispose of any of such Other Securities to any other Person, whether directly, indirectly, voluntarily, involuntarily, by operation of law, pursuant to judicial process (including, without limitation, divorce decree) or otherwise (a "Transfer"), except as permitted by this Section 4.1 but not otherwise prohibited by Section 8.5. Any attempted Transfer of Other Securities not permitted by this Section 4.1 shall be null and void, and the Company shall not in any way give effect to any such impermissible Transfer. 4.1.1. Transfers under this Agreement, etc. Any Investor may Transfer any or all Other Securities held by such Investor: (i) to the Company or any subsidiary of the Company in one or more transactions approved by the Board, (ii) to any Bain Investor in a transaction approved by the Board, (iii) on the terms and subject to the conditions of Sections 5, 6, 7 or 8, or (iv) to the public through a broker, dealer or market maker pursuant to Rule 144 after the Initial Public Offering. 4.1.2. Transfers of Management Securities to Immediate Family. Any individual holder of Management Securities may Transfer any or all of such Securities to a Member of the Immediate Family of such holder; provided, however, that no such Transfer shall be effective until such Member of the Immediate Family has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that the Securities to be received by such Member of the Immediate Family are subject to all the provisions of this Agreement and that such Member of the Immediate Family is bound hereby and a party hereto to the same extent as a Senior Management Initial Investor or Junior Management Initial Investor, as the case may be; and provided, further, that any transfer of an Option shall be subject to all of the terms and conditions of such Option, or the plan under which such Option was issued, in addition to the terms and conditions hereof. 4.1.3. Transfers of Management Securities Upon Death. Upon the death of any individual holder of Management Securities, the Securities held by such holder may be distributed by will or other instrument taking effect at death or by applicable laws of descent and distribution to such holder's estate, executors, administrators and personal representatives, and then to such holder's heirs, legatees or distributees, whether or not such recipients are Members of the Immediate Family of such holder; provided, however, -16- that no such Transfer shall be effective until the recipient has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that the Securities to be received by such recipient are subject to all the provisions of this Agreement and that such recipient is bound hereby and a party hereto to the same extent as a Senior Management Initial Investor or Junior Management Initial Investor, as the case may be; and provided, further, that any transfer of an Option shall be subject to all of the terms and conditions of such Option, or the plan under which such Option was issued, in addition to the terms and conditions hereof. 4.1.4. Transfers of Management Securities to Charities. Any holder of Management Securities may Transfer as a charitable gift any or all of such Securities to any Person which is described in Section 501(c)(3) of the Internal Revenue Code of 1986, as from time to time in effect; provided, however, that no such Transfer shall be effective until such transferee has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that the Securities to be received by such transferee are subject to all the provisions of this Agreement and that such transferee is bound hereby and a party hereto to the same extent as a Senior Management Initial Investor or Junior Management Initial Investor, as the case may be; and provided, further, that any transfer of an Option shall be subject to all of the terms and conditions of such Option, or the plan under which such Option was issued, in addition to the terms and conditions hereof. 4.1.5. Transfers of Other Securities to Entities Under Common Control. Any holder of Other Securities which is an institutional investor may Transfer any or all of such Securities to a Person under common control with such holder in a bona fide transfer not part of a transaction or series of transactions that results in the direct or indirect transfer of such Securities to a Person not under common control with such holder; provided, however, that (i) no such Transfer shall be effective until such transferee under common control has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that the Securities to be received by such transferee are subject to all the provisions of this Agreement and that such transferee is bound hereby and a party hereto to the same extent as the transferor of such Securities and (ii) any transfer of an Option shall be subject to all of the terms and conditions of such Option, or the plan under which such Option was issued, in addition to the terms and conditions hereof. 4.2. Period. The foregoing provisions of this Section 4 shall expire on the first date on which the earlier of the following shall have occurred: (i) there shall exist a Significant Public Float or (ii) (A) prior to the LLC Liquidation, the LLC owns less than fifty percent (50%) of all -17- Securities owned by it immediately after the closing under the LLC Purchase Agreement or (B) after the LLC Liquidation, the Bain Investors own less than fifty percent (50%) of all Securities owned by them immediately after the LLC Liquidation. 4.3. Status in Hands of Certain Transferees. Notwithstanding any other provision of this Agreement, (a) Securities Transferred pursuant to and in compliance with Sections 6 or 7 hereof shall in the hands of the Proposed Buyer not constitute Securities for any purpose of this Agreement; (b) Securities or Non-CSFB Warrant Securities Transferred (i) pursuant to and in compliance with Section 8 hereof or (ii) in compliance with this Agreement in any public offering or under Rule 144 shall in the hands of the recipient not constitute Securities or Non-CSFB Warrant Securities for any purpose of this Agreement; (c) Securities acquired in accordance with the provisions of this Agreement by any Investor from another Investor shall upon such acquisition be deemed for all purposes hereof to be Bain Securities, CSFB Securities, Senior Management Securities, Junior Management Securities or Other Securities hereunder, as the case may be, of like kind with the other Securities held by such acquiring Investor; and (d) Securities Transferred as described in Section 7.5(d) shall upon acquisition be deemed for all purposes hereof to be Junior Management Securities. 4.4. Lock-Up. Notwithstanding any provision to the contrary contained in this Section 4, no Transfer may be made pursuant to this Section 4 except in compliance with the provisions of Section 8.5 hereof. 5. CSFB AND JUNIOR MANAGEMENT OPTIONS. CSFB and the Junior Management Investors shall have the option to purchase certain of the Option-Eligible Shares on the terms and conditions set forth in this Section 5. 5.1. Junior Management. Subject to the provisions of this Section 5.1 and effective upon their execution of a Joinder and Supplement to this Stockholders Agreement, the LLC hereby grants to each Junior Management Initial Investor an irrevocable option (the "Junior Management Options") to purchase up to the aggregate number of Option-Eligible Shares set forth on Schedule 5.1 hereto (the "Junior Management Option-Eligible Shares") at a per share purchase price (the "Purchase Price") of $5.83, upon the occurrence of the initial Liquidity Event. Upon execution of the Joinder and Supplement by each Junior Management Initial Investor, Schedule 5.1 shall be amended to set forth the number of Option-Eligible Shares subject to the Junior Management Option of such Junior Management Initial Investor. 5.1.1. Notice. Not fewer than ten (10) business days prior to the consummation of the Liquidity Event, a notice (the "Liquidity Event Notice") shall be furnished by the Company to each holder of Option-Eligible Shares and to each Junior Management Initial -18- Investor. The Liquidity Event Notice shall include (i) the proposed date of consummation of the Liquidity Event and (ii) the number of vested Junior Management Option-Eligible Shares that each Junior Management Initial Investor is entitled to purchase. 5.1.2. Vesting. The Junior Management Options shall be subject to vesting according to the following schedule: Percentage of Shares Vested Date --------------------------- ---- 25% Immediately 50% September 27, 2000 75% September 27, 2001 100% September 27, 2002 Upon the occurrence of the Liquidity Event, the foregoing schedule shall be accelerated in respect of any Junior Management Initial Investor who remains employed by the Company or one of its Affiliates such that 100% of the Option-Eligible Shares subject to his or her Junior Management Option shall become immediately vested. No Junior Management Initial Investor who is not employed by the Company or one of its Affiliates at the time of consummation of the Liquidity Event may exercise his or her Junior Management Option with respect to any unvested Junior Management Option-Eligible Shares. 5.1.3. Exercise. Each Junior Management Initial Investor desiring to exercise its Junior Management Option shall send a written commitment within three (3) business days after the furnishing of the Liquidity Event Notice to the Company and to each holder of Option-Eligible Shares (the "Option-Eligible Share Sellers") specifying the number of Junior Management Option-Eligible Shares which such Junior Management Initial Investor desires to purchase (each Junior Management Initial Investor who so elects to exercise the Junior Management Option being referred to herein as an "Exercising Purchaser"). Each Junior Management Initial Investor who has not so elected to exercise his or her Junior Management Option shall be deemed to have waived all of his or her rights with respect to such Junior Management Option, and his or her Junior Management Option shall terminate upon consummation of the Liquidity Event. In the event that an Exercising Purchaser elects to purchase less than the total number of Junior Management Option- Eligible Shares which are subject to his or her Junior Management Option, such Junior Management Investor shall be deemed to have waived all of his or her rights with respect to the remaining Junior Management Option-Eligible Shares, and his or her Junior Management Option shall terminate as to the remaining Junior Management Option- Eligible Shares upon consummation of the Liquidity Event. -19- The exercise by each Exercising Purchaser shall be irrevocable except as hereinafter provided, and each such Exercising Purchaser shall be bound and obligated to acquire such amount of Junior Management Option-Eligible Shares as such Exercising Purchaser shall have specified in such Exercising Purchaser's written commitment. If at the end of the one hundred twentieth (120th) day following the date on which the Liquidity Event Notice was given the Liquidity Event has not been consummated, each Exercising Purchaser shall be released from his or her obligations under the written commitment, the Liquidity Event Notice shall be null and void, the Junior Management Options shall remain in full force and effect and it shall be necessary for a separate Liquidity Event Notice to have been furnished, and the terms and provisions of this Section 5.1 separately complied with, in order to consummate a Liquidity Event, unless the failure to consummate the Liquidity Event resulted from any failure by any Junior Management Investor to comply in any material respect with the terms of this Section 5.1. 5.1.4. Certain Legal Requirements. In the event the participation by any Junior Management Investor as an Exercising Purchaser would require under applicable law (i) the registration or qualification of any securities or of any person as a broker or dealer or agent with respect to such securities or (ii) the provision to any participant in the transaction of any information other than such information as would be required under Regulation D of the Securities and Exchange Commission or similar rule then in effect in an offering made pursuant to said Regulation D solely to "accredited investors" as defined in said Regulation D, the Option-Eligible Share Sellers shall be obligated only to use their reasonable best efforts to cause such requirements to have been complied with to the extent necessary to permit such Exercising Purchaser to receive such securities. Notwithstanding any provisions of this Section 5.1.4, if use of reasonable best efforts shall not have resulted in such requirements being complied with to the extent necessary to permit such Exercising Purchaser to receive such securities, the Option-Eligible Share Sellers may exclude such Exercising Purchaser from participation in the transaction. The obligation of the Option- Eligible Share Sellers to use reasonable best efforts to cause such requirements to have been complied with to the extent necessary to permit an Exercising Purchaser to receive such securities shall be conditioned on such Exercising Purchaser executing such documents and instruments, and taking such other actions (including without limitation, if required by the Option-Eligible Share Sellers on advice of their counsel, agreeing to be represented during the course of such transaction by a "purchaser representative" (as defined in Regulation D) in connection with evaluating the merits and risks of the prospective investment and acknowledging that he was so represented), as the Option- Eligible Share Sellers shall reasonably request in order to permit such requirements to have been complied with. Each Exercising Purchaser agrees to take such actions as the Option- -20- Eligible Share Sellers shall reasonably request in order to permit such requirements to have been complied with. 5.1.5. Payment and Delivery of Certificates. The closing of the purchase pursuant to the Junior Management Option (the "Junior Management Closing") shall occur contemporaneously with and subject to the consummation of the Liquidity Event. At the Junior Management Closing, (a) each Option-Eligible Share Seller shall deliver the certificates evidencing the Junior Management Option-Eligible Shares to be sold by such Option-Eligible Share Seller, duly endorsed, or with stock powers or other appropriate instruments duly endorsed, for transfer with signature guaranteed, free and clear of any liens, encumbrances or adverse claims, with any stock transfer tax stamps affixed; and (b) each Exercising Purchaser shall deliver an amount equal to the Purchase Price multiplied by the number of Junior Management Option-Eligible Shares to be purchased by such Exercising Purchaser through a wire transfer to the credit of an account designated by each Option-Eligible Share Seller to the Exercising Purchasers in writing not less than two (2) business days prior to the date of the Junior Management Closing. 5.1.6. Certain Adjustments. In the event of any change in the number of issued and outstanding shares of Common Stock by reason of any stock dividend, split-up or combination of shares, the number and kind of shares subject to the Junior Management Options, and the Purchase Price, shall be appropriately adjusted. 5.1.7. Notice of Transfer. Upon any transfer of Option-Eligible Shares other than upon exercise of a Junior Management Option, the transferring holder shall provide to the Junior Management Initial Investors and the Company a statement setting forth the number of Option-Eligible Shares transferred and the name and address of the transferee and a statement signed by the transferee acknowledging that the transferred Option-Eligible Shares shall continue to be subject to the Junior Management Options hereunder. 5.1.8. Termination. The Junior Management Options shall terminate on the earlier of (i) the twelfth anniversary of the date hereof and (ii) immediately following the consummation of the initial Liquidity Event. 5.2. CSFB. Subject to the provisions of this Section 5.2, the LLC hereby grants to CSFB an irrevocable option (the "CSFB Option") to purchase up to the aggregate number of Option-Eligible Shares set forth on Schedule 5.2 hereto (the "CSFB Option-Eligible Shares") at a per share purchase price (the "Purchase Price") of $14.56, upon the occurrence of the initial Liquidity Event. -21- 5.2.1. Notice. Not fewer than ten (10) business days prior to the consummation of the Liquidity Event, a notice (the "Liquidity Event Notice") shall be furnished by the Company to each holder of Option-Eligible Shares and to CSFB. The Liquidity Event Notice shall include (i) the proposed date of consummation of the Liquidity Event and (ii) the number of CSFB Option-Eligible Shares that CSFB is entitled to purchase. 5.2.2. Exercise. If CSFB desires to exercise the CSFB Option, it shall send a written commitment no more than five (5) business days after the furnishing of the Liquidity Event Notice to the Company and to each holder of Option-Eligible Shares (the "Option-Eligible Share Sellers") specifying the amount of CSFB Option-Eligible Shares which CSFB desires to purchase. If CSFB does not elect to exercise its CSFB Option, CSFB shall be deemed to have waived all of its rights with respect to the CSFB Option, and the CSFB Option shall terminate upon consummation of the Liquidity Event. If CSFB elects to purchase less than the total number of CSFB Option-Eligible Shares which are subject to the CSFB Option, CSFB shall be deemed to have waived all of its rights with respect to the remaining CSFB Option-Eligible Shares, and the CSFB Option shall terminate as to the remaining CSFB Option-Eligible Shares upon consummation of the Liquidity Event. The exercise by CSFB shall be irrevocable except as hereinafter provided, and CSFB shall be bound and obligated to acquire such amount of CSFB Option-Eligible Shares as it shall have specified in its written commitment. If at the end of the one hundred twentieth (120th) day following the date on which the Liquidity Event Notice was given the Liquidity Event has not been consummated, CSFB shall be released from its obligations under the written commitment, the Liquidity Event Notice shall be null and void, the CSFB Option shall remain in full force and effect and it shall be necessary for a separate Liquidity Event Notice to have been furnished, and the terms and provisions of this Section 5.2 separately complied with, in order to consummate a Liquidity Event, unless the failure to consummate the Liquidity Event resulted from any failure by CSFB to comply in any material respect with the terms of this Section 5.2. CSFB shall purchase the CSFB Option-Eligible Shares from the Option-Eligible Share Sellers pro rata, on the basis of the number of Option-Eligible Shares beneficially owned by each Option-Eligible Share Seller. 5.2.3. Payment and Delivery of Certificates. The closing of the purchase pursuant to the CSFB Option (the "CSFB Closing") shall occur contemporaneously with and subject to the consummation of the Liquidity Event. At the CSFB Closing, (a) each Option-Eligible Share Seller shall deliver the certificates evidencing the CSFB Option-Eligible -22- Shares to be sold by such Option-Eligible Share Seller, duly endorsed, or with stock powers or other appropriate instruments duly endorsed, for transfer with signature guaranteed, free and clear of any liens, encumbrances or adverse claims, with any stock transfer tax stamps affixed; and (b) CSFB shall deliver an amount equal to the Purchase Price multiplied by the number of CSFB Option-Eligible Shares to be purchased by CSFB through a wire transfer to the credit of an account designated by each Option-Eligible Share Seller to CSFB in writing not less than two (2) business days prior to the date of the CSFB Closing. 5.2.4. Certain Adjustments. In the event of any change in the number of issued and outstanding shares of Common Stock by reason of any stock dividend, split-up or combination of shares, the number and kind of shares subject to the CSFB Option, and the Purchase Price, shall be appropriately adjusted. 5.2.5. Termination. The CSFB Option shall terminate on the earlier of (i) the twelfth anniversary of the date hereof and (ii) immediately following the consummation of the Liquidity Event. 5.2.6. Notice of Transfer. Upon any transfer of Option-Eligible Shares other than upon exercise of the CSFB Option, the transferring holder shall provide to CSFB and the Company a statement setting forth the number of Option-Eligible Shares transferred and the name and address of the transferee and a statement signed by the transferee acknowledging that the transferred Option-Eligible Shares shall continue to be subject to the CSFB Option hereunder. 6. "TAKE ALONG" RIGHTS. Each holder of Securities hereby agrees, if requested by the Bain Majority Holders, to Transfer for value (for purposes of this Section 6, a "Sale") a specified percentage (for purposes of this Section 6, the "Sale Percentage") of the Securities then owned by such holder to any Person (for purposes of this Section 6, the "Proposed Buyer") in the manner and on the terms set forth in this Section 6 in connection with the Sale by one or more holders of Bain Securities (collectively, the "Proposed Bain Seller") of the Sale Percentage of the total number of Bain Securities held by all holders of Bain Securities on a fully diluted basis to the Proposed Buyer; provided, however, that no holder of Securities shall have any obligations under this Section 6 with respect to a particular Transfer if the Sale Percentage with respect to such Transfer is less than 10%. 6.1. Procedure. If the Bain Majority Holders elect to exercise their rights under this Section 6, a notice (the "Come Along Notice") shall be furnished by the Proposed Bain Seller to each holder of Securities. The Come Along Notice shall set forth the principal terms of the -23- proposed Sale insofar as it relates to the Securities, including the number of Securities to be purchased from the Proposed Bain Seller, the Sale Percentage, the maximum and minimum purchase price, the name and address of the Proposed Buyer and (if the Proposed Buyer is not subject to the periodic reporting requirements of the Exchange Act) the name of each director of the Proposed Buyer and of each Person which is the beneficial owner of more than twenty percent (20%) of the common stock of the Proposed Buyer. If the Bain Majority Holders consummate the Sale referred to in the Come Along Notice, each other holder of Securities (each a "Participating Seller") shall be bound and obligated to Sell the Sale Percentage of the Securities in the Sale on the same terms and conditions (subject to all of the provisions of this Agreement and it being understood that, without limiting the foregoing, for such purposes the terms applicable to Shares of Common Stock shall be identical in all respects), with respect to each Security Sold, as the Proposed Bain Seller shall Sell each Bain Security in the Sale, and, in the case of Options, have the opportunity to either (i) exercise or convert such Options (if then exercisable or convertible) and participate in such sale as holders of Common Stock issuable upon such exercise or conversion or (ii) upon the consummation of the Sale, receive in exchange for such Options (to the extent exercisable or convertible at the time of such Sale) consideration equal to the amount determined by multiplying (1) the same amount of consideration per Share received by the holders of the Common Stock of the same class of Common Stock for which the Option is exercisable or into which the Option is convertible in connection with the Sale less the exercise or conversion price per share of such Option by (2) the number of shares of Common Stock of such class represented by such Option. If at the end of the ninetieth (90th) day following the date of the effectiveness of the Come Along Notice the Proposed Bain Seller has not completed the Sale, each Participating Seller shall be released from his obligation under the Come Along Notice, the Come Along Notice shall be null and void, and it shall be necessary for a separate Come Along Notice to have been furnished and the terms and provisions of this Section 6 separately complied with, in order to consummate such Sale pursuant to this Section 6, unless the failure to complete such Sale resulted from any failure by any Participating Seller to comply in any material respect with the terms of this Section 6. 6.2. Certain Legal Requirements. In the event the consideration to be paid in exchange for Securities in the proposed Sale pursuant to Section 6.1 includes any securities and the receipt thereof by any Investor as a Participating Seller would require under applicable law (i) the registration or qualification of such securities or of any person as a broker or dealer or agent with respect to such securities or (ii) the provision to any participant in the Sale of any information other than such information as would be required under Regulation D of the Securities and Exchange Commission or similar rule then in effect in an offering made pursuant to said Regulation D solely to "accredited investors" as defined in said Regulation D, the Proposed Bain Seller shall be obligated only to use its reasonable best efforts to cause such requirements to have been complied with to the extent necessary to permit such Participating Seller to receive such -24- securities. Notwithstanding any provisions of this Section 6, if use of reasonable best efforts shall not have resulted in such requirements being complied with to the extent necessary to permit such Participating Seller to receive such securities, the Proposed Bain Seller shall cause to be paid to such Participating Seller in lieu thereof, against surrender of the Securities (in accordance with Section 6.4 hereof) which would have otherwise been Sold by such Participating Seller to the Proposed Buyer in the Sale, an amount in cash equal to the Fair Market Value of the securities which such Participating Seller would otherwise receive. The obligation of the Proposed Bain Seller to use reasonable best efforts to cause such requirements to have been complied with to the extent necessary to permit a Participating Seller to receive such securities shall be conditioned on such Participating Seller executing such documents and instruments, and taking such other actions (including without limitation, if required by the Proposed Bain Seller on advice of its counsel, agreeing to be represented during the course of such transaction by a "purchaser representative" (as defined in Regulation D) in connection with evaluating the merits and risks of the prospective investment and acknowledging that he was so represented), as the Proposed Bain Seller shall reasonably request in order to permit such requirements to have been complied with. Each Participating Seller agrees to take such actions as the Proposed Bain Seller shall reasonably request in order to permit such requirements to have been complied with, and no Participating Seller shall have the right to require that such Participating Seller receive cash in lieu of securities on grounds that such requirements have not been complied with. 6.3. Further Assurances; Management Roll-over. Each Participating Seller, and each Investor to whom the Securities held by such Participating Seller were originally issued, shall, whether in his capacity as a Participating Seller, stockholder, officer or director of the Company, or otherwise, take or cause to be taken all such actions (subject as to entering into agreements to the provisions of the next sentence hereof) as may be reasonably requested in order expeditiously to consummate each Sale pursuant to Section 6.1; provided, however, that no Management Initial Investor party to an employment agreement with the Company or any of its subsidiaries shall be required hereunder to extend the term thereof. In addition, notwithstanding any contrary provision contained in this Agreement, in the event that the proposed Sale is a Liquidity Event, at the option of the Bain Majority Investors and on no more than one occasion under this Agreement, if (A) a Management Investor is currently employed by the Company or was so employed at any time during the 12 preceding months without any material diminution of his or her responsibilities and (B) the Proposed Buyer is a Financial Buyer, such Management Investor and each other holder of Securities previously held by, or distributed or issued in respect of Securities or membership interests of the LLC previously held by, such Management Investor (other than any Person which is described in Section 501(c)(3) of the Internal Revenue Code of 1986, as from time to time in effect) may be required to retain, or exchange for equity in the Proposed Buyer or one of its Affiliates or the surviving entity, up to 25%, in the case of Senior Management Investors, or 15%, in the case of Junior Management Investors, of their Securities. Each Participating Seller or -25- Investor agrees to execute and deliver such agreements as may be necessary for the Participating Seller to be subject to the same terms and conditions with respect to the Sale as apply to the Proposed Bain Seller, including, without limitation, an agreement by such Participating Seller (i) to be subject to such purchase price escrow, indemnity or adjustment provisions as may apply to Investors generally, (ii) to be liable in respect of any individual representations or warranties to be given by selling Investors in the Sale regarding such matters as legal capacity or due organization of such Participating Seller, authority to participate in the Sale, compliance by such selling Investor with laws and agreements applicable to it, and ownership (free and clear of liens, charges, encumbrances and adverse claims) of Securities to be sold by such Participating Seller ("Individual Representations") (insofar as such Individual Representations relate to such Participating Seller) and (iii) to be liable in respect of any general representations or warranties to be given by selling Investors in the Sale regarding such matters as the liabilities (contingent and otherwise), assets, agreements and business of the Company and its subsidiaries, the compliance of the Sale with laws and contracts, and the adequacy of disclosure ("General Representations"); provided, however, that (a) the Management Initial Investors shall make no representations or warranties pursuant to such agreement other than Individual Representations but shall be liable as indemnitors with respect to the General Representations made by other selling Investors in the Sale, and (b) except with respect to Individual Representations the aggregate amount of the liability of each Participating Seller in the Sale shall not exceed the lesser of (i) such Participating Seller's pro rata portion of any such liability, in accordance with such Participating Seller's portion of the total number of Securities included in the Sale and (ii) the net proceeds received by such Participating Seller from the Sale. 6.4. Closing. The closing of a Sale pursuant to Section 6.1 shall take place at such time and place as the Bain Majority Holders shall specify by notice to each Participating Seller. At the closing of any Sale under this Section 6, each Participating Seller shall deliver the certificates evidencing the Securities to be sold by such Participating Seller, duly endorsed, or with stock powers or other appropriate instruments duly endorsed, for transfer with signature guaranteed, free and clear of any liens, encumbrances or adverse claims, with any stock transfer tax stamps affixed, against delivery of the applicable consideration. 6.5. Fairness Opinions in Certain Circumstances. 6.5.1. Opinion. In the case of a proposed Sale pursuant to Section 6.1 to a Proposed Buyer which is an Affiliated Buyer, in the event that the CSFB Majority Holders or the Management Majority Holders give notice (the date of such notice being the "Section 6.5 Request Date") to the Proposed Bain Seller of a request for a fairness opinion under this Section 6.5 within ten (10) days after the earlier of the effectiveness of the Come Along Notice with respect thereto or such date as the Proposed Bain Seller may provide -26- a separate written notice of such Sale, then such Sale shall not be effected pursuant to the provisions of Section 6.1 unless the Company or the Proposed Bain Seller shall furnish the holders so requesting (with a copy thereof to any holder of Other Securities that may so request) a notice which includes a written opinion of an Independent Investment Banking Firm to the effect that the Sale is fair to the holders of the requesting type of Securities from a financial point of view (a "Section 6.5 Opinion"). In rendering such Section 6.5 Opinion, such Independent Investment Banking Firm shall consider (i) the form and amount of consideration to be received pursuant to such Sale in respect of Shares by holders of Shares other than holders of the requesting type of Securities, (ii) the form and amount of consideration to be received pursuant to such Sale in respect of Shares by the holders of the requesting type of Securities, and (iii) other factors it may deem relevant. 6.5.2. Selection of Investment Banking Firm. The Independent Investment Banking Firm to provide the Section 6.5 Opinion shall be selected by agreement of the CSFB Majority Holders and the Management Majority Holders. Absent such agreement by the Section 6.5 Request Date, the CSFB Majority Holders shall, within two (2) business days of the Section 6.5 Request Date, furnish the Management Majority Holders with a list of three (3) independent investment banking firms, and within ten (10) calendar days of the Section 6.5 Request Date the Management Majority Holders shall select one of such firms to render the Section 6.5 Opinion. In the event such firm shall decline to serve, the Management Majority Holders shall, within three (3) business days of notice to that effect, select another firm from such three. All fees and costs of such Independent Investment Banking Firm shall be paid by the Company. 6.6. Special Approval Right. If on the sixtieth (60th) day following the date of this Agreement the Bain Initial Investors own membership interests in the LLC representing less than $10 million (at cost), the right of the Bain Majority Holders to require the Sale shall be subject to the approval of the holders of a majority of the Securities issued in the LLC Liquidation to holders of voting units of the LLC. 6.7. Period. The foregoing provisions of this Section 6 shall expire on the earliest of: (i) prior to the LLC Liquidation, the first date on which the LLC owns less than fifty percent (50%) of all Securities owned by it immediately after the closing under the LLC Purchase Agreement; (ii) after the LLC Liquidation, the first date on which the Bain Investors own less than fifty percent (50%) of all Securities owned by them immediately following the LLC Liquidation; (iii) upon the closing of the Initial Public Offering if, in the written opinion of the managing underwriter for the Initial Public Offering, the continued effectiveness of this Section 6 would be detrimental to the sale of securities in the Initial Public Offering or the price to be received for such securities; or (iv) the date on which there exists a Significant Public Float; provided, - --------- -27- however, that with respect to clause (iv) hereof, in the event a Come Along Notice shall have become effective within ninety (90) days prior to such date, the foregoing provisions of this Section 6 shall expire upon the earlier of (i) the consummation of the closing of the Sale to which the Come Along Notice relates and (ii) the ninetieth (90th) day following the effectiveness of the Come Along Notice. 7. CO-SALE RIGHTS. 7.1. Tag Along. No holder or holders of Bain Securities (for purposes of this Section 7, collectively, the "Proposed Bain Seller") shall Transfer (for purposes of this Section 7, a "Sale") any Bain Securities to any other Person (the "Proposed Buyer") except in the manner and on the terms set forth in this Section 7, and attempted Transfers in violation of this Section 7 shall be null and void. 7.1.1. Offer. A written notice (the "Tag Along Notice") shall be furnished by the Proposed Bain Seller to each holder of Other Securities (the "Tag Along Offerees") at least ten (10) business days prior to a Transfer. The Tag Along Notice shall include: (a) The principal terms of the proposed Sale insofar as it relates to the Securities, including the number of Securities to be purchased from the Proposed Bain Seller, the percentage on a fully-diluted basis of the total number of Bain Securities held by all holders of Bain Securities which such number of Securities constitutes (for purposes of this Section 7, the "Sale Percentage"), the maximum and minimum purchase price, the name and address of the Proposed Buyer, and (if the Proposed Buyer is not subject to the periodic reporting requirements of the Exchange Act) the name of each director of the Proposed Buyer and of each Person which is the beneficial owner of more than twenty percent (20%) of the Common Stock of the Proposed Buyer; and (b) An offer by the Proposed Bain Seller to include, at the option of each Tag Along Offeree, in the Sale to the Proposed Buyer such number of Securities (not in any event to exceed the Sale Percentage of the total number of Securities held by such Tag Along Offeree) owned by each Tag Along Offeree determined in accordance with Section 7.1.2 hereof, on the same terms and conditions (subject to all of the provisions of this Agreement), with respect to each Security Sold, as the Proposed Bain Seller shall Sell each of its Securities. 7.1.2. Exercise. Each Tag Along Offeree desiring to accept the offer contained in the Tag Along Notice shall send a written commitment to the Proposed Bain Seller -28- specifying the number of Securities (not in any event to exceed the Sale Percentage of the total number of Securities held by such Tag Along Offeree) which such Tag Along Offeree desires to have included in the Sale within ten (10) business days after the effectiveness of the Tag Along Notice (each a "Participating Seller"). Each Tag Along Offeree who has not so accepted such offer shall be deemed to have waived all of his or her rights with respect to the Sale, and the Proposed Bain Seller and the Participating Sellers shall thereafter be free to Sell to the Proposed Buyer, at a price no greater than the maximum price set forth in the Tag Along Notice and otherwise on terms not more favorable in any material respect to them than those set forth in the Tag Along Notice, without any further obligation to such non-accepting Tag Along Offerees. If, prior to consummation, the terms of such proposed Sale shall change with the result that the price shall be greater than 105% of the maximum price set forth in the Tag Along Notice or the other terms shall be more favorable in any material respect than as set forth in the Tag Along Notice, it shall be necessary for a separate Tag Along Notice to have been furnished, and the terms and provisions of this Section 7 separately complied with, in order to consummate such proposed Sale pursuant to this Section 7; provided, however, that in the case of such a separate Take Along Notice, the applicable period referred to in Section 7.1.1 and this Section 7.1.2 shall be five (5) business days. The acceptance of each Participating Seller shall be irrevocable except as hereinafter provided, and each such Participating Seller shall be bound and obligated to Sell in the Sale, on the same terms and conditions specified in the Tag Along Notice with respect to each Share of Common Stock Sold, as the Proposed Bain Seller (subject to all of the provisions of this Agreement), such number of Securities as such Participating Seller shall have specified in such Participating Seller's written commitment, and, in the case of Options, have the opportunity to either (i) exercise or convert such Options (if then exercisable or convertible) and participate in such sale as holders of Common Stock issuable upon such exercise or conversion or (ii) upon the consummation of the Sale, receive in exchange for such Options (to the extent exercisable or convertible at the time of such Sale) consideration equal to the amount determined by multiplying (1) the same amount of consideration per Share received by the holders of the Common Stock of the same class of Common Stock for which the Option is exercisable or into which the Option is convertible in connection with the Sale less the exercise or conversion price per share of such Option by (2) the number of shares of Common Stock of such class represented by such Option. In the event the Proposed Bain Seller shall be unable (otherwise than by reason of the circumstances described in Section 7.2) to obtain the inclusion in the Sale of all Securities which the Proposed Bain Seller and each Participating Seller desires to have included in the Sale (as evidenced in the case of the Proposed Bain Seller by the Tag Along Notice and in the case of each Participating Seller by such Participating Seller's -29- written commitment), the number of Securities to be sold in the Sale by the Proposed Bain Seller and each Participating Seller shall be reduced on a pro rata basis according to the proportion which the number of Securities which each such Seller desires to have included in the Sale bears to the total number of Securities desired by all such Sellers to have included in the Sale. If at the end of the one hundred eightieth (180th) day following the date of the effectiveness of the Tag Along Notice the Proposed Bain Seller has not completed the Sale as provided in the foregoing provisions of this Section 7.1, each Participating Seller shall be released from his obligations under his written commitment, the Tag Along Notice shall be null and void, and it shall be necessary for a separate Tag Along Notice to have been furnished, and the terms and provisions of this Section 7 separately complied with, in order to consummate such Sale pursuant to this Section 7, unless the failure to complete such Sale resulted from any failure by any Tag Along Offeree to comply in any material respect with the terms of this Section 7. 7.2. Certain Legal Requirements. In the event the consideration to be paid in exchange for Securities in the proposed Sale pursuant to Section 7.1 includes any securities and the receipt thereof by any Investor as a Participating Seller would require under applicable law (i) the registration or qualification of such securities or of any person as a broker or dealer or agent with respect to such securities or (ii) the provision to any participant in the Sale of any information other than such information as would be required under Regulation D of the Securities and Exchange Commission or similar rule then in effect in an offering made pursuant to said Regulation D solely to "accredited investors" as defined in said Regulation D, the Proposed Bain Seller shall be obligated only to use its reasonable best efforts to cause such requirements to have been complied with to the extent necessary to permit such Participating Seller to receive such securities. Notwithstanding any provisions of this Section 7, if use of reasonable best efforts shall not have resulted in such requirements being complied with to the extent necessary to permit such Participating Seller to receive such securities, the Proposed Bain Seller shall cause to be paid to such Participating Seller in lieu thereof, against surrender of the Securities (in accordance with Section 7.4 hereof) which would have otherwise been Sold by such Participating Seller to the Proposed Buyer in the Sale, an amount in cash equal to the Fair Market Value of the securities which such Participating Seller would otherwise receive. The obligation of the Proposed Bain Seller to use reasonable best efforts to cause such requirements to have been complied with to the extent necessary to permit a Participating Seller to receive such securities shall be conditioned on such Participating Seller executing such documents and instruments, and taking such other actions (including without limitation, if required by the Proposed Bain Seller on advice of its counsel, agreeing to be represented during the course of such transaction by a "purchaser representative" (as defined in Regulation D) in connection with evaluating the merits and risks of the prospective -30- investment and acknowledging that he was so represented), as the Proposed Bain Seller shall reasonably request in order to permit such requirements to have been complied with. Each Participating Seller agrees to take such actions as the Proposed Bain Seller shall reasonably request in order to permit such requirements to have been complied with, and no Participating Seller shall have the right to require that such Participating Seller receive cash in lieu of securities on grounds that such requirements have not been complied with. 7.3. Further Assurances; Management Roll-Over. Each Participating Seller, and each Investor to whom the Securities held by such Participating Seller were originally issued, shall, whether in his capacity as a Participating Seller, stockholder, officer or director of the Company, or otherwise, take or cause to be taken all such actions (subject as to entering into agreements to the provisions of the next sentence hereof) as may be reasonably requested in order expeditiously to consummate each Sale pursuant to Section 7.1; provided, however, that no Management Initial Investor party to an employment agreement with the Company or any of its subsidiaries shall be required hereunder to extend the term thereof. In addition, notwithstanding any contrary provision contained in this Agreement, in the event that the proposed Sale is a Liquidity Event, at the option of the Bain Majority Investors and on no more than one occasion under this Agreement, if (A) a Management Investor is currently employed by the Company or was so employed at any time during the 12 preceding months without any material diminution of his or her responsibilities and (B) the Proposed Buyer is a Financial Buyer, such Management Investor and each other holder of Securities previously held by, or distributed or issued in respect of Securities or membership interests of the LLC previously held by, such Management Investor (other than any Person which is described in Section 501(c)(3) of the Internal Revenue Code of 1986, as from time to time in effect) may be required to retain, or exchange for equity in the Proposed Buyer or one of its Affiliates or the surviving entity, up to 25%, in the case of Senior Management Investors, or 15%, in the case of Junior Management Investors, of their Securities. Each Participating Seller or Investor agrees to execute and deliver such agreements as may be necessary for the Participating Seller to be subject to the same terms and conditions with respect to the Sale as apply to the Proposed Bain Seller, including, without limitation, an agreement by such Participating Seller (i) to be subject to such purchase price escrow, indemnity or adjustment provisions as may apply to Investors generally, (ii) to be liable in respect of any Individual Representations to be given by selling Investors in the Sale (insofar as such Individual Representations relate to such Participating Seller) and (iii) to be liable in respect of any General Representations to be given by selling Investors in the Sale; provided, however, that (a) the Management Initial Investors shall make no representations or warranties pursuant to such agreement other than Individual Representations but shall be liable as indemnitors with respect to the General Representations made by other selling Investors in the Sale, and (b) except with respect to Individual Representations, the aggregate amount of the liability of each Participating Seller shall not exceed the lesser of (i) such Participating Seller's pro rata portion of any such -31- liability, in accordance with such Participating Seller's portion of the total number of Securities included in the Sale and (ii) the net proceeds received by such Participating Seller from the Sale. 7.4. Closing. The closing of a Sale pursuant to Section 7.1 shall take place at such time and place as the Bain Majority Holders shall specify by notice to each Participating Seller. At the closing of any Sale under this Section 7, each Participating Seller shall deliver the certificates evidencing the Securities to be sold by such Participating Seller, duly endorsed, or with stock powers or other appropriate instruments duly endorsed, for transfer with signature guaranteed, free and clear of any liens, encumbrances or adverse claims, with any stock transfer tax stamps affixed, against delivery of the applicable consideration. 7.5. Excluded Transactions. Notwithstanding any provisions of this Section 7 to the contrary and subject to the provisions of Section 8 below, the preceding provisions of this Section 7 shall not restrict any Transfer pursuant to the provisions of Section 6 or 8 of this Agreement; and no holder of Other Securities shall have pursuant to the provisions of this Section 7 any right of participation or otherwise with respect to any Transfer of Bain Securities: (a) to a Bain Investor or an Affiliated Fund; or (b) to any trust established for the benefit of partners of a Bain Investor or an Affiliated Fund or pro rata to the partners of a Bain Investor or an Affiliated Fund; or (c) in a public offering or under Rule 144; or (d) to any director, officer or employee of the Company or its subsidiaries; provided, however, that the aggregate number of shares of Common Stock transferred under this clause (d) shall not exceed an aggregate of ten percent (10%) of the outstanding number of shares of Common Stock (calculated on a fully diluted basis as of immediately after giving effect to the transfer in question). Notwithstanding the provisions of the immediately preceding sentence, no Transfer of Bain Securities pursuant clause (a), (b) or (d) of such sentence shall be effective until the recipient has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that all Bain Securities to be received by such recipient are subject to all of the provisions of this Agreement and that such recipient is bound hereby and a party hereto to the same extent as a Bain Initial Investor or Junior Management Initial Investor, as the case may be. -32- 7.6. Period. The foregoing provisions of this Section 7 shall expire on the earliest of: (i) prior to the LLC Liquidation, the first date on which the LLC owns less than fifty percent (50%) of all Securities owned by it immediately after the closing under the LLC Purchase Agreement; (ii) after the LLC Liquidation, the first date on which the Bain Investors own less than fifty percent (50%) of all Securities owned by them immediately following the LLC Liquidation; (iii) upon the closing of the Initial Public Offering if, in the written opinion of the managing underwriter for the Initial Public Offering, the continued effectiveness of this Section 7 would be detrimental to the sale of securities in the Initial Public Offering or the price to be received for such securities; or (iv) the date on which there exists a Significant Public Float; provided, however, that with respect to clause (iv) hereof, in the event a Take Along Notice shall have become effective within one hundred twenty (120) days prior to such date, the foregoing provisions of this Section 7 shall expire on the earlier of (i) the consummation of the closing of the Sale to which the Take Along Notice relates and (ii) the one hundred twentieth (120th) day following the effectiveness of the Take Along Notice. 8. REGISTRATION RIGHTS. The Company will perform and comply, and cause each of its subsidiaries to perform and comply, with such of following provisions as are applicable to it. Each holder of Securities or Non-CSFB Warrant Securities will perform and comply with such of the following provisions as are applicable to such holder. 8.1. Piggyback Registration Rights. 8.1.1. Election. Whenever the Company proposes to register (other than a registration pursuant to Section 8.3.3) on form S-1, S-2 or S-3 (or any successor form) any shares of Common Stock for its own or others' account under the Securities Act for a public offering (each a "Public Offering"), the Company shall furnish each holder of Registrable Securities prompt notice of its intent to do so. Upon the request of any such holder given by notice to the Company within twenty (20) days after the effectiveness of such notice from the Company, the Company will use its reasonable best efforts to cause to be included in such registration all of the Registrable Securities which such holder requests. 8.1.2. Further Assurances. Holders of Registrable Securities participating in any Public Offering shall take all such actions and execute all such documents and instruments that are reasonably requested by the Company to effect the sale of their Registrable Securities in such Public Offering, including without limitation being parties to the underwriting agreement entered into by the Company and any other selling shareholders in connection therewith and being liable in respect of any representations and warranties being made by each selling shareholder and any indemnification agreements and "lock-up" -33- agreements made by each selling shareholder for the benefit of the underwriters in such underwriting agreement; provided, however, that (i) no Management Initial Investor party to an employment agreement with the Company or any of its subsidiaries shall be required hereunder to extend the term thereof; and (ii) except with respect to individual representations and warranties regarding such matters as legal capacity or due organization of such participating holder, authority to participate in the Public Offering, compliance by such selling shareholder with laws and agreements applicable to it, ownership (free and clear of liens, charges, encumbrances and adverse claims) of Registrable Securities to be sold by such selling shareholder and accuracy of information with respect to such selling shareholder furnished for inclusion in any disclosure document relating to each Public Offering ("Individual Underwriting Agreement Representations"), the aggregate amount of the liabilities of such participating holder of Registrable Securities pursuant to such underwriting agreement shall not exceed the lesser of (a) such participating holder's pro rata portion of any such liability, in accordance with such participating holder's portion of the total number of Registrable Securities included in the Public Offering or (b) the net proceeds received by such participating holder from the Public Offering. In the case any Management Initial Investor holding Registrable Securities shall request participation in any Public Offering pursuant to this Section 8.1, the Company shall use its reasonable best efforts to induce the managing underwriter of the securities being offered to permit such Management Initial Investor to make no representations or warranties in the underwriting agreement other than Individual Underwriting Agreement Representations, but to be liable as indemnitors with respect to any other representations or warranties made by other selling holders in such underwriting agreement, but in the event the managing underwriter shall not accede to such request, such Management Initial Investor shall, within five (5) days of notice to that effect from the managing underwriter or its counsel, either elect to make such other representations and warranties in the underwriting agreement as shall be made by other participating holders or to withdraw from participation. 8.1.3. Expenses. The Company shall pay all expenses of the holders of Registrable Securities participating in any Public Offering pursuant to this Section 8.1, other than (i) underwriting discounts and commissions, if any, attributable to the Registrable Securities being sold by such holder, (ii) applicable transfer taxes, if any, and (iii) fees and charges of any attorneys or other advisors (other than attorneys and advisors retained by the Company to advise it in connection with such Public Offering and one counsel retained to advise all holders of Registrable Securities in connection with such Public Offering) retained by any such holders. -34- 8.1.4. Excluded Transactions. Notwithstanding the preceding provisions of this Section 8.1, no holder of Registrable Shares shall have any right of participation or otherwise with respect to the following Public Offerings: (a) Any Public Offering relating solely to employee benefit plans, or (b) Any Public Offering the proceeds of which are used principally to finance the acquisition after the date hereof by the Company or any of its subsidiaries of any acquired businesses or any Public Offering constituting an exchange of securities for securities of any such acquired businesses. 8.2. Demand Registration Rights. 8.2.1. Registration on Request of Holders of Bain Securities. One or more holders of Bain Securities that wish to register securities representing at least twenty-five percent (25%) of the total amount of Bain Securities then outstanding (as to such registration, the "Initiating Holders") may, by notice to the Company specifying the intended method or methods of disposition, request that the Company effect the registration under the Securities Act of all or a specified part of the Registrable Securities held by such Initiating Holders. Promptly after receipt of such notice, the Company will give notice of such requested registration to all other holders of Registrable Securities. The Company will then use its reasonable best efforts to effect the registration under the Securities Act of the Registrable Securities which the Company has been requested to register by such Initiating Holders, and, subject to all of the provisions of this Section 8, all other Registrable Securities which the Company has been requested to register pursuant to Section 8.1.1 by notice delivered to the Company within twenty (20) days after the giving of such notice by the Company (which request shall specify the intended method of disposition of such Registrable Securities), all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities which the Company has been so requested to register. No holder of Bain Securities shall present any request for registration pursuant to this Section 8.2.1 (i) at any time within one hundred eighty (180) days after either the furnishing by the Company of any notice of proposed registration under Section 8.1 or 8.2 hereof (unless abandoned by notice from the Company or the Majority Initiating Holders, as applicable) or the consummation of any other Public Offering, without the prior consent of the Company or (ii) if the Company has previously effected three registrations of Registrable Securities under this Section 8.2.1. 8.2.2. Registration on Request of Holders of CSFB and Senior Management Securities and Non-CSFB Warrant Securities. -35- 8.2.2.1. Senior Management Investors. At any time not earlier than one hundred eighty (180) days after the closing of the first registered secondary offering following the Initial Public Offering, the Senior Management Majority Holders (as to such registration, the "Initiating Holders") may, by notice to the Company specifying the intended method or methods of disposition, request that the Company effect the registration under the Securities Act of all or a specified part of the Registrable Securities held by such Initiating Holders. The demand registration rights granted pursuant to this Section 8.2.2.1 may not be exercised if the Company has previously effected a registration of Registrable Securities under this Section 8.2.2.1. 8.2.2.2. CSFB. At any time not earlier than one hundred eighty (180) days after the closing of the first registered secondary offering following the Initial Public Offering, the CSFB Majority Holders (as to such registration, the "Initiating Holders") may, by notice to the Company specifying the intended method or methods of disposition, request that the Company effect the registration under the Securities Act of all or a specified part of the Registrable Securities held by such Initiating Holders. The demand registration rights granted pursuant to this Section 8.2.2.2 may not be exercised if the Company has previously effected a registration of Registrable Securities under this Section 8.2.2.2. 8.2.2.3. Non-CSFB Warrantholders. At any time not earlier than one hundred eighty (180) days after the closing of the first registered secondary offering following the Initial Public Offering, the holders of Non-CSFB Warrant Securities (other than the Company, the Bain Investors or the Other Investors) representing an aggregate of at least 25% of the Non-CSFB Warrant Securities then outstanding (as to such registration, the "Initiating Holders") may, by notice to the Company specifying the intended method or methods of disposition, request that the Company effect the registration under the Securities Act of all or a specified part of the Registrable Securities held by such Initiating Holders. The demand registration rights granted pursuant to this Section 8.2.2.3 may not be exercised if the Company has previously effected two registrations of Registrable Securities under this Section 8.2.2.3. 8.2.2.4. Certain Provisions. No holder of Other Securities or Non-CSFB Warrant Securities shall present any request for registration pursuant to this Section 8.2.2 at any time within one hundred eighty (180) days after either the furnishing by the Company of any notice of proposed registration under Section 8.1 or 8.2 -36- hereof (unless abandoned by notice from the Company or the Majority Initiating Holders, as applicable) or the consummation of any other Public Offering, without the prior consent of the Company. Promptly after receipt of any notice requesting registration of Registrable Securities pursuant to this Section 8.2.2, the Company will give notice of such requested registration to all other holders of Registrable Securities. The Company will then use its reasonable best efforts to effect the registration under the Securities Act of the Registrable Securities which the Company has been requested to register by the holders requesting pursuant to this Section 8.2.2, and, subject to all of the provisions of this Section 8, all other Registrable Securities which the Company has been requested to register pursuant to Section 8.1.1 by notice delivered to the Company within 20 days after the giving of such notice by the Company (which request shall specify the intended method of disposition of such Registrable Securities), all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities which the Company has been so requested to register. 8.2.3. Form. Each registration requested pursuant to this Section 8.2 shall be effected by the filing of a registration statement on Form S-1 (or any other form which includes substantially the same information as would be required to be included in a registration statement on such form as currently constituted), unless the use of a different form has been agreed to in writing by holders of at least a majority of the Registrable Securities held by the Initiating Holders (the "Majority Initiating Holders"). 8.2.4. Registrations Pursuant to Section 8.2. In the case of a registration pursuant to Section 8.2, whenever the Majority Initiating Holders shall request that such registration shall be effected pursuant to an underwritten offering, such registration shall be so effected, and all Registrable Securities to be included in such registration shall be included in such underwritten offering, subject to the cutback provisions of Section 8.3.1. If requested by such underwriters, the Company will enter into an underwriting agreement with such underwriters for such offering containing such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, customary indemnity and contribution provisions. 8.2.5. Expenses. The Company shall pay all expenses of the holders of Registrable Securities participating in any Public Offering pursuant to this Section 8.2, other than (i) underwriting discounts and commissions, if any, (ii) applicable transfer taxes, if any, and (iii) fees and charges of any attorneys or other advisors (other than attorneys and advisors retained by the Company to advise it in connection with such Public -37- Offering and one counsel retained to advise all holders of Registrable Securities in connection with such Public Offering) retained by any such holders. 8.3. Certain Other Provisions. 8.3.1. Cutbacks. Notwithstanding the foregoing provisions of this Section 8, if the Company is advised in good faith by any managing underwriter of securities being offered pursuant to any Public Offering under this Section 8 that the number of shares requested to be sold in such Public Offering is greater than the number of such shares which can be included in such Public Offering without materially adversely affecting such Public Offering, the shares to be included in such offering shall be reduced to the extent requested by such managing underwriter as provided in this Section 8.3.1: 8.3.1.1. Company Registration or IPO. Upon registration by the Company of securities for its own account as contemplated by Section 8.1.1 or in the case of an Initial Public Offering, shares to be included in such offering shall be reduced in the following order and fashion: (i) first, Registrable Securities requested to be included in the Public Offering by Persons other than the Company, if any, with respect to such Public Offering shall be reduced pro rata (based on the number of shares requested to be included by such Persons); and (ii) second, securities proposed to be included by the Company shall be reduced. 8.3.1.2. Demand Registration Rights. Upon the exercise of demand registration rights by the Initiating Holders pursuant to Section 8.2 (except in the case of an Initial Public Offering, which shall be governed by Section 8.3.1.1), the shares to be included in such offering shall be reduced in the following order and fashion: (i) first, securities other than Registrable Securities proposed to be included shall be reduced pro rata (based on the number of such securities proposed to be included); and (ii) second, Registrable Securities requested to be included by Persons other than the Company, if any, with respect to such Public Offering shall be -38- reduced pro rata (based on the number of shares requested to be included by such Persons). 8.3.1.3. Special Management Cut-Back. Notwithstanding any contrary provision contained in this Agreement, in the event that the Public Offering is a Liquidity Event or a subsequent secondary Public Offering, at the option of the Bain Majority Investors and on no more than one occasion under this Agreement, if a Management Investor is currently employed by the Company or was so employed at any time during the 12 preceding months without any material diminution of his or her responsibilities, such Management Investor and each other holder of Securities previously held by, or distributed or issued in respect of Securities or membership interests of the LLC previously held by, such Management Investor (other than any Person which is described in Section 501(c)(3) of the Internal Revenue Code of 1986, as from time to time in effect) may be required to retain, rather than sell, up to 25%, the case of Senior Management Investors, or 15%, in the case of Junior Management Investors, of their Securities. 8.3.2. Number of Requests, Minimum IPO Size, etc. In the event the number of shares requested to be included in a Public Offering by the Initiating Holders with respect thereto is reduced by operation of the provisions of Section 8.3.1, such demand shall be excluded in determining the number of demands exercisable by such Initiating Holders. No demand may be made unless the Initiating Holders with respect thereto hold Registrable Securities constituting at least five percent (5%) of the aggregate outstanding number of shares of Common Stock (or, in the case of Section 8.2.2.3, at least the lesser of (x) five percent (5%) of the aggregate outstanding number of shares of Common Stock and (y) thirty-three percent (33%) of the then outstanding Registrable Securities subject to Section 8.2.2.3). In the event a proposed demand would result in the Initial Public Offering, the Company shall not be obligated to effect such registration unless the proceeds (net of underwriters' discount and commission) therefrom exceed $50 million, and any such demand which does not result in an effective registration by operation of this sentence shall not count for purposes of determining the number of demands exercisable by the Initiating Holders in question. 8.3.3. Resale Shelf Registration for Non-CSFB Warrant Securities. In addition to the registration rights granted pursuant to Section 8.1 and 8.2 above, upon the request of the Non-CSFB Majority Warrantholders, the Company will at its own expense, not later than three hundred and ninety five (395) days after the effectiveness of the first underwritten Public Offering, file, and use its reasonable best efforts to cause to become and remain effective, a shelf registration statement under the Securities Act covering the -39- Registrable Securities included in the Non-CSFB Warrant Securities until such time as may be consented to by the Non-CSFB Majority Warrantholders; provided, however, that (i) the rights provided by this Section 8.3.3 shall expire on such date, if any, as all Non-CSFB Warrant Securities are freely tradeable under clause (k) of Rule 144 and no holder of Non- CSFB Warrant Securities holds more than one percent (1%) of all outstanding shares of Common Stock and (ii) the Company shall not be required to file any registration statement pursuant to this Section 8.3.3 at any time within one hundred eighty (180) days after either the furnishing by the Company of any notice of proposed registration under Section 8.1 or 8.2 hereof (unless abandoned by notice from the Company or the Majority Initiating Holders, as applicable) or the consummation of any other Public Offering. 8.3.4. Selection of Managing Underwriters. In the case of any registration proposed by the Company for the Public Offering of securities for its own account, the managing underwriters, if any, with respect thereto shall be selected by the Company. In the case of any registration pursuant to Section 8.2 hereof, the holders of a majority of the Registrable Securities requested to be included therein hereunder shall select the managing underwriters, if any, with respect thereto. Notwithstanding the foregoing provisions of this Section 8.3.4, in the case of the Initial Public Offering, the managing underwriter with respect thereto shall be selected by the Bain Majority Holders. 8.3.5. Selection of Counsel. Counsel to the Company in connection with any Public Offering shall be selected by the Company, and counsel to the selling holders of Registrable Securities shall be selected by the holders of a majority of the Registrable Securities requested pursuant to the provisions hereof to be included therein. 8.4. Indemnification and Contribution. 8.4.1. Indemnities of the Company. In the event of any registration of any Registrable Securities or other debt or equity securities under the Securities Act, and in connection with any registration statement or any other disclosure document produced by or on behalf of the Company and any of its subsidiaries pursuant to which securities of the Company and any of its subsidiaries are sold (whether or not for the account of the Company) or any other disclosure document produced by or on behalf of the Company and any of its subsidiaries, including without limitation reports required or other documents filed under the Exchange Act, the Company will, and hereby does, and will cause its subsidiaries, jointly and severally to, indemnify and hold harmless each seller of Registrable Securities, any other holder of Securities or Non-CSFB Warrant Securities who is or might be deemed to be a controlling Person of the Company and any of its subsidiaries within the meaning of Section 15 of the Securities Act or Section 20 of the -40- Exchange Act, their respective direct and indirect partners, advisory board members, directors, officers and shareholders, and each other Person, if any, who controls any such seller or any such holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being referred to herein as a "Covered Person"), against any losses, claims, damages or liabilities, joint or several, to which such Covered Person may be or become subject under the Securities Act, the Exchange Act, any other securities or other law of any jurisdiction, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in any registration statement under the Securities Act, any preliminary prospectus or final prospectus included therein, or any related summary prospectus, or any amendment or supplement thereto, or any document incorporated by reference therein, or any other such disclosure document or other document or report, (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any violation by the Company and any of its subsidiaries of any federal, state or common law rule or regulation applicable to the Company and to any of its subsidiaries and relating to action or inaction in connection with any such registration, disclosure document or other document or report, and will reimburse such Covered Person for any legal or any other expenses incurred by it in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that neither the Company nor any of its subsidiaries shall be liable to any Covered Person in any such case to the extent that any such loss, claim, damage, liability, action or proceeding arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement, incorporated document or other such disclosure document or other document or report, in reliance upon and in conformity with written information furnished to the Company or to any of its subsidiaries through an instrument duly executed by such Covered Person specifically stating that it is for use in the preparation thereof. The indemnities of the Company and of its subsidiaries contained in this Section 8.4.1 shall remain in full force and effect regardless of any investigation made by or on behalf of such Covered Person and shall survive any transfer of securities. 8.4.2. Indemnities to the Company. The Company and any of its subsidiaries may require, as a condition to including any securities in any registration statement filed pursuant to this Section 8, that the Company and any of its subsidiaries shall have received an undertaking satisfactory to it from the prospective seller of such securities, to indemnify and hold harmless the Company and any of its subsidiaries, each director of the Company -41- or any of its subsidiaries, each officer of the Company or any of its subsidiaries who shall sign such registration statement and each other Person (other than such seller), if any, who controls the Company and any of its subsidiaries within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, with respect to any statement in or omission from such registration statement, any preliminary prospectus or final prospectus included therein, or any amendment or supplement thereto, or any document incorporated therein, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company or to any of its subsidiaries through an instrument executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement, or incorporated document. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company, any of its subsidiaries, or any such director, officer or controlling Person and shall survive any transfer of securities. 8.4.3. Contribution. If the indemnification provided for in Sections 8.4.1 or 8.4.2 hereof is unavailable to a party that would have been an indemnified party under any such Section in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each party that would have been an indemnifying party thereunder shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative fault of such indemnifying party on the one hand and such indemnified party on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or such indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just or equitable if contribution pursuant to this Section 8.4.3 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the preceding sentence. The amount paid or payable by a contributing party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8.4.3 shall include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No Person guilty of fraudulent misrepresentation (within the meaning of Section -42- 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 8.4.4. Limitation on Liability of Holders of Registrable Securities. The liability of each holder of Registrable Securities in respect of all indemnification and contribution obligations of such holder arising under this Section 8.4 shall not in any event exceed an amount equal to the net proceeds to such holder (after deduction of all underwriters' discounts and commissions and all other expenses paid by such holder in connection with the registration in question) from the disposition of the Registrable Securities disposed of by such holder pursuant to such registration. 8.5. Lock-up. Without the prior written consent of the Company, for a period beginning seven days immediately preceding and ending on the 180th day following the effective date of the registration statement used in connection with such offering, no holder of Bain Securities or Other Securities (whether or not a selling shareholder pursuant to such registration statement) shall (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise Transfer, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for such Common Stock or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Common Stock, whether any such transaction described in clause (a) or (b) above is to be settled by delivery of such Common Stock or such other securities, in cash or otherwise; provided, however, that the foregoing restrictions shall not apply to (i) transactions relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the Initial Public Offering, (ii) Transfers among any Affiliates, provided that the transferee Affiliate agrees to be bound by the terms of this Agreement, including this Section 8.5, (iii) Transfers to the Company or any subsidiary of the Company in one or more transactions approved by the Board or (iv) Transfers constituting the exercise of the Junior Management Options or the CSFB Option in accordance with the provisions of Section 5. 9. CERTAIN FUTURE EQUITY FINANCINGS OF THE COMPANY. The Company shall not issue or sell any shares of any of its capital stock or any securities convertible into or exchangeable for any shares of its capital stock, issue or grant any rights (either preemptive or other) to subscribe for or to purchase, or any options or warrants for the purchase of, or enter into any agreements providing for the issuance (contingent or otherwise) of, any of its capital stock or any stock or securities convertible into or exchangeable for any shares of its capital stock, or grant stock appreciation or other equity equivalent rights, in each case to any Bain Initial Investor or to any Person in which any Bain Initial Investor beneficially owns, directly or indirectly, 5% or more of any class of outstanding capital stock of such Person (each an "Issuance" of "Subject -43- Securities"), except in compliance with the following provisions of this Section 9; provided, however, that the provisions of this Section 9 shall not apply to any such issuance or sale pursuant to options, warrants or rights for, or securities convertible into, other securities, in each case if such options, warrants, rights or convertible securities either (i) were outstanding as of the date hereof, (ii) were issued after the date hereof and the provisions of this Section 9 were complied with in connection with the issuance of such securities, or (iii) were issued after the date hereof and the provisions of this Section 9 did not apply to the issuance of such securities. 9.1. Right of Participation. 9.1.1. Offer. Not fewer than twenty (20) days prior to the consummation of the Issuance, a notice (the "Preemption Notice") shall be furnished by the Company to each holder of Other Securities (collectively, the "Preemptive Purchaser Offerees"). The Preemption Notice shall include: (i) The principal terms of the proposed Issuance, including without limitation the amount and kind of Subject Securities to be included in the Issuance, the percentage of the total number of shares of Common Stock outstanding as of immediately prior to giving effect to such Issuance (calculated on a fully diluted basis) which the number of shares of Common Stock held by such Preemptive Purchaser Offeree constitutes (the "Preemptive Portion"), the maximum price per unit of the Subject Securities, the name and address of the Persons to whom the Subject Securities will be Issued (the "Proposed Buyers") and the other principal terms of the proposed Issuance; and (ii) An offer by the Company to Issue, at the option of each Preemptive Purchaser Offeree, to such Preemptive Purchaser Offeree such portion of the Subject Securities to be included in the Issuance as may be requested by such Preemptive Purchaser Offeree (not to exceed the Preemptive Portion of the total amount of Subject Securities to be included in the Issuance) determined as provided in Section 9.1.2, on the same terms and conditions, with respect to each unit of Subject Securities issued to the Preemptive Purchaser Offerees, as each of the Proposed Buyers shall be Issued each of his, her or its units of Subject Securities. 9.1.2. Time and Manner of Exercise by Offerees. Each Preemptive Purchaser Offeree desiring to accept the offer contained in the Preemption Notice shall send a written commitment to the Company specifying the amount of Subject Securities (not in any event to exceed the Preemptive Portion of the total amount of Subject Securities to be included in the Issuance) which such Preemptive Purchaser Offeree desires to be issued within -44- twenty (20) days after effectiveness of the Preemption Notice (each Preemptive Purchaser Offeree who so accepts theoffer contained in the Preemption Notice being referred to herein as a"Participating Buyer"). Each Preemptive Purchaser Offeree who has not so accepted such offer shall be deemed to have waived all of his rights with respect to the Issuance, and the Company shall thereafter be free to Issue in the Issuance to the Proposed Buyers, at a price no less than 95% of the maximum price set forth in the Preemption Notice and on otherwise substantially no more favorable terms than as set forth in the Preemption Notice, without any further obligation to include such non-accepting Preemptive Purchaser Offerees in the Issuance. If, prior to consummation, the terms of such proposed Issuance shall change with the result that the price shall be less than 95% of the maximum price set forth in the Preemption Notice or the other principal terms shall be substantially more favorable than as set forth in the Preemption Notice, it shall be necessary for a separate Preemption Notice to have been furnished, and the terms and provisions of this Section 9.1 separately complied with, in order to consummate such proposed Issuance pursuant to this Section 9.1; provided, however, that in the case of such a separate Preemption Notice, the applicable period referred to in Sections 9.1.1 shall be seven (7) days and the applicable period referred to in Section 9.1.2 shall be three (3) business days. The acceptance of each Participating Buyer shall be irrevocable except as hereinafter provided, and each such Participating Buyer shall be bound and obligated to acquire in the Issuance on the same terms and conditions, with respect to each unit of Subject Securities Issued, as the Proposed Buyers, such amount of Subject Securities as such Participating Buyer shall have specified in such Participating Buyer's written commitment. If at the end of the one hundred twentieth (120th) day following the date on which the Preemption Notice was given the Company has not completed the Issuance as provided in the foregoing provisions of this Section 9, each Participating Buyer shall be released from his obligations under the written commitment, the Preemption Notice shall be null and void, and it shall be necessary for a separate Preemption Notice to have been furnished, and the terms and provisions of this Section 9.1 separately complied with, in order to consummate an Issuance pursuant to this Section 9.1, unless the failure to complete the Issuance resulted from any failure by any Preemptive Purchaser Offeree to comply in any material respect with the terms of this Section 9. 9.1.3. Certain Legal Requirements. In the event the participation by any Preemptive Purchaser Offeree as a Participating Buyer would require under applicable law (i) the registration or qualification of any securities or of any person as a broker or dealer -45- or agent with respect to such securities or (ii) the provision to any participant in the Issuance of any information other than such information as would be required under Regulation D of the Securities and Exchange Commission or similar rule then in effect in an offering made pursuant to said Regulation D solely to "accredited investors" as defined in said Regulation D, the Company shall be obligated only to use its reasonable best efforts to cause such requirements to have been complied with to the extent necessary to permit such Participating Buyer to receive such securities. Notwithstanding any provisions of this Section 9, if use of reasonable best efforts shall not have resulted in such requirements being complied with to the extent necessary to permit such Participating Buyer to receive such securities, the Company may exclude such Participating Buyer from participation in the Issuance. The obligation of the Company to use reasonable best efforts to cause such requirements to have been complied with to the extent necessary to permit a Participating Buyer to receive such securities shall be conditioned on such Participating Buyer executing such documents and instruments, and taking such other actions (including without limitation, if required by the Company on advice of its counsel, agreeing to be represented during the course of such transaction by a "purchaser representative" (as defined in Regulation D) in connection with evaluating the merits and risks of the prospective investment and acknowledging that he was so represented), as the Company shall reasonably request in order to permit such requirements to have been complied with. Each Participating Buyer agrees to take such actions as the Company shall reasonably request in order to permit such requirements to have been complied with. 9.1.4. Special Rule in Certain Circumstances. In the event that the participation of each Proposed Buyer in an Issuance is conditioned upon the purchase by such Proposed Buyer of any securities (including without limitation debt securities) other than Subject Securities ("Other Offered Securities"), the Company may require as a condition to the participation in the Issuance by the Preemptive Purchaser Offerees that such Preemptive Purchaser Offerees acquire in the Issuance, together with the Subject Securities to be acquired by them, Other Offered Securities in the same proportion to the Subject Securities to be acquired by them as Other Offered Securities are acquired by each Proposed Buyer in proportion to the Subject Securities acquired in the Issuance by such Proposed Buyer, on the same terms and conditions (except as specifically otherwise provided in this Section 9.1) as to each unit of Subject Securities and Other Offered Securities issued to the Preemptive Purchaser Offerees, as each of the Proposed Buyers shall be issued each of his, her or its units of Subject Securities and Other Offered Securities. 9.1.5. Closing. Each Participating Buyer shall take such actions and execute such documents and instruments as shall be reasonably necessary or desirable in order to consummate the Issuance expeditiously and on the same terms as the Proposed Buyers; -46- provided, however, that in the event the consideration payable -------- ------- by the Proposed Buyers in the Issuance for Subject Securities (or, if applicable, Other Offered Securities) includes any securities or other property other than cash, at the option of each Participating Buyer, such Participating Buyer may deliver, in lieu of such securities or other property other than cash, cash in the amount equal to the then Fair Market Value of such consideration constituting securities or other property other than cash. For purposes of this Section 9.1.5, Fair Market Value shall be determined in good faith by the Board as of the date of the Issuance in question. At the closing of any Issuance under this Section 9.1, each of the Participating Buyers shall be delivered the notes, certificates or other instruments evidencing the Subject Securities (and, if applicable, Other Offered Securities) to be Issued to such Participating Buyer, registered in the name of such Participating Buyer or his or its designated nominee, free and clear of any Liens, with any transfer tax stamps affixed, against delivery by such Participating Buyer of the applicable consideration. 9.2. Termination. The foregoing provisions of this Section 9 shall terminate immediately following the closing of the Issuance of Common Stock by the Company pursuant to the Initial Public Offering. 10. DETERMINATION OF FAIR MARKET VALUE. The term "Fair Market Value" shall mean, the fair value of the applicable Security or other securities as of the applicable date on the basis of a sale of such Security or securities in an arms length private sale between a willing buyer and a willing seller, neither acting under compulsion (or, in the case of an Option, the fair value of the Shares that may then be purchased or received by the holder of such Option upon exercise or conversion thereof, determined as described in this Section 10, minus the exercise or conversion price applicable thereto). In determining such Fair Market Value, no discount shall be taken for constituting a minority interest and no upward adjustment or discount shall be taken relating to the fact that the Securities in question are subject to the restrictions and entitled to the rights provided hereunder. For purposes of Sections 6 or 7 of this Agreement, such Fair Market Value shall be determined: (i) in the case of any Securities or other securities to be valued representing less than 10% of the then outstanding Registrable Securities, in good faith by the Board and (ii) in the case of any Securities or other securities to be valued representing more than 10% of the then outstanding Registrable Securities, absent any agreement between the Company and the holders of a majority of the Securities in question regarding such valuation, by an Independent Investment Banking Firm retained by the Company (the fees and expenses of which shall be shared in one-half shares by the Company, on the one hand, and the holders of Securities subject to such Fair Market Value determination, on the other hand) selected as follows. The Board shall select three Independent Investment Banking Firms none of whom shall be an Affiliate -47- of any Investor, and the Independent Investment Banking Firm to perform the calculation shall be selected from such list of three by the holders of a majority of the Securities subject to such Fair Market Value determination. 11. REMEDIES. 11.1. Generally. The Company and all holders of Securities and Non-CSFB Warrant Securities shall have all remedies available at law, in equity or otherwise in the event of any breach or violation of this Agreement or any default hereunder by the Company, any holder of Securities or any holder of Non-CSFB Warrant Securities. The parties acknowledge and agree that in the event of any breach of this Agreement, in addition to any other remedies which may be available, each of the parties hereto shall be entitled to specific performance of the obligations of the other parties hereto and, in addition, to such other equitable remedies (including, without limitation, preliminary or temporary relief) as may be appropriate in the circumstances. 11.2. Deposit. Without limiting the generality of Section 11.1, if any Investor (a "Non-Complying Investor") fails to deliver any certificate or certificates evidencing Securities that may be required to be sold pursuant to any provision of this Agreement in accordance with the terms hereof, the Company or other Person entitled to purchase or require the sale of such securities may, at its option, in addition to all other remedies it may have, deposit the purchase price for such Securities with any national bank or trust company having combined capital, surplus and undivided profits in excess of one hundred million dollars ($100,000,000) and which has agreed to act as escrow agent in the manner contemplated by this Section 11.2 and shall furnish or make available to all interested Persons satisfactory evidence of such deposit and thereupon the Company shall cancel on its books the certificate or certificates representing such Securities and, in the case of any such purchase of Securities by a Person other than the Company issue, in lieu thereof and in the name of such Person, a new certificate or certificates representing such Securities and thereupon all of the Non-Complying Investor's rights in and to such Securities shall terminate. Thereafter, upon delivery to the Company by such Non-Complying Investor of the certificate or certificates evidencing such Securities (duly endorsed, or with stock powers or other appropriate instruments of transfer duly endorsed, for transfer, with signature guaranteed, free and clear of any liens or encumbrances, and with any stock transfer tax stamps affixed), the Company shall instruct the escrow agent referred to above to deliver the purchase price (without any interest from the date of the closing to the date of such delivery, any such interest to accrue to the Person who deposited the purchase price for such Securities) to such Non-Complying Investor. 12. LEGENDS. -48- 12.1. Securities Act Legend. Each certificate representing Securities or Non-CSFB Warrant Securities shall have the following legend endorsed conspicuously thereupon: "The securities represented by this certificate were issued in a private placement, without registration under the Securities Act of 1933, as amended (the "Act"), and may not be sold, assigned, pledged or otherwise transferred in the absence of an effective registration under the Act covering the transfer or an opinion of counsel, satisfactory to the issuer, that registration under the Act is not required." The legend required by this Section 12.1 shall cease to be required as to any particular Securities (i) when, in the opinion of Ropes & Gray, Hutchins Wheeler & Dittmar, Bingham Dana LLP, Weil Gotshal & Manges, Willkie Farr & Gallagher or other counsel reasonably acceptable to the Company, such restrictions are no longer required in order to assure compliance with the Securities Act or (ii) when such Securities shall have been registered under the Securities Act or transferred pursuant to Rule 144 thereunder. Whenever (x) such requirement shall cease and terminate as to any Securities or (y) such Securities shall be transferable under paragraph (k) of Rule 144, the holder thereof shall be entitled to receive from the Company, without expense, new certificates not bearing the legend set forth in this Section 12.1. 12.2. Stockholders Agreement Legend. Each certificate representing Securities shall have the following legend endorsed conspicuously thereupon: "The securities represented by this certificate are subject to restrictions on voting and transfer and requirements of sale and the provisions as set forth in the Stockholders Agreement dated as of September 27, 1999, as amended and in effect from time to time, and constitute ______________ Securities as defined in such Stockholders Agreement. The Company will furnish a copy of such agreement to the holder of this certificate without charge upon written request." Any person who acquires Securities which are not subject to all or part of the terms of this Agreement shall have the right to have such legend (or the applicable portion thereof) removed from certificates representing such Securities. 12.3. Option-Eligible Shares Legend. Each certificate representing Option-Eligible Shares shall have the following legend endorsed conspicuously thereupon: "The securities represented by this certificate are Option-Eligible Shares (as defined in the Stockholders Agreement) and are subject to purchase by the holders -49- of the Junior Management Options and the CSFB Option (as defined in the Stockholders Agreement) under the terms and conditions described in Section 5 of the Stockholders Agreement, and any transfer of these Option-Eligible Shares is subject to certain conditions specified in and must be in compliance with the terms of such Section 5 of the Stockholders Agreement." The legend required by this Section 12.3 shall cease to be required (a) as to any particular Option-Eligible Shares, upon the exercise of a Junior Management Option or the CSFB Option with respect to such shares or (ii) with respect to all Option-Eligible Shares, after all Junior Management Options and the CSFB Option have terminated pursuant to the terms of Section 5, and in any such event the holder thereof shall be entitled to receive from the Company, without expense, replacement certificates not bearing the legend set forth in this Section 12.3. 12.4. Stop Transfer Instruction. The Company will instruct any transfer agent not to register the Transfer of any Securities until the conditions specified in the foregoing legends are satisfied. 13. AMENDMENT, TERMINATION, ETC. 13.1. No Oral Modifications. This Agreement may not be orally amended, modified, extended or terminated, nor shall any oral waiver of any of its terms be effective. 13.2. Written Modifications. This Agreement may be amended, modified, extended or terminated, and the provisions hereof may be waived, by an agreement in writing signed by the Bain Majority Holders and the holders of a majority of all Securities then outstanding and each such amendment, modification, extension, termination and waiver shall be binding upon each party hereto and each holder of Securities and Non-CSFB Warrant Securities subject hereto; provided, however, (a) the consent of the CSFB Majority Holders shall be required for any amendment, modification, extension, termination or waiver which has a material adverse effect on the rights of the holders of CSFB Securities as such under this Agreement, (b) the consent of the Management Majority Holders shall be required for any amendment, modification, extension, termination or waiver which has a material adverse effect on the rights of the holders of Management Securities as such under this Agreement, (c) the consent of the Non-CSFB Majority Warrantholders shall be required for any amendment, modification, extension, termination or waiver which has a material adverse effect on the rights of the holders of Non-CSFB Warrant Securities as such under this Agreement. In addition, each party hereto and each holder of Securities or Non-CSFB Warrant Securities subject hereto may waive any of its rights hereunder by an instrument in writing signed by such party or holder. -50- 14. MISCELLANEOUS. 14.1. Authority; Effect. Each party hereto represents and warrants to and agrees with each other party that the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized on behalf of such party and do not violate any agreement or other instrument applicable to such party or by which its assets are bound. This Agreement does not, and shall not be construed to, give rise to the creation of a partnership among any of the parties hereto, or to constitute any of such parties members of a joint venture or other association. 14.2. Notices. Notices and other communications provided for in this Agreement shall be in writing and shall be effective (i) when one day shall have elapsed (exclusive of Saturdays, Sundays and banking holidays in the City of Boston) from their deposit for overnight delivery with Federal Express or other bonded courier (charges prepaid), addressed to the party or parties sought to be charged with notice of the same at the respective addresses set forth or referred to below, subject to written notice of change of address given by any party to each other party, (ii) when three (3) days shall have elapsed (exclusive of Saturdays, Sundays and banking holidays in the City of Boston) from their deposit in the U.S. mail, postage prepaid and registered or certified, addressed to the party or parties sought to be charged with notice of the same at the respective addresses set forth or referred to below, subject to written notice of change of address given by any party to each other party, or (iii) if earlier, upon receipt. If to the Company, to it at: c/o ICON Health & Fitness, Inc. 875 South Main Street Logan, Utah 84321 Attention: President with a copy to: Bain Capital, Inc. Two Copley Place, 7th Floor Boston, Massachusetts 02116 Attention: Robert C. Gay Ron Mika -51- If to the Bain Investors, to them at: c/o Bain Capital, Inc. Two Copley Place, 7th Floor Boston, Massachusetts 02116 Attention: Robert C. Gay Ron Mika with a copy to: Ropes & Gray One International Place Boston, Massachusetts 02110 Attention: R. Newcomb Stillwell If to CSFB, to it at: Credit Suisse First Boston Corp. Eleven Madison Avenue New York, NY 10010-3629 Attention: Christopher Pechock with a copy to: Bingham Dana LLP One State Street Hartford, Connecticut 06103-3178 Attention: Evan D. Flaschen If to Scott Watterson or Gary Stevenson, to him at: c/o ICON Health & Fitness, Inc. 875 South Main Street Logan, Utah 84321 with a copy to: -52- Hutchins, Wheeler & Dittmar, a Professional Corporation 101 Federal Street Boston, MA 02110 Attention: Charles W. Robins If to the Non-CSFB Warrantholders, to them at: c/o IBJ Whitehall Bank & Trust Company One State Street New York, New York 10004 with a copy to: Weil Gotshal & Manges 767 Fifth Avenue New York, New York 10028 Attention: Matthew D. Bloch If to any other Investor, to such Investor at the address set forth in the stock record book of the Company. Notice to the holder of record of any shares of capital stock shall be deemed to be notice to the holder of such shares for all purposes hereof. 14.3. Binding Effect, etc. This Agreement constitutes the entire agreement of the parties with respect to its subject matter, supersedes all prior or contemporaneous oral or written agreements or discussions with respect to such subject matter, and shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, representatives, successors and assigns. No provision of this Agreement providing for the expiration of any provision by lapse of time or upon the occurrence of specified events or otherwise shall relieve any Person of liability for breach or violation prior to such expiration. 14.4. Descriptive Headings. The descriptive headings of this Agreement are for convenience of reference only, are not to be considered a part hereof and shall not be construed to define or limit any of the terms or provisions hereof. 14.5. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one instrument. -53- 14.6. Severability. If in any judicial or arbitral proceedings a court or arbitrator shall refuse to enforce any provision of this Agreement, then such unenforceable provision shall be deemed eliminated from this Agreement for the purpose of such proceedings to the extent necessary to permit the remaining provisions to be enforced. To the full extent, however, that the provisions of any applicable law may be waived, they are hereby waived to the end that this Agreement be deemed to be valid and binding agreement enforceable in accordance with its terms, and in the event that any provision hereof shall be found to be invalid or unenforceable, such provision shall be construed by limiting it so as to be valid and enforceable to the maximum extent consistent with and possible under applicable law. 14.7. Joint and Several Liability of the Company and ICON. ICON shall be jointly and severally liable in respect of all payment obligations of the Company under this Agreement. 14.8. Third Party Beneficiaries. Solely for purposes of Sections 8 (other than Section 8.5), 11.1, 12.1, 13, 14 and 15 hereof, the Non-CSFB Warrantholders shall be deemed to be intended third-party beneficiaries of this Agreement and shall be bound hereby. 14.9. Termination of Equity Commitment Letter. ICON, the Bain Initial Investors, CSFB and the Senior Management Initial Investors hereby agree on behalf of themselves and their affiliates that the letter agreement dated July 8, 1999 between ICON, Bain Capital, Inc., Credit Suisse First Boston Corp. and the Senior Management Initial Investors, as amended (the "Equity Commitment Letter"), is hereby terminated without further liability to any party thereunder and shall be of no further force and effect. 14.10. Limitation on CSFB Acquisitions. CSFB agrees that neither it nor any of its Affiliates shall acquire any shares of Common Stock or Options from any third party if, after giving effect to such acquisition, CSFB and its Affiliates would own (or be deemed to own) in the aggregate Equivalent Shares representing more than 49.5% of the outstanding shares of Common Stock of the Company on a fully diluted basis. Solely for purposes of this Section 14.10, in calculating the number of Equivalent Shares owned by CSFB and its Affiliates, CSFB shall be deemed to have exercised the CSFB Option in full. -54- 15. GOVERNING LAW. 15.1. Governing Law. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of Delaware without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. 15.2. Consent to Jurisdiction. Each party to this Agreement, by its execution hereof, (a) hereby irrevocably submits to the exclusive jurisdiction of the state courts of the State of New York sitting in the County of New York or the United States District Court for the Southern District of New York for the purpose of any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof, (b) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, and agrees not to allow any of its subsidiaries to assert, by way of motion, as a defense or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceeding brought in one of the above-named courts is improper, or that this Agreement or the subject matter hereof or thereof may not be enforced in or by such court and (c) hereby agrees not to commence or maintain any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof or thereof other than before one of the above-named courts nor to make any motion or take any other action seeking or intending to cause the transfer or removal of any such action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation to any court other than one of the above-named courts whether on the grounds of inconvenient forum or otherwise. Notwithstanding the foregoing, to the extent that any party hereto is or becomes a party in any litigation in connection with which it may assert indemnification rights set forth in this agreement, the court in which such litigation is being heard shall be deemed to be included in clause (a) above. Each party hereto hereby consents to service of process in any such proceeding in any manner permitted by New York law, and agrees that service of process by registered or certified mail, return receipt requested, at its address specified pursuant to Section 14.2 hereof is reasonably calculated to give actual notice. The provisions of this Section 15.2 shall not restrict the ability of any party to enforce in any court any judgment obtained in the federal or state courts of the State of New York. 15.3. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, -55- DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION, CLAIM, CAUSE OF ACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE), INQUIRY, PROCEEDING OR INVESTIGATION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING. EACH PARTY HERETO ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE OTHER PARTIES HERETO THAT THIS SECTION 15.3 CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH THEY ARE RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 15.3 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. 15.4. Reliance. Each of the parties hereto acknowledges that he or it has been informed by each other party that the provisions of Section 15 constitute a material inducement upon which such party is relying and will rely in entering into this Agreement and the transactions contemplated hereby. [THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] -56- [Stockholders Agreement] IN WITNESS WHEREOF, each of the undersigned has duly executed this Agreement (or caused this Agreement to be executed on its behalf by its officer or representative thereunto duly authorized) under seal as of the date first above written. THE COMPANY: HF HOLDINGS, INC. By /s/ S. Fred Beck ------------------------------------- Title: CFO, Vice President & Treasurer ICON: ICON HEALTH & FITNESS, INC. By /s/ S. Fred Beck ------------------------------------- Title: CFO, Vice President & Treasurer THE BAIN INITIAL INVESTORS: BAIN CAPITAL FUND IV, L.P. By Bain Capital Partners IV, L.P., a Delaware Limited Partnership, its general partner By Bain Capital Investors, Inc., its general partner By /s/ Robert Gay ------------------------------------ Title: Managing Director [Stockholders Agreement] BAIN CAPITAL FUND IV-B, L.P. By Bain Capital Partners IV, L.P., a Delaware Limited Partnership, its general partner By Bain Capital Investors, Inc., its general partner By /s/ Robert Gay ------------------------------------- Title: Managing Director BCIP ASSOCIATES By /s/ Robert Gay ------------------------------------- Title: a general partner BCIP TRUST ASSOCIATES, L.P. By /s/ Robert Gay ------------------------------------- Title: a general partner [Stockholders Agreement] THE LLC: HF INVESTMENT HOLDINGS, LLC By /s/ Gary E. Stevenson ------------------------------------- Title: Administrative Member [Stockholders Agreement] THE SENIOR MANAGEMENT INITIAL INVESTORS: /s/ Gary E. Stevenson --------------------------------------- Gary Stevenson, individually /s/ Scott Watterson --------------------------------------- Scott Watterson, individually [Stockholders Agreement] CSFB: CREDIT SUISSE FIRST BOSTON CORPORATION By /s/ David J. Matlin ------------------------------------- Title: Managing Director [Stockholders Agreement] By /s/ Stanley C. Tuttleman ------------------------------------- Stanley C. Tuttleman [Stockholders Agreement] INVERNESS/PHOENIX CAPITAL LLC By W. McComb Dunwoody ------------------------------------- Title: Managing Director [Stockholders Agreement] By /s/ Lee Ming Tsung ------------------------------------- Lee Ming Tsung [Stockholders Agreement] By /s/ Wen-Chung Ko ------------------------------------- Wen-Chung Ko EX-10.11 19 EXHIBIT 10.11 Exhibit 10.11 EMPLOYMENT AGREEMENT entered on the 27th day of September, 1999. AMONG: HF HOLDINGS, INC., a Delaware corporation. ("COMPANY") ICON HEALTH & FITNESS, INC., a Delaware corporation. ("SUBSIDIARY") SCOTT R. WATTERSON, acting in his personal capacity, of the City of LOGAN, State of UTAH. ("EMPLOYEE") THE PARTIES AGREE AS FOLLOWS: 1. PREAMBLE 1.1. The COMPANY and the SUBSIDIARY have made an exchange offer for all outstanding 13% Senior Subordinated Notes due 2002 of the SUBSIDIARY, 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc. and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation, pursuant to an Exchange Offer and Consent Solicitation, dated July 30, 1999, as supplemented (the "Exchange Offer"). 1.2. It is recorded that the COMPANY, in connection with the Restructuring (as defined in the Equity Letter Agreement (the "Equity Letter"), dated July 8, 1999, attached, as amended, to the Exchange Offer as Annex H) desires to conclude an agreement for the employment of the EMPLOYEE as Chairman and Chief Executive Officer of the COMPANY, according to the terms and conditions to be set forth in this Agreement. 1.3. This Agreement is to record the terms and conditions which govern the mutual relations of the parties hereto with respect to its subject matter. 1.4. In this Agreement, "BUSINESS" means the manufacture, sale and distribution of SPORTING GOODS as carried on by the COMPANY, the SUBSIDIARY, and their respective various divisions and subsidiaries, from time to time. "SPORTING GOODS" means fitness equipment and accessories, which presently involve treadmills, home gyms, aerobic exercises, trampolines, weights and benches and exercise accessories, but the content of such product lines may vary from time to time. 1.5. In this Agreement, AFFILIATES means any entity in which the COMPANY or the SUBSIDIARY holds more than a 20% voting interest direct or indirect. 2. EMPLOYMENT AND ONE-TIME BONUS 2.1. This Agreement shall come into effect on the date hereof ("EFFECTIVE DATE"). 2.2. The COMPANY hereby employs the EMPLOYEE and the EMPLOYEE agrees to serve the COMPANY in the positions of Chairman and Chief Executive Officer for a term of three (3) years from the EFFECTIVE DATE, subject to earlier termination as hereinafter provided (the "TERM"). 2.3. Although this agreement is concluded between the COMPANY and the EMPLOYEE, it is agreed that the duties and obligations of the EMPLOYEE hereunder extend to the SUBSIDIARY and to all of the COMPANY's other subsidiaries, present and future, although the EMPLOYEE will not necessarily be an employee of such entities. The EMPLOYEE agrees to serve, if requested by the COMPANY, as an officer or director of the SUBSIDIARY and any other subsidiaries, in each case without additional consideration. 2.4. Upon the execution and delivery hereof, the COMPANY shall pay the EMPLOYEE a one-time bonus of FIVE HUNDRED THOUSAND DOLLARS ($500,000). 3. BASE SALARY, EXPENSES AND BENEFITS 3.1. In consideration for the faithful performance of services by the EMPLOYEE to be rendered to the COMPANY as herein provided, the COMPANY shall pay to the EMPLOYEE during the TERM an annual base salary of FIVE HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($525,000) payable in semi-monthly installments or in accordance with the general policy of the COMPANY which may change from time to time but in no event less frequently than monthly. 3.2. The annual base salary mentioned in Section 3.1 above shall be reviewed by the Board of Directors of the COMPANY and may be adjusted upwards in the Board's discretion, annually for each year of the TERM, taking into account, among other things: a) the performance by the EMPLOYEE of his duties and functions pursuant to this Agreement, b) the general economic situation, c) the development and performance of the BUSINESS, and d) other matters deemed relevant by the Board of Directors such as an increase in shareholder equity and the rate on return on investment. 3.3. The COMPANY shall reimburse the EMPLOYEE for all reasonable expenses which are incurred by the EMPLOYEE in the performance of his duties hereunder 2 and (i) subject to the COMPANY's annual budget or (ii) as authorized by the Board of Directors of the COMPANY or (iii) in accordance with the policies and procedures established from time to time by the Board of Directors of the COMPANY or a committee delegated for such purpose. 3.4. During the Term, the COMPANY shall provide the EMPLOYEE with the use of a new automobile of his choice, acting reasonably (and consistently with his past practice) every 3 years for the purposes of his employment commensurate with the position of the EMPLOYEE and having regard to COMPANY policy in force from time to time. The COMPANY shall assume all costs and expenses of said automobile and its operation, including, without limitation, insurance, maintenance, gas and use of such automobile. Upon the expiry of the TERM, the EMPLOYEE shall deliver such automobile to the COMPANY. 3.5. During the Term, the EMPLOYEE shall be entitled to participate in the COMPANY's life, welfare, and health insurance plans for senior executives on the same terms as those of other senior executives. 3.6. During the Term, the EMPLOYEE shall be entitled to participate in fringe benefit programs which are not less favorable than those extended by the COMPANY to its senior executives, including without limitation an as yet to be defined deferred compensation plan to be established by the Board of Directors, but excluding for this purpose any such plan or program adopted exclusively for the benefit of junior management. 4. ANNUAL BONUS 4.1. The EMPLOYEE shall receive with respect to (i) each fiscal year ending during the Term, and (ii) that portion of any fiscal year ending after Term during which he is employed hereunder, a bonus equal to one and one-quarter percent (1.25% ) of the consolidated EBITDA (as that term is defined in the Credit Agreement of even date herewith among the SUBSIDIARY, General Electric Capital Corporation and the other lenders thereunder, without regard to any amendments thereto) of the SUBSIDIARY and its subsidiaries (but not including the COMPANY), provided that such bonus shall not be payable with respect to any such fiscal year unless such EBITDA for such fiscal year threeexceeds five and one-half percent (5.5%) of the consolidated net sales of the SUBSIDIARY and its subsidiaries (but not including the COMPANY) determined in accordance with generally accepted accounting principles and provided, further, that for purposes of this Agreement, EBITDA shall be calculated without regard to any bonuses payable hereunder. 4.2. The sole basis for the bonus calculation shall be the audited financial statements of the SUBSIDIARY and its subsidiaries for the fiscal year in question. 3 4.3. Any bonus to which EMPLOYEE is entitled under the provisions of this Agreement for any fiscal year shall be paid to him (regardless of whether the TERM has terminated) in accordance with the COMPANY'S previous practice, with a first installment equal to forty percent (40%) of a good faith estimate of the bonus for such year, to be paid during the month of December of such year and a final installment to be paid as promptly as reasonably practicable after the end of, but not later than the 75th day after the end of each such fiscal year. 5. DUTIES 5.1. The EMPLOYEE shall perform those functions which are normally the functions of the Chairman and Chief Executive Officer of the COMPANY and such other offices as he may hold pursuant to Section 2.3, and shall further perform those functions which shall be reasonably determined from time to time by the Board of Directors of the COMPANY, such functions not to be inconsistent with those herein set forth. The EMPLOYEE shall report to, and be subject to the authority of, the Board of Directors of the COMPANY. 5.2. The COMPANY shall give the EMPLOYEE a notice of six (6) months prior to any relocation of the EMPLOYEE. 5.3. It is the specific responsibility of the EMPLOYEE, between regular meetings of the Board, to apprise Board Members of significant business matters. 5.4. The EMPLOYEE shall, during the TERM, devote his entire working time, attention and energies to the business of the COMPANY, the SUBSIDIARY, and their respective AFFILIATES. 5.5. The EMPLOYEE shall not, during the TERM, except under Section 5.6, be engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. Notwithstanding the prohibition contained in the present clause, the EMPLOYEE shall be entitled to continue to sit on the boards of directors of the companies listed on Schedule I hereto, and on the boards of directors of other companies if such activity is approved in writing by the Board of Directors of the COMPANY. In the case of non-profit corporations or charities, such approval shall not be unreasonably withheld, but in all other cases, the Board shall have sole discretion to grant, delay or withhold approval, with or without conditions. 5.6. The EMPLOYEE shall not invest his personal assets in any business other than NON-COMPETING BUSINESSES, and even in the case of such investments: a) No services are required or furnished on the part of the EMPLOYEE in the operations of the companies in which such investments are made and in which his participation is solely that of an investor provided that this subsection is not infringed by the EMPLOYEE's providing counseling (and not acting in a "line" capacity) on a non-remunerative basis to all 4 such companies for a maximum of 5 hours per week and 200 hours per year; and b) If the EMPLOYEE purchases securities in any corporation whose securities are regularly traded in a recognized securities market, such purchases shall not result in his collectively owning beneficially at any time five percent (5%) or more of the equity securities of any corporation engaged in a business other than a NON-COMPETING BUSINESS. The foregoing restrictions shall not apply to any investment of whatever extent the EMPLOYEE may take in the shares of the COMPANY or of any successor company. For the purposes of this subsection, NON-COMPETING BUSINESSES are all businesses other than those which compete with: a) the BUSINESS; or b) any other business carried on in the future by the COMPANY, the SUBSIDIARY or any AFFILIATES, provided that the EMPLOYEE has access to confidential information concerning such business. Moreover, the EMPLOYEE shall not knowingly assist any RELATIVE to make any investment which the EMPLOYEE is not permitted to make by this section. 5.7. The EMPLOYEE is a member of the Board of Directors and acknowledges that he has a significant interest in this Agreement and undertakes the following: 5.7.1. To seek independent legal counsel at the EMPLOYEECOMPANY's expense to negotiate and review this Agreement on the EMPLOYEE's behalf; 5.7.2. To disclose his interest in this Agreement to the other members of the Board of Directors; and 5.7.3. To retire from and abstain from the discussion and vote at any meeting of the Board of Directors at which this Agreement or any default by EMPLOYEE or matter arising therefrom is the subject of a discussion or a vote. 5.8. The EMPLOYEE also undertakes the following: 5.8.1. To use every best effort (including the establishment of written procedures known to operation personnel) to promptly bring to the attention of the Board of Directors of the COMPANY any matter requiring the COMPANY's decision or action where his own interests or those of a RELATIVE are involved and to abstain from taking such decision or action until the Board of Directors decides. 5 5.8.2. If requested, to be absent from and abstain from the discussion and vote at any meeting of the aforementioned Board of Directors where the subject matter being discussed and voted upon is any matter covered by section 5.8.l. 5.8.3. For the purposes of this Agreement RELATIVE means the EMPLOYEE's spouse, parent, sibling, child or sibling's children, the spouses of the foregoing and any other person who could be claimed as a dependent on the EMPLOYEE's or RELATIVE's federal income tax return, any corporation or partnership in which a RELATIVE or the EMPLOYEE holds a five percent (5%) interest or of which a RELATIVE or the EMPLOYEE is an officer or director, and any trust of which any of the foregoing is a beneficiary. 6. EQUITY GRANT 6.1. Contemporaneously herewith, the COMPANY will issue to the EMPLOYEE 375,000 shares of Common Stock of the COMPANY, at no cost to EMPLOYEE, which the COMPANY represents and warrants is equal to 3.74893% of the COMPANY's Common Stock outstanding on a fully diluted basis upon closing of the Restructuring. 7. CONFIDENTIALITY, ETC. 7.1. The EMPLOYEE recognizes and acknowledges that the confidential information, trade secrets and proprietary processes of the COMPANY, its AFFILIATES and subsidiaries as they may exist from time to time are valuable, special and unique assets of the BUSINESS of the COMPANY, its AFFILIATES and subsidiaries, access to and knowledge of which are essential to the performance of the EMPLOYEE's duties hereunder. The EMPLOYEE will not, during the TERM of his employment or at any time within five (5) years following its termination, for any reason whatsoever, in whole or in part, disclose such confidential information, secrets or processes to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the EMPLOYEE make use of such property for his own purposes or for the benefit of any person, firm, corporation or other entity (except the COMPANY, its AFFILIATES and subsidiaries) under any circumstances whatsoever, except as may be required in the fulfillment of his function with the COMPANY within the terms of this Agreement or except as provided by law; provided these restrictions shall not apply to such information, secrets and processes which are then in the public domain (provided that the EMPLOYEE was not responsible, directly or indirectly, for permitting such secrets or process to enter the public domain without the COMPANY's consent). 7.2. The EMPLOYEE furthermore agrees that upon termination of the TERM he will remit to the COMPANY all writings and materials, in his possession or under his control, which either belong to the COMPANY and AFFILIATES or which may 6 contain confidential information concerning the COMPANY and AFFILIATES. The EMPLOYEE may, however, retain his personal diary/agenda after removing or destroying all confidential COMPANY or AFFILIATES material therein. 7.3. Any and all inventions, discoveries, developments, methods, processes, compositions, works, concepts and ideas (whether or not patentable or copyrightable) conceived, made, developed, created or reduced to practice by the EMPLOYEE (whether at the request or suggestion of the COMPANY or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the period of his employment by the COMPANY or any of its subsidiaries which may relate to the business, ventures or other activities of or products manufactured or sold by the COMPANY or any of its subsidiaries (collectively, "Proprietary Rights"), shall be promptly and fully disclosed by the EMPLOYEE to an appropriate executive officer of the COMPANY and shall be the COMPANY's exclusive property as against the EMPLOYEE and his heirs and personal representatives, and the EMPLOYEE hereby assigns to the COMPANY his entire right, title and interest therein and shall promptly deliver to an appropriate executive officer of the COMPANY all papers, drawings models, data and other material relating to any of the foregoing Proprietary Rights, conceived, made, developed, created or reduced to practice by him as aforesaid. All copyrightable Proprietary Rights shall be considered "works made for hire." The EMPLOYEE shall, upon the COMPANY's request and without any payment therefor, execute any documents reasonably necessary or advisable in the opinion of the COMPANY's counsel to assign, and confirm the COMPANY's title in, his entire right, title and interest in the foregoing Proprietary Rights and to direct issuance of patents or copyrights to the COMPANY with respect to such Proprietary Rights as are the COMPANY's exclusive property as against the EMPLOYEE and his heirs and personal representatives under this Section 7.3 or to vest in the COMPANY title to such Proprietary Rights as against the EMPLOYEE and his heirs and personal representatives, the expense of securing any such patent or copyright, however, to be borne by the COMPANY. In addition, the Company shall reimburse the EMPLOYEE for any reasonable expenses incurred in having such documents reviewed by EMPLOYEE's counsel. 8. VACATION 8.1. The EMPLOYEE shall have the right to an annual paid vacation of no less duration than four (4) weeks. 9. TERMINATION OF EMPLOYMENT 9.1. Notwithstanding any other provision contained herein, the COMPANY may on or after the EFFECTIVE DATE send to the EMPLOYEE notice of one of the following events and should the EMPLOYEE fail to cure the matter giving rise to the notice within thirty (30) days after receipt of such notice, the TERM shall 7 terminate without any delay stipulated therein or any indemnity payable in lieu thereof: a) EMPLOYEE's willful misconduct or gross negligence; b) The commission of a criminal act by the EMPLOYEE against the COMPANY involving material harm (whether nor not charges are filed); c) The commission by the EMPLOYEE of a criminal act of moral turpitude bringing the COMPANY into disrepute (whether or not charges are filed); d) Willful insubordination to any directive of the Board of Directors provided reasonable prior notice of such directive is given; or e) Actions contrary to Sections 5.4, 5.5, 5.6, 5.8, 7 or 10 causing COMPANY or AFFILIATES material harm. 9.2. Notwithstanding any other provision contained herein, the TERM shall terminate automatically, without notice or indemnity in lieu thereof, upon the occurrence of one of the following events: a) The bankruptcy or voluntary state insolvency filing of the EMPLOYEE; or b) The death of the EMPLOYEE. 9.3. The EMPLOYEE may terminate the TERM by sending his resignation in writing to Board of Directors not less than six (6) months prior to the effective date of such resignation or, if such resignation is submitted in good faith so that the EMPLOYEE can perform full time church service, not less than three (3) months prior to the effective date of such resignation, failing which notice the EMPLOYEE may be subject to any and all damages incurred as a result of such failure. In the event the EMPLOYEE has given such a notice to the COMPANY, the COMPANY may, at its option, earlier terminate EMPLOYEE's employment. 9.4. Except under the circumstances described in Section 9.6, the COMPANY may terminate the TERM by sending a notice in writing to the EMPLOYEE. 9.5. The EMPLOYEE may immediately terminate the TERM by sending a notice of termination to the Board of Directors with immediate effect following any material diminution of the EMPLOYEE's responsibilities or in the event that the EMPLOYEE is asked by the Board of Directors to perform any act which a reasonable person would consider illegal or unethical and the COMPANY has not withdrawn its request to the EMPLOYEE to perform such act within five (5) days of receiving a written notice from the EMPLOYEE to withdraw such a request. 8 9.6. The COMPANY may immediately terminate the TERM by sending a notice in writing to the EMPLOYEE with immediate effect: 9.6.1. after a period of six (6) consecutive months (or aggregating six (6) months in any twelve (12) month period) of absence by the EMPLOYEE from his employment as a result of sickness or disability, or 9.6.2. after sixty (60) days of absence by the EMPLOYEE from his employment as a result of sickness or disability and a certification by three (3) physicians that the EMPLOYEE is likely to be disabled for a period of at least six (6) months from the initial date of sickness or disability. One (1) such physician shall be chosen by the EMPLOYEE, one (1) shall be chosen by the COMPANY and the third shall be chosen by the other two (2) selected physicians. The EMPLOYEE agrees that in the event of his sickness, he shall submit himself for examination by such physicians if reasonably requested to do so by the COMPANY. For the purposes of this section, "disabled" or "disability" shall mean a temporary or permanent substantial inability because of a physical or mental illness to continue to discharge the EMPLOYEE's duties hereunder. Notwithstanding any other provision hereof, the EMPLOYEE's compensation during any period of the EMPLOYEE'S disability shall be reduced to the extent of any payments to the EMPLOYEE for such period under any disability plan or program maintained for the EMPLOYEE by the COMPANY for his benefit. 9.7. In the event of the termination of the TERM by virtue of section 9.6 in addition to the payments described therein, the COMPANY shall pay to the EMPLOYEE a severance pay equal to one (1) month base salary in effect at termination for each calendar year, or part thereof, of the EMPLOYEE's employment with the COMPANY, the SUBSIDIARY, IHF Capital, Inc. or IHF Holdings, Inc. (or any predecessor companies of the COMPANY, the SUBSIDIARY, IHF Capital, Inc., or IHF Holdings, Inc.) after January 1, 1988. 9.8. In the event of the termination of the TERM by virtue of Section 9.3, 9.4 or 9.5, the COMPANY shall pay to the EMPLOYEE a severance pay equal to the EMPLOYEE's base salary then in effect and the bonus referred to in Section 4 hereof, pro-rated for the period of the payment, for two (2) years following the termination of the TERM, provided, however, that if, due to the EMPLOYEE's resignation, there is a termination of the TERM, without any action by the COMPANY, during the one (1) year period following the EFFECTIVE DATE, the EMPLOYEE shall forego FIVE HUNDRED THOUSAND DOLLARS ($500,000) of any severance pay to which he would otherwise be entitled under this Section 9.8, unless the resignation resulting in such termination is submitted (i) in good faith by EMPLOYEE pursuant to Section 9.3 so that the EMPLOYEE can perform full time church service, or (ii) pursuant to Section 9.5. The bonuses shall be paid to the EMPLOYEE within ninety (90) days from the end of the COMPANY's applicable fiscal year, and the base salary shall be paid to the 9 EMPLOYEE on the same payment schedule as was applicable to the EMPLOYEE during his employment. 10. RESTRICTIVE COVENANT 10.1. EMPLOYEE shall not, during the TERM of his employment hereunder and for a period of four (4) years from its termination, either directly or indirectly, individually or in partnership, carry on or be engaged in, or concerned with or interested in, in any capacity whatsoever (including that of principal, agent, shareholder (subject to section 5.6(b)), consultant, employee, lender or surety), any person, firm, association, syndicate or company engaged in or concerned with or interested in the conception, development, fabrication, transformation, marketing, distribution, advertising, franchising or sale in Canada, the United States or the European Economic Community, or any of them, of any products or services similar or identical to any of those manufactured, distributed, or sold by the COMPANY or any of its subsidiaries in the course of his employment with the COMPANY, its AFFILIATES and subsidiaries. 10.2. (a) EMPLOYEE shall not, during the TERM of his employment hereunder and for a period of twelve (12) months from its termination, directly or indirectly, hire any Designated Employee. (b) EMPLOYEE shall not, during the TERM of his employment hereunder and for a period of eighteen (18) months from its termination, directly or indirectly, solicit, interfere with or endeavor to entice away, any Designated Employee. (c) For purposes of this Section 10.2., the term "Designated Employee" shall mean any person if that person is or was a Senior Employee of the COMPANY or any of its AFFILIATES or subsidiaries during the period beginning six (6) months prior to the termination of the TERM and ending (i) in the case of clause (a), twelve (12) months thereafter and (ii) in the case of clause (b), eighteen (18) months thereafter, but shall exclude Gary E. Stevenson or any RELATIVE. For purposes of this Section 10.2 "Senior Employee" shall mean each of the two hundred (200) most highly compensated employees of the COMPANY or any of its subsidiaries or AFFILIATES. 10.3. Notwithstanding the foregoing, if termination of employment occurs under Section 9.3, 9.4 or 9.5, the period stipulated by Section 10.1 is reduced to two (2) years; provided, however, that such period shall be extended by written notice to the EMPLOYEE within thirty (30) days of such termination up to two (2) years (i.e., up to a total of four (4) years from the termination of EMPLOYEE's employment) to the extent that the COMPANY, at its option, pays to the EMPLOYEE a severance pay equal to the EMPLOYEE's base salary then in effect and the bonus referred to in Section 4 hereof, pro-rated for the period of the payment, for a period of up to an additional two (2) years beyond that required to 10 be paid by the COMPANY to the EMPLOYEE under Section 9.8. If paid at the COMPANY's option, such bonuses are to be paid within ninety (90) days from the end of the COMPANY's applicable fiscal year, and the base salary shall be paid to the EMPLOYEE on the same payment schedule as was applicable to the EMPLOYEE during his employment. 11. REASONABLENESS AND REMEDIES 11.1. The EMPLOYEE agrees that all the conditions and restrictions established in this Agreement are reasonable taking into account the circumstances surrounding this Agreement. 11.2. The EMPLOYEE recognizes that in the view of the serious and irreparable harm which a violation hereof would have on the COMPANY, and without prejudice to the COMPANY's other remedies, injunctive relief would constitute an available and appropriate remedy and, to the extent permitted by law, the COMPANY shall not be required to furnish any security or bond in respect thereof. 12. [INTENTIONALLY DELETED] 13. GENERAL LIMIT ON EMPLOYEE'S LIABILITY 13.1. As a general and overall limitation of the EMPLOYEE's liability to the COMPANY and AFFILIATES, the COMPANY agrees that the EMPLOYEE shall not be liable, for any reason except as set forth below, to the COMPANY or any of its AFFILIATES for an amount in excess of the amount provided in the next sentence hereof. Accordingly, as and for their sole remedy against the EMPLOYEE, the COMPANY agrees that for any claim or cause of action that the COMPANY or any of its AFFILIATES may have against the EMPLOYEE, whether past or future, their sole remedy shall be the forfeiture of the EMPLOYEE's salary, bonus and other compensation (but not the equity grant under Section 6.1 hereof, which shall not be subject to forfeiture) received by the EMPLOYEE during the COMPANY's fiscal year in which the EMPLOYEE's termination occurred plus subsequently accruing compensation. In this regard, the COMPANY agrees, to the extent permitted by applicable law, to indemnify the EMPLOYEE from and against any liability the EMPLOYEE may have in excess of that provided in the immediately preceding sentence (i) hereunder or (ii) for any other claim the COMPANY or any of its AFFILIATES may have against the EMPLOYEE. However, nothing in this Section 13 shall limit the EMPLOYEE's liability to the COMPANY or any of its AFFILIATES or provide the EMPLOYEE any indemnity (i) for any act by the EMPLOYEE involving theft, fraud or embezzlement against the COMPANY or any of its AFFILIATES, (ii) in respect of any equitable remedy against the EMPLOYEE, (iii) in respect of any agreement listed on Schedule I of the Old Employment Agreement (as defined in that separate Termination Agreement among IHF Capital, Inc., IHF Holdings, Inc., SUBSIDIARY and EMPLOYEE, dated an even date hereof (the "Termination Agreement")) or any agreement heretofore or hereafter entered into 11 by the EMPLOYEE after the date of the Old Employment Agreement, (iv) in respect of any claim or cause of action asserted by the COMPANY or any of its AFFILIATES as a counterclaim (to the extent of any liability the COMPANY or any of its AFFILIATES may have by reason of the EMPLOYEE claim in question) or as a set off, or (v) under Section 7, 9.3 or 10 of this Agreement or under the Non-Competition Agreement (as defined in the First Amended and Restated Master Transaction Agreement dated as of October 12, 1994 among ICON Health & Fitness, Inc. and the other parties thereto (the "Master Transaction Agreement")); provided, however, that the aggregate of the liability of the EMPLOYEE to the COMPANY or any of its AFFILIATES under Section 7, 9.3 or 10 of this Agreement or to the COMPANY, any of its AFFILIATES, IHF Capital, Inc. or any of its AFFILIATES (as defined in the Old Employment Agreement) under the Non-Competition Agreement and of the liability of the EMPLOYEE to IHF Capital, Inc. or any of its AFFILIATES (as so defined) in respect of claims subject to the $18,000,000 limits set forth in the third to last sentence of Section 10.3.1.1 of the Master Transaction, shall not exceed $1,240,000. 14. AMENDMENTS 14.1. This Agreement may be amended only by written instrument duly executed by all the parties hereby and approved by the Board of Directors of the COMPANY. 15. NO ASSIGNMENT 15.1. No party hereto shall assign, in whole or in part, this agreement or any of its or his respective rights and obligations hereunder without the express prior written consent of the other parties hereto; for this purpose the merger or reorganization of the COMPANY or the SUBSIDIARY or any AFFILIATE shall not be considered an assignment. 16. NO WAIVER 16.1 No waiver by any party of any breach of the obligations of any other party hereunder shall be a waiver of any subsequent breach or of any other obligation, nor shall any forbearance to seek a remedy for any breach be a waiver of any rights and remedies with respect to any subsequent breach. 17. SEVERABILITY 17.1. The invalidity of one of the provisions of this Agreement shall not invalidate or otherwise affect any of the other provisions of this Agreement, which shall remain in full force and effect, and each such invalid provision shall be construed by limiting it so as to be valid for the maximum extent permitted by law. 18. CURRENCY, ETC. 12 18.1. All references in this Agreement to dollar of $ mean lawful currency of the United States of America. 18.2. The COMPANY shall have the right to withhold, from or in respect of any payment, benefit or other item of compensation due to the EMPLOYEE hereunder, any federal, state or local taxes of any kind required by law to be withheld with respect thereto. In the event that at the time any withholding is required hereunder, the amount of cash payments from which the applicable withholding taxes may be deducted is less than the withholding taxes due, the EMPLOYEE shall pay to the COMPANY, in immediately available funds, an amount equal to such shortfall. 19. GOVERNING LAW; ARBITRATION 19.1. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of Utah, without giving effect to any choice or conflict of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction; provided, however, that any dispute relating to the provisions of Section 19.2 shall be governed by the United States Arbitration Act as then in force. 19.2. Except solely as set forth in Section 19.4, each dispute, difference, controversy or claim arising in connection with or related or incidental to, or question occurring under, this Agreement or the subject matter hereof shall be finally settled under the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") by an arbitral tribunal composed of three (3) arbitrators, at least one (1) of whom shall be an attorney experienced in corporate transactions, appointed by agreement of the parties in accordance with said Rules. In the event the parties fail to agree upon a panel of arbitrators from the first list of potential arbitrators proposed by the AAA, the AAA will submit a second list in accordance with said Rules. In the event the parties shall have failed to agree upon a full panel of arbitrators from said second list, any remaining arbitrators to be selected shall be appointed by the AAA in accordance with said Rules. If, at the time of the arbitration, the parties agree in writing to submit the dispute to a single arbitrator, said single arbitrator shall be appointed by agreement of the parties in accordance with the foregoing procedure, or, failing such agreement, by the AAA in accordance with said Rules. The foregoing arbitration proceedings may be commenced by any party by notice to all other parties. 19.3. The place of arbitration shall be Salt Lake City, Utah. 19.4. The parties hereto exclude any right of appeal to any court on the merits of the dispute. The provisions of this Section 19 may be enforced in any court having jurisdiction over the award of any of the parties or any of their respective assets and judgment on the award (including without limitation equitable remedies) granted in any arbitration hereunder may be entered in any such court. Nothing contained in this Section 19 shall prevent any party from seeking interim 13 measures of protection in the form of pre-award attachment of assets or preliminary or temporary equitable relief. 19.5. To the extent not prohibited by applicable law which cannot be waived, each of the parties hereto hereby waives, and covenants that he or it will not assert (whether as plaintiff, defendant, or otherwise), any right to trial by jury in any forum in respect of any issue, claim, demand, cause of action, action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof, in each case whether now existing or hereafter arising and whether in contract or tort or otherwise. Any of the parties hereto may file an original counterpart or a copy of this Section 19.5 with any court as written evidence of the consent of each of the parties hereto to the waiver of his or its right to trial by jury. 19.6. Each of the parties hereto acknowledges that he or it has been informed by each other party that the provisions of Section 19 constitute a material inducement upon which such party is relying and will rely in entering into this Agreement and the transactions contemplated hereby. 20. BINDING ON HEIRS 20.1. This Agreement binds and inures to the benefit of the parties, their heirs, executors, administrators, successors and permitted assigns (subject to Section 9.2(b)). 21. ENTIRE AGREEMENT 21.1 This Agreement embodies the entire Agreement between the parties hereto concerning the subject matters mentioned herein and supersedes all previous discussions, correspondence, understandings or agreements, whether written or oral, with respect to such matters, except as provided in the Termination Agreement. This agreement shall constitute an agreement between employer and employee of the type referred to in Section 1, Chapter 28, Title 34 of the Utah Code, Annotated. 22. ATTORNEY'S FEES 22.1. In the event that any party hereto shall be found in default or in breach of this Agreement pursuant to arbitral or judicial proceedings, such party shall be liable to pay all reasonable attorney's fees, court costs and other related collection costs and expenses incurred by the non-defaulting or non-breaching party in pursuing its rights hereunder. 14 23. NOTICES 23.1. All notices and other communications necessary or contemplated under this Agreement shall be in writing and shall be delivered in the manner specified herein or, in the absence of such specification, shall be deemed to have been duly given three (3) business days after mailing by certified mail, when delivered by hand, or when delivered by facsimile upon confirmation of receipt, or one (1) day after sending by overnight delivery service, to the respective addresses of the parties set forth below: a) for notices and communications to the COMPANY or the SUBSIDIARY: HF HOLDINGS, INC. ICON HEALTH & FITNESS, INC. 1500 South 1000 East Logan, Utah 84321 Fax: 435-750-5238 Attn: Board of Directors b) For notices and communications to the EMPLOYEE: Scott R. Watterson 560 South 1000 East Logan, Utah 84321 c) With a copy in each case to: Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02110 Fax: 617-951-1295 Attn: Charles W. Robins, Esq. and Ropes & Gray One International Place Boston, MA 02110 Fax: 617-951-7050 Attn: R. Newcomb Stillwell, Esq. 24. JOINT AND SEVERAL LIABILITY 24.1. The COMPANY and the SUBSIDIARY shall be jointly and severally liable in respect of all payment obligations of the COMPANY hereunder. 15 IN WITNESS WHEREOF the parties have hereto signed this 27th day of September, 1999. HF HOLDINGS, INC. By: /s/ S. Fred Beck - ----------------------------------- ------------------------------------- Witness Title: Vice President ICON HEALTH & FITNESS, INC. By: /s/ S. Fred Beck - ----------------------------------- ------------------------------------- Witness Title: Vice President /s/ Scott R. Watterson - ----------------------------------- --------------------------------------- Witness SCOTT R. WATTERSON SCHEDULE I To EMPLOYMENT AGREEMENT Among HF HOLDINGS, INC. ICON HEALTH & FITNESS, INC. And SCOTT R. WATTERSON ------------ Board Seats ------------ Ampad Make-a-Wish Foundation of Utah Utah Foundation Utah State Foundation Board Patient Link.com Cornerstone Capital 17 EX-10.12 20 EXHIBIT 10.12 Exhibit 10.12 EMPLOYMENT AGREEMENT entered on the 27th day of September, 1999. AMONG: HF HOLDINGS, INC., a Delaware corporation. ("COMPANY") ICON HEALTH & FITNESS, INC., a Delaware corporation. ("SUBSIDIARY") GARY E. STEVENSON, acting in his personal capacity, of the City of PROVIDENCE, State of UTAH. ("EMPLOYEE") THE PARTIES AGREE AS FOLLOWS: 1. PREAMBLE 1.1. The COMPANY and the SUBSIDIARY have made an exchange offer for all outstanding 13% Senior Subordinated Notes due 2002 of the SUBSIDIARY, 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc. and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation, pursuant to an Exchange Offer and Consent Solicitation, dated July 30, 1999, as supplemented (the "Exchange Offer"). 1.2. It is recorded that the COMPANY, in connection with the Restructuring (as defined in the Equity Letter Agreement (the "Equity Letter"), dated July 8, 1999, attached, as amended, to the Exchange Offer as Annex H) desires to conclude an agreement for the employment of the EMPLOYEE as President and Chief Operating Officer of the COMPANY, according to the terms and conditions to be set forth in this Agreement. 1.3. This Agreement is to record the terms and conditions which govern the mutual relations of the parties hereto with respect to its subject matter. 1.4. In this Agreement, "BUSINESS" means the manufacture, sale and distribution of SPORTING GOODS as carried on by the COMPANY, the SUBSIDIARY, and their respective various divisions and subsidiaries, from time to time. "SPORTING GOODS" means fitness equipment and accessories, which presently involve treadmills, home gyms, aerobic exercises, trampolines, weights and benches and exercise accessories, but the content of such product lines may vary from time to time. 1.5. In this Agreement, AFFILIATES means any entity in which the COMPANY or the SUBSIDIARY holds more than a 20% voting interest direct or indirect. 2. EMPLOYMENT AND ONE-TIME BONUS 2.1. This Agreement shall come into effect on the date hereof ("EFFECTIVE DATE"). 2.2. The COMPANY hereby employs the EMPLOYEE and the EMPLOYEE agrees to serve the COMPANY in the positions of President and Chief Operating Officer for a term of three (3) years from the EFFECTIVE DATE, subject to earlier termination as hereinafter provided (the "TERM"). 2.3. Although this agreement is concluded between the COMPANY and the EMPLOYEE, it is agreed that the duties and obligations of the EMPLOYEE hereunder extend to the SUBSIDIARY and to all of the COMPANY's other subsidiaries, present and future, although the EMPLOYEE will not necessarily be an employee of such entities. The EMPLOYEE agrees to serve, if requested by the COMPANY, as an officer or director of the SUBSIDIARY and any other subsidiaries, in each case without additional consideration. 2.4. Upon the execution and delivery hereof, the COMPANY shall pay the EMPLOYEE a one-time bonus of FIVE HUNDRED THOUSAND DOLLARS ($500,000). 3. BASE SALARY, EXPENSES AND BENEFITS 3.1. In consideration for the faithful performance of services by the EMPLOYEE to be rendered to the COMPANY as herein provided, the COMPANY shall pay to the EMPLOYEE during the TERM an annual base salary of FOUR HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($475,000) payable in semi-monthly installments or in accordance with the general policy of the COMPANY which may change from time to time but in no event less frequently than monthly. 3.2. The annual base salary mentioned in Section 3.1 above shall be reviewed by the Board of Directors of the COMPANY and may be adjusted upwards in the Board's discretion, annually for each year of the TERM, taking into account, among other things: a) the performance by the EMPLOYEE of his duties and functions pursuant to this Agreement, b) the general economic situation, c) the development and performance of the BUSINESS, and d) other matters deemed relevant by the Board of Directors such as an increase in shareholder equity and the rate on return on investment. 3.3. The COMPANY shall reimburse the EMPLOYEE for all reasonable expenses which are incurred by the EMPLOYEE in the performance of his duties hereunder 2 and (i) subject to the COMPANY's annual budget or (ii) as authorized by the Board of Directors of the COMPANY or (iii) in accordance with the policies and procedures established from time to time by the Board of Directors of the COMPANY or a committee delegated for such purpose. 3.4. During the Term, the COMPANY shall provide the EMPLOYEE with the use of a new automobile of his choice, acting reasonably (and consistently with his past practice) every 3 years for the purposes of his employment commensurate with the position of the EMPLOYEE and having regard to COMPANY policy in force from time to time. The COMPANY shall assume all costs and expenses of said automobile and its operation, including, without limitation, insurance, maintenance, gas and use of such automobile. Upon the expiry of the TERM, the EMPLOYEE shall deliver such automobile to the COMPANY. 3.5. During the Term, the EMPLOYEE shall be entitled to participate in the COMPANY's life, welfare, and health insurance plans for senior executives on the same terms as those of other senior executives. 3.6. During the Term, the EMPLOYEE shall be entitled to participate in fringe benefit programs which are not less favorable than those extended by the COMPANY to its senior executives, including without limitation an as yet to be defined deferred compensation plan to be established by the Board of Directors, but excluding for this purpose any such plan or program adopted exclusively for the benefit of junior management. 4. ANNUAL BONUS 4.1. The EMPLOYEE shall receive with respect to (i) each fiscal year ending during the Term, and (ii) that portion of any fiscal year ending after Term during which he is employed hereunder, a bonus equal to one and one-tenth percent (1.10%) of the consolidated EBITDA (as that term is defined in the Credit Agreement of even date herewith among the SUBSIDIARY, General Electric Capital Corporation and the other lenders thereunder, without regard to any amendments thereto) of the SUBSIDIARY and its subsidiaries (but not including the COMPANY), provided that such bonus shall not be payable with respect to any such fiscal year unless such EBITDA for such fiscal year exceeds five and one-half percent (5.5%) of the consolidated net sales of the SUBSIDIARY and its subsidiaries (but not including the COMPANY) determined in accordance with generally accepted accounting principles and provided, further, that for purposes of this Agreement, EBITDA shall be calculated without regard to any bonuses payable hereunder. 4.2. The sole basis for the bonus calculation shall be the auditied financial statements of the SUBSIDIARY and its subsidiairies for the fiscal year in question. 3 4.3. Any bonus to which EMPLOYEE is entitled under the provisions of this Agreement for any fiscal year shall be paid to him (regardless of whether the TERM has terminated) in accordance with the COMPANY'S previous practice, with a first installment equal to forty percent (40%) of a good faith estimate of the bonus for such year, to be paid during the month of December of such year and a final installment to be paid as promptly as reasonably practicable after the end of, but not later than the 75th day after the end of each such fiscal year. 5. DUTIES 5.1. The EMPLOYEE shall perform those functions which are normally the functions of the President and Chief Operating Officer of the COMPANY and such other offices as he may hold pursuant to Section 2.3, and shall further perform those functions which shall be reasonably determined from time to time by the Board of Directors of the COMPANY, such functions not to be inconsistent with those herein set forth. The EMPLOYEE shall report to, and be subject to the authority of, the Board of Directors of the COMPANY. 5.2. The COMPANY shall give the EMPLOYEE a notice of six (6) months prior to any relocation of the EMPLOYEE. 5.3. It is the specific responsibility of the EMPLOYEE, between regular meetings of the Board, to apprise Board Members of significant business matters. 5.4. The EMPLOYEE shall, during the TERM, devote his entire working time, attention and energies to the business of the COMPANY, the SUBSIDIARY, and their respective AFFILIATES. 5.5. The EMPLOYEE shall not, during the TERM, except under Section 5.6, be engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. Notwithstanding the prohibition contained in the present clause, the EMPLOYEE shall be entitled to continue to sit on the boards of directors of the companies listed on Schedule I hereto, and on the boards of directors of other companies if such activity is approved in writing by the Board of Directors of the COMPANY. In the case of non-profit corporations or charities, such approval shall not be unreasonably withheld, but in all other cases, the Board shall have sole discretion to grant, delay or withhold approval, with or without conditions. 5.6. The EMPLOYEE shall not invest his personal assets in any business other than NON-COMPETING BUSINESSES, and even in the case of such investments: a) No services are required or furnished on the part of the EMPLOYEE in the operations of the companies in which such investments are made and in which his participation is solely that of an investor provided that this subsection is not infringed by the EMPLOYEE's providing counseling (and not acting in a "line" capacity) on a non-remunerative basis to all 4 such companies for a maximum of 5 hours per week and 200 hours per year; and b) If the EMPLOYEE purchases securities in any corporation whose securities are regularly traded in a recognized securities market, such purchases shall not result in his collectively owning beneficially at any time five percent (5%) or more of the equity securities of any corporation engaged in a business other than a NON-COMPETING BUSINESS. The foregoing restrictions shall not apply to any investment of whatever extent the EMPLOYEE may take in the shares of the COMPANY or of any successor company. For the purposes of this subsection, NON-COMPETING BUSINESSES are all businesses other than those which compete with: a) the BUSINESS; or b) any other business carried on in the future by the COMPANY, the SUBSIDIARY or any AFFILIATES, provided that the EMPLOYEE has access to confidential information concerning such business. Moreover, the EMPLOYEE shall not knowingly assist any RELATIVE to make any investment which the EMPLOYEE is not permitted to make by this section. 5.7. The EMPLOYEE is a member of the Board of Directors and acknowledges that he has a significant interest in this Agreement and undertakes the following: 5.7.1. To seek independent legal counsel at the COMPANY's expense to negotiate and review this Agreement on the EMPLOYEE's behalf; 5.7.2. To disclose his interest in this Agreement to the other members of the Board of Directors; and 5.7.3. To retire from and abstain from the discussion and vote at any meeting of the Board of Directors at which this Agreement or any default by EMPLOYEE or matter arising therefrom is the subject of a discussion or a vote. 5.8. The EMPLOYEE also undertakes the following: 5.8.1. To use every best effort (including the establishment of written procedures known to operation personnel) to promptly bring to the attention of the Board of Directors of the COMPANY any matter requiring the COMPANY's decision or action where his own interests or those of a RELATIVE are involved and to abstain from taking such decision or action until the Board of Directors decides. 5 5.8.2. If requested, to be absent from and abstain from the discussion and vote at any meeting of the aforementioned Board of Directors where the subject matter being discussed and voted upon is any matter covered by section 5.8.l. 5.8.3. For the purposes of this Agreement RELATIVE means the EMPLOYEE's spouse, parent, sibling, child or sibling's children, the spouses of the foregoing and any other person who could be claimed as a dependent on the EMPLOYEE's or RELATIVE's federal income tax return, any corporation or partnership in which a RELATIVE or the EMPLOYEE holds a five percent (5%) interest or of which a RELATIVE or the EMPLOYEE is an officer or director, and any trust of which any of the foregoing is a beneficiary. 6. EQUITY GRANT 6.1. Contemporaneously herewith, the COMPANY will issue to the EMPLOYEE 291,700 shares of Common Stock of the COMPANY, at no cost to EMPLOYEE, which the COMPANY represents and warrants is equal to 2.91617% of the COMPANY's Common Stock outstanding on a fully diluted basis upon closing of the Restructuring. 7. CONFIDENTIALITY, ETC. 7.1. The EMPLOYEE recognizes and acknowledges that the confidential information, trade secrets and proprietary processes of the COMPANY, its AFFILIATES and subsidiaries as they may exist from time to time are valuable, special and unique assets of the BUSINESS of the COMPANY, its AFFILIATES and subsidiaries, access to and knowledge of which are essential to the performance of the EMPLOYEE's duties hereunder. The EMPLOYEE will not, during the TERM of his employment or at any time within five (5) years following its termination, for any reason whatsoever, in whole or in part, disclose such confidential information, secrets or processes to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the EMPLOYEE make use of such property for his own purposes or for the benefit of any person, firm, corporation or other entity (except the COMPANY, its AFFILIATES and subsidiaries) under any circumstances whatsoever, except as may be required in the fulfillment of his function with the COMPANY within the terms of this Agreement or except as provided by law; provided these restrictions shall not apply to such information, secrets and processes which are then in the public domain (provided that the EMPLOYEE was not responsible, directly or indirectly, for permitting such secrets or process to enter the public domain without the COMPANY's consent). 7.2. The EMPLOYEE furthermore agrees that upon termination of the TERM he will remit to the COMPANY all writings and materials, in his possession or under his control, which either belong to the COMPANY and AFFILIATES or which may 6 contain confidential information concerning the COMPANY and AFFILIATES. The EMPLOYEE may, however, retain his personal diary/agenda after removing or destroying all confidential COMPANY or AFFILIATES material therein. 7.3. Any and all inventions, discoveries, developments, methods, processes, compositions, works, concepts and ideas (whether or not patentable or copyrightable) conceived, made, developed, created or reduced to practice by the EMPLOYEE (whether at the request or suggestion of the COMPANY or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the period of his employment by the COMPANY or any of its subsidiaries which may relate to the business, ventures or other activities of or products manufactured or sold by the COMPANY or any of its subsidiaries (collectively, "Proprietary Rights"), shall be promptly and fully disclosed by the EMPLOYEE to an appropriate executive officer of the COMPANY and shall be the COMPANY's exclusive property as against the EMPLOYEE and his heirs and personal representatives, and the EMPLOYEE hereby assigns to the COMPANY his entire right, title and interest therein and shall promptly deliver to an appropriate executive officer of the COMPANY all papers, drawings models, data and other material relating to any of the foregoing Proprietary Rights, conceived, made, developed, created or reduced to practice by him as aforesaid. All copyrightable Proprietary Rights shall be considered "works made for hire." The EMPLOYEE shall, upon the COMPANY's request and without any payment therefor, execute any documents reasonably necessary or advisable in the opinion of the COMPANY's counsel to assign, and confirm the COMPANY's title in, his entire right, title and interest in the foregoing Proprietary Rights and to direct issuance of patents or copyrights to the COMPANY with respect to such Proprietary Rights as are the COMPANY's exclusive property as against the EMPLOYEE and his heirs and personal representatives under this Section 7.3 or to vest in the COMPANY title to such Proprietary Rights as against the EMPLOYEE and his heirs and personal representatives, the expense of securing any such patent or copyright, however, to be borne by the COMPANY. In addition, the Company shall reimburse the EMPLOYEE for any reasonable expenses incurred in having such documents reviewed by EMPLOYEE's counsel. 8. VACATION 8.1. The EMPLOYEE shall have the right to an annual paid vacation of no less duration than four (4) weeks. 9. TERMINATION OF EMPLOYMENT 9.1. Notwithstanding any other provision contained herein, the COMPANY may on or after the EFFECTIVE DATE send to the EMPLOYEE notice of one of the following events and should the EMPLOYEE fail to cure the matter giving rise to the notice within thirty (30) days after receipt of such notice, the TERM shall 7 terminate without any delay stipulated therein or any indemnity payable in lieu thereof: a) EMPLOYEE's willful misconduct or gross negligence; b) The commission of a criminal act by the EMPLOYEE against the COMPANY involving material harm (whether nor not charges are filed); c) The commission by the EMPLOYEE of a criminal act of moral turpitude bringing the COMPANY into disrepute (whether or not charges are filed); d) Willful insubordination to any directive of the Board of Directors provided reasonable prior notice of such directive is given; or e) Actions contrary to Sections 5.4, 5.5, 5.6, 5.8, 7 or 10 causing COMPANY or AFFILIATES material harm. 9.2. Notwithstanding any other provision contained herein, the TERM shall terminate automatically, without notice or indemnity in lieu thereof, upon the occurrence of one of the following events: a) The bankruptcy or voluntary state insolvency filing of the EMPLOYEE; or b) The death of the EMPLOYEE. 9.3. The EMPLOYEE may terminate the TERM by sending his resignation in writing to Board of Directors not less than six (6) months prior to the effective date of such resignation or, if such resignation is submitted in good faith so that the EMPLOYEE can perform full time church service, not less than three (3) months prior to the effective date of such resignation, failing which notice the EMPLOYEE may be subject to any and all damages incurred as a result of such failure. In the event the EMPLOYEE has given such a notice to the COMPANY, the COMPANY may, at its option, earlier terminate EMPLOYEE's employment. 9.4. Except under the circumstances described in Section 9.6, the COMPANY may terminate the TERM by sending a notice in writing to the EMPLOYEE. 9.5. The EMPLOYEE may immediately terminate the TERM by sending a notice of termination to the Board of Directors with immediate effect following any material diminution of the EMPLOYEE's responsibilities or in the event that the EMPLOYEE is asked by the Board of Directors to perform any act which a reasonable person would consider illegal or unethical and the COMPANY has not withdrawn its request to the EMPLOYEE to perform such act within five (5) days of receiving a written notice from the EMPLOYEE to withdraw such a request. 8 9.6. The COMPANY may immediately terminate the TERM by sending a notice in writing to the EMPLOYEE with immediate effect: 9.6.1. after a period of six (6) consecutive months (or aggregating six (6) months in any twelve (12) month period) of absence by the EMPLOYEE from his employment as a result of sickness or disability, or 9.6.2. after sixty (60) days of absence by the EMPLOYEE from his employment as a result of sickness or disability and a certification by three (3) physicians that the EMPLOYEE is likely to be disabled for a period of at least six (6) months from the initial date of sickness or disability. One (1) such physician shall be chosen by the EMPLOYEE, one (1) shall be chosen by the COMPANY and the third shall be chosen by the other two (2) selected physicians. The EMPLOYEE agrees that in the event of his sickness, he shall submit himself for examination by such physicians if reasonably requested to do so by the COMPANY. For the purposes of this section, "disabled" or "disability" shall mean a temporary or permanent substantial inability because of a physical or mental illness to continue to discharge the EMPLOYEE's duties hereunder. Notwithstanding any other provision hereof, the EMPLOYEE's compensation during any period of the EMPLOYEE'S disability shall be reduced to the extent of any payments to the EMPLOYEE for such period under any disability plan or program maintained for the EMPLOYEE by the COMPANY for his benefit. 9.7. In the event of the termination of the TERM by virtue of section 9.6 in addition to the payments described therein, the COMPANY shall pay to the EMPLOYEE a severance pay equal to one (1) month base salary in effect at termination for each calendar year, or part thereof, of the EMPLOYEE's employment with the COMPANY, the SUBSIDIARY, IHF Capital, Inc. or IHF Holdings, Inc. (or any predecessor companies of the COMPANY, the SUBSIDIARY, IHF Capital, Inc., or IHF Holdings, Inc.) after January 1, 1988. 9.8. In the event of the termination of the TERM by virtue of Section 9.3, 9.4 or 9.5, the COMPANY shall pay to the EMPLOYEE a severance pay equal to the EMPLOYEE's base salary then in effect and the bonus referred to in Section 4 hereof, pro-rated for the period of the payment, for two (2) years following the termination of the TERM, provided, however, that if, due to the EMPLOYEE's resignation, there is a termination of the TERM, without any action by the COMPANY, during the one (1) year period following the EFFECTIVE DATE, the EMPLOYEE shall forego FIVE HUNDRED THOUSAND DOLLARS ($500,000) of any severance pay to which he would otherwise be entitled under this Section 9.8, unless the resignation resulting in such termination is submitted (i) in good faith by EMPLOYEE pursuant to Section 9.3 so that the EMPLOYEE can perform full time church service, or (ii) pursuant to Section 9.5. The bonuses shall be paid to the EMPLOYEE within ninety (90) days from the end of the COMPANY's applicable fiscal year, and the base salary shall be paid to the 9 EMPLOYEE on the same payment schedule as was applicable to the EMPLOYEE during his employment. 10. RESTRICTIVE COVENANT 10.1. EMPLOYEE shall not, during the TERM of his employment hereunder and for a period of four (4) years from its termination, either directly or indirectly, individually or in partnership, carry on or be engaged in, or concerned with or interested in, in any capacity whatsoever (including that of principal, agent, shareholder (subject to section 5.6(b)), consultant, employee, lender or surety), any person, firm, association, syndicate or company engaged in or concerned with or interested in the conception, development, fabrication, transformation, marketing, distribution, advertising, franchising or sale in Canada, the United States or the European Economic Community, or any of them, of any products or services similar or identical to any of those manufactured, distributed, or sold by the COMPANY or any of its subsidiaries in the course of his employment with the COMPANY, its AFFILIATES and subsidiaries. 10.2. (a) EMPLOYEE shall not, during the TERM of his employment hereunder and for a period of twelve (12) months from its termination, directly or indirectly, hire any Designated Employee. (b) EMPLOYEE shall not, during the TERM of his employment hereunder and for a period of eighteen (18) months from its termination, directly or indirectly, solicit, interfere with or endeavor to entice away, any Designated Employee. (c) For purposes of this Section 10.2., the term "Designated Employee" shall mean any person if that person is or was a Senior Employee of the COMPANY or any of its AFFILIATES or subsidiaries during the period beginning six (6) months prior to the termination of the TERM and ending (i) in the case of clause (a), twelve (12) months thereafter and (ii) in the case of clause (b), eighteen (18) months thereafter, but shall exclude Scott R. Watterson or any RELATIVE. For purposes of this Section 10.2 "Senior Employee" shall mean each of the two hundred (200) most highly compensated employees of the COMPANY or any of its subsidiaries or AFFILIATES. 10.3. Notwithstanding the foregoing, if termination of employment occurs under Section 9.3, 9.4 or 9.5, the period stipulated by Section 10.1 is reduced to two (2) years; provided, however, that such period shall be extended by written notice to the EMPLOYEE within thirty (30) days of such termination up to two (2) years (i.e., up to a total of four (4) years from the termination of EMPLOYEE's employment) to the extent that the COMPANY, at its option, pays to the EMPLOYEE a severance pay equal to the EMPLOYEE's base salary then in effect and the bonus referred to in Section 4 hereof, pro-rated for the period of the payment, for a period of up to an additional two (2) years beyond that required to 10 be paid by the COMPANY to the EMPLOYEE under Section 9.8. If paid at the COMPANY's option, such bonuses are to be paid within ninety (90) days from the end of the COMPANY's applicable fiscal year, and the base salary shall be paid to the EMPLOYEE on the same payment schedule as was applicable to the EMPLOYEE during his employment. 11. REASONABLENESS AND REMEDIES 11.1. The EMPLOYEE agrees that all the conditions and restrictions established in this Agreement are reasonable taking into account the circumstances surrounding this Agreement. 11.2. The EMPLOYEE recognizes that in the view of the serious and irreparable harm which a violation hereof would have on the COMPANY, and without prejudice to the COMPANY's other remedies, injunctive relief would constitute an available and appropriate remedy and, to the extent permitted by law, the COMPANY shall not be required to furnish any security or bond in respect thereof. 12. [INTENTIONALLY DELETED] 13. GENERAL LIMIT ON EMPLOYEE'S LIABILITY 13.1. As a general and overall limitation of the EMPLOYEE's liability to the COMPANY and AFFILIATES, the COMPANY agrees that the EMPLOYEE shall not be liable, for any reason except as set forth below, to the COMPANY or any of its AFFILIATES for an amount in excess of the amount provided in the next sentence hereof. Accordingly, as and for their sole remedy against the EMPLOYEE, the COMPANY agrees that for any claim or cause of action that the COMPANY or any of its AFFILIATES may have against the EMPLOYEE, whether past or future, their sole remedy shall be the forfeiture of the EMPLOYEE's salary, bonus and other compensation (but not the equity grant under Section 6.1 hereof, which shall not be subject to forfeiture) received by the EMPLOYEE during the COMPANY's fiscal year in which the EMPLOYEE's termination occurred plus subsequently accruing compensation. In this regard, the COMPANY agrees, to the extent permitted by applicable law, to indemnify the EMPLOYEE from and against any liability the EMPLOYEE may have in excess of that provided in the immediately preceding sentence (i) hereunder or (ii) for any other claim the COMPANY or any of its AFFILIATES may have against the EMPLOYEE. However, nothing in this Section 13 shall limit the EMPLOYEE's liability to the COMPANY or any of its AFFILIATES or provide the EMPLOYEE any indemnity (i) for any act by the EMPLOYEE involving theft, fraud or embezzlement against the COMPANY or any of its AFFILIATES, (ii) in respect of any equitable remedy against the EMPLOYEE, (iii) in respect of any agreement listed on Schedule I of the Old Employment Agreement (as defined in that separate Termination Agreement among IHF Capital, Inc., IHF Holdings, Inc., SUBSIDIARY and EMPLOYEE, dated an even date hereof (the "Termination Agreement")) or any agreement heretofore or hereafter entered into 11 by the EMPLOYEE after the date of the Old Employment Agreement, (iv) in respect of any claim or cause of action asserted by the COMPANY or any of its AFFILIATES as a counterclaim (to the extent of any liability the COMPANY or any of its AFFILIATES may have by reason of the EMPLOYEE claim in question) or as a set off, or (v) under Section 7, 9.3 or 10 of this Agreement or under the Non-Competition Agreement (as defined in the First Amended and Restated Master Transaction Agreement dated as of October 12, 1994 among ICON Health & Fitness, Inc. and the other parties thereto (the "Master Transaction Agreement")); provided, however, that the aggregate of the liability of the EMPLOYEE to the COMPANY or any of its AFFILIATES under Section 7, 9.3 or 10 of this Agreement or to the COMPANY, any of its AFFILIATES, IHF Capital, Inc. or any of its AFFILIATES (as defined in the Old Employment Agreement) under the Non-Competition Agreement and of the liability of the EMPLOYEE to IHF Capital, Inc. or any of its AFFILIATES (as so defined) in respect of claims subject to the $18,000,000 limits set forth in the third to last sentence of Section 10.3.1.1 of the Master Transaction, shall not exceed $1,240,000. 14. AMENDMENTS 14.1. This Agreement may be amended only by written instrument duly executed by all the parties hereby and approved by the Board of Directors of the COMPANY. 15. NO ASSIGNMENT 15.1. No party hereto shall assign, in whole or in part, this agreement or any of its or his respective rights and obligations hereunder without the express prior written consent of the other parties hereto; for this purpose the merger or reorganization of the COMPANY or the SUBSIDIARY or any AFFILIATE shall not be considered an assignment. 16. NO WAIVER 16.1 No waiver by any party of any breach of the obligations of any other party hereunder shall be a waiver of any subsequent breach or of any other obligation, nor shall any forbearance to seek a remedy for any breach be a waiver of any rights and remedies with respect to any subsequent breach. 17. SEVERABILITY 17.1. The invalidity of one of the provisions of this Agreement shall not invalidate or otherwise affect any of the other provisions of this Agreement, which shall remain in full force and effect, and each such invalid provision shall be construed by limiting it so as to be valid for the maximum extent permitted by law. 18. CURRENCY, ETC. 12 18.1. All references in this Agreement to dollar of $ mean lawful currency of the United States of America. 18.2. The COMPANY shall have the right to withhold, from or in respect of any payment, benefit or other item of compensation due to the EMPLOYEE hereunder, any federal, state or local taxes of any kind required by law to be withheld with respect thereto. In the event that at the time any withholding is required hereunder, the amount of cash payments from which the applicable withholding taxes may be deducted is less than the withholding taxes due, the EMPLOYEE shall pay to the COMPANY, in immediately available funds, an amount equal to such shortfall. 19. GOVERNING LAW; ARBITRATION 19.1. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of Utah, without giving effect to any choice or conflict of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction; provided, however, that any dispute relating to the provisions of Section 19.2 shall be governed by the United States Arbitration Act as then in force. 19.2. Except solely as set forth in Section 19.4, each dispute, difference, controversy or claim arising in connection with or related or incidental to, or question occurring under, this Agreement or the subject matter hereof shall be finally settled under the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") by an arbitral tribunal composed of three (3) arbitrators, at least one (1) of whom shall be an attorney experienced in corporate transactions, appointed by agreement of the parties in accordance with said Rules. In the event the parties fail to agree upon a panel of arbitrators from the first list of potential arbitrators proposed by the AAA, the AAA will submit a second list in accordance with said Rules. In the event the parties shall have failed to agree upon a full panel of arbitrators from said second list, any remaining arbitrators to be selected shall be appointed by the AAA in accordance with said Rules. If, at the time of the arbitration, the parties agree in writing to submit the dispute to a single arbitrator, said single arbitrator shall be appointed by agreement of the parties in accordance with the foregoing procedure, or, failing such agreement, by the AAA in accordance with said Rules. The foregoing arbitration proceedings may be commenced by any party by notice to all other parties. 19.3. The place of arbitration shall be Salt Lake City, Utah. 19.4. The parties hereto exclude any right of appeal to any court on the merits of the dispute. The provisions of this Section 19 may be enforced in any court having jurisdiction over the award of any of the parties or any of their respective assets and judgment on the award (including without limitation equitable remedies) granted in any arbitration hereunder may be entered in any such court. Nothing contained in this Section 19 shall prevent any party from seeking interim 13 measures of protection in the form of pre-award attachment of assets or preliminary or temporary equitable relief. 19.5. To the extent not prohibited by applicable law which cannot be waived, each of the parties hereto hereby waives, and covenants that he or it will not assert (whether as plaintiff, defendant, or otherwise), any right to trial by jury in any forum in respect of any issue, claim, demand, cause of action, action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof, in each case whether now existing or hereafter arising and whether in contract or tort or otherwise. Any of the parties hereto may file an original counterpart or a copy of this Section 19.5 with any court as written evidence of the consent of each of the parties hereto to the waiver of his or its right to trial by jury. 19.6. Each of the parties hereto acknowledges that he or it has been informed by each other party that the provisions of Section 19 constitute a material inducement upon which such party is relying and will rely in entering into this Agreement and the transactions contemplated hereby. 20. BINDING ON HEIRS 20.1. This Agreement binds and inures to the benefit of the parties, their heirs, executors, administrators, successors and permitted assigns (subject to Section 9.2(b)). 21. ENTIRE AGREEMENT 21.1 This Agreement embodies the entire Agreement between the parties hereto concerning the subject matters mentioned herein and supersedes all previous discussions, correspondence, understandings or agreements, whether written or oral, with respect to such matters, except as provided in the Termination Agreement. This agreement shall constitute an agreement between employer and employee of the type referred to in Section 1, Chapter 28, Title 34 of the Utah Code, Annotated. 22. ATTORNEY'S FEES 22.1. In the event that any party hereto shall be found in default or in breach of this Agreement pursuant to arbitral or judicial proceedings, such party shall be liable to pay all reasonable attorney's fees, court costs and other related collection costs and expenses incurred by the non-defaulting or non-breaching party in pursuing its rights hereunder. 14 23. NOTICES 23.1. All notices and other communications necessary or contemplated under this Agreement shall be in writing and shall be delivered in the manner specified herein or, in the absence of such specification, shall be deemed to have been duly given three (3) business days after mailing by certified mail, when delivered by hand, or when delivered by facsimile upon confirmation of receipt, or one (1) day after sending by overnight delivery service, to the respective addresses of the parties set forth below: a) for notices and communications to the COMPANY or the SUBSIDIARY: HF HOLDINGS, INC. ICON HEALTH & FITNESS, INC. 1500 South 1000 East Logan, Utah 84321 Fax: 435-750-5238 Attn: Board of Directors b) For notices and communications to the EMPLOYEE: Gary E. Stevenson 370 Abbey Lane Providence, Utah 84332 c) With a copy in each case to: Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02110 Fax: 617-951-1295 Attn: Charles W. Robins, Esq. and Ropes & Gray One International Place Boston, MA 02110 Fax: 617-951-7050 Attn: R. Newcomb Stillwell, Esq. 24. JOINT AND SEVERAL LIABILITY 24.1. The COMPANY and the SUBSIDIARY shall be jointly and severally liable in respect of all payment obligations of the COMPANY hereunder. 15 IN WITNESS WHEREOF the parties have hereto signed this 27th day of September, 1999. HF HOLDINGS, INC. By: /s/ S. Fred Beck - ----------------------------------- ------------------------------------- Witness Title: Vice President ICON HEALTH & FITNESS, INC. By: /s/ S. Fred Beck - ----------------------------------- ------------------------------------- Witness Title: Vice President /s/ Gary E. Stevenson - ----------------------------------- ---------------------------------------- Witness GARY E. STEVENSON 16 SCHEDULE I To EMPLOYMENT AGREEMENT Among HF HOLDINGS, INC. ICON HEALTH & FITNESS, INC. And GARY E. STEVENSON ------------ Board Seats ------------ Boy Scots of America, Local Council Utah State Business College 17 EX-10.13 21 EXHIBIT 10.13 Exhibit 10.13 NON-RECOURSE NOTE U.S. $1,209,340 September 27, 1999 New York, New York FOR VALUE RECEIVED, the undersigned, Scott R. Watterson (the "Borrower"), hereby promises to pay to HF Holdings, Inc., a Delaware corporation (the "Company"), at the office of the Company located at 1500 South 1000 West, Logan, UT 84321, or such other place as the holder hereof may designate, in immediately available funds, the principal amount of ONE MILLION TWO HUNDRED AND NINE THOUSAND THREE HUNDRED FORTY DOLLARS ($1,209,340) on September 26, 2009 (the "Maturity Date"), together with interest on the principal balance hereof from the date of issuance hereof through and including the Maturity Date, at the times and at the rates provided herein. The repayment of the loan evidenced by this Non-Recourse Note (the "Note") shall be subject to the terms and conditions set forth hereinbelow. 1. Interest. Interest shall accrue on the unpaid principal balance of this Note at a rate identical to the rate of interest payable from time to time by ICON Health and Fitness, Inc. ("ICON") under the Revolving Loan portion of the Credit Agreement, dated on even date herewith, among ICON, General Electric Capital Corporation and other lenders, calculated on the basis of a 360-day year consisting of twelve 30-day months. Such interest shall be payable quarterly in cash on the first day of each December, March, June and September. All interest hereunder shall cease to accrue upon the earlier of (i) the last day of the calendar month immediately preceding the date as of which the cumulative consolidated net taxable income of the Company and its subsidiaries (computed by disregarding deductions of the Company and its subsidiaries arising from events and transactions occurring after the closing of the ICON Restructuring (as that term is referred to in the Exchange Offer and Consent Solicitation Statement, dated July 30, 1999, of the Company and ICON, as supplemented), including without limitation any extraordinary transactions, including any acquisitions, effected after the ICON Restructuring) arising on or after the date of the ICON Restructuring exceeds zero dollars ($0), and (ii) May 31, 2000, provided that the consolidated EBITDA (as that term is defined in the Credit Agreement of even date herewith among ICON, General Electric Capital Corporation and the other lenders thereunder, without regard to any amendments thereto) of ICON and its subsidiaries, for ICON's fiscal year then ended, exceeds $64 million. The Borrower and every endorser and guarantor hereof hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and consents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the additional release of any other party or person primarily or secondarily liable. No delay or omission on the part of the holder hereof in exercising any right hereunder shall operate as a waiver of any such right or of any other rights hereunder, nor shall any delay, omission or waiver on any one occasion be construed as a bar to or waiver of the same or any other rights on any future occasion. The Borrower and every endorser and guarantor hereof agree to pay on demand all costs and expenses (including reasonable attorneys' fees and disbursements) which may be incurred or paid by the holder in the collection of this Note or the enforcement of the holder's rights and remedies hereunder. 2. Optional Prepayment. This Note may be prepaid at the option of the Borrower in whole or in part at any time and from time to time without premium or penalty. Any such prepayment on account of principal hereunder shall be recorded by the Company and endorsed on the schedule which is attached to and is part of this Note. The entries on the records of the Company (including any appearing on this Note) shall be prima facie evidence of all principal amounts outstanding hereunder. 3. Mandatory Prepayment. The Borrower shall prepay 100% of the unpaid principal of this Note, together with any accrued and unpaid interest thereon as provided in Section 1 of this Note, upon the occurrence of a Liquidity Event, as such term is defined in the Company Stockholders Agreement, also dated as of an even date herewith. 4. Event of Default. An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Borrower fails to pay any principal or interest under this Note when the same becomes due and payable; or (b) the Borrower fails to perform or comply with any material term or condition contained in this Note (other than nonpayment as described in clause (a) above), and such default continues for more than twenty (20) days after the Borrower has received written notice thereof from the Company; or (c) the Borrower makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they mature or become due, or petitions or applies for the appointment of a trustee or other custodian, liquidator or receiver of the Borrower of any substantial part of its assets, or commences any case or other proceeding relating to the Borrower or any bankruptcy, reorganization, insolvency or similar law of any jurisdiction; or any such involuntary case or proceeding shall be filed or commenced against the Borrower by any third party, and the Borrower shall indicate its approval thereof or consent thereto or such case or proceeding shall not have been dismissed within sixty (60) days following the filing or commencement thereof; or (d) a decree or order is entered appointing any trustee, custodian, liquidator or receiver for the Borrower or its assets, or adjudicating the Borrower a bankrupt or -2- insolvent, or approving a petition in any such case or proceeding, or a decree or order of relief is entered in respect of the Borrower in an involuntary case under federal or state bankruptcy laws as now or hereafter constituted. 5. Remedies on Event of Default. (a) Automatic Acceleration. If an Event of Default described in paragraph (c) or (d) of Section 4 of this Note has occurred, this Note shall thereupon automatically become immediately due and payable. (b) Acceleration by Declaration. If an Event of Default described in paragraph (a) or (b) of Section 4 of this Note has occurred and is continuing, the Company may at any time declare this Note to be immediately due and payable. (c) Effect of Acceleration. Upon this Note becoming due and payable under this Section 5, whether automatically or by declaration, this Note will forthwith mature and the entire unpaid principal amount of this Note, plus all accrued and unpaid interest thereon (to the full extent permitted by applicable law), shall be immediately due and payable. 6. Nonrecourse. All loans made under this Note, and all interest thereon and all costs related thereto, shall be nonrecourse to the Borrower or to any other person, and the holder hereof shall have recourse only to the assets of the Borrower referred to in Section 7 hereof which are being pledged to secure the Borrower's obligations hereunder. 7. Pledge of Collateral. As collateral security for the prompt payment of the indebtedness evidenced hereby and the performance of all obligations hereunder and all amendments and replacements hereof, the Borrower hereby agrees to pledge, assign, deliver and grant a security interest in the Collateral (as defined below) at the time of the making of the initial loan hereunder. The value of such collateral security shall be equal to at least $2,418,680 (the "Minimum Collateral Value Amount"), and shall consist of (i) common stock of the Company held by the Borrower, representing 375,000 of the Company's common stock outstanding immediately after the ICON Restructuring (the "Stock Collateral"), plus (ii) sufficient membership interests held by the Borrower in HF Investment Holdings, LLC, a Delaware limited liability company (the "Membership Interest Collateral"), such that the aggregate value of the Stock Collateral plus the Membership Interest Collateral (collectively, the "Collateral") is not less than the Minimum Collateral Value Amount. For purposes of this Note, the value of the Collateral shall be equal to such value as established at the time of the ICON Restructuring closing. The pledging of the Collateral shall be governed by a Pledge and Security Agreement, substantially in the form attached hereto as Appendix A, which shall be executed and delivered by the Borrower, together with all necessary stock certificates, executed stock powers and executed UCC-1 financing statements, as a condition to the making of the initial loan hereunder. -3- This Non-Recourse Note shall take effect as a sealed instrument, shall be governed by the laws of the State of Utah and shall be binding upon the Borrower and its successors and assigns. BORROWER /s/ Scott R. Watterson ----------------------- Scott R. Watterson -4- SCHEDULE TO NON-RECOURSE NOTE OF SCOTT R. WATTERSON TO HF HOLDINGS, INC. DATED SEPTEMBER 27, 1999 Remaining Principal Unpaid Date of Amount Principal Notation Entry Paid Balance Made by - ------- --------- ---------- -------- -5- Appendix A to Non-Recourse Note PLEDGE AND SECURITY AGREEMENT This Pledge and Security Agreement (the "Agreement"), dated as of September 27, 1999 is made by Scott R. Watterson, an individual (the "Grantor"), and HF Holdings, Inc., a Delaware corporation (the "Company"). WHEREAS, the Grantor is the legal and beneficial owner of certain capital stock of the Company; WHEREAS, the Grantor is also the legal and beneficial owner of certain membership interests in HF Investment Holdings, LLC, a Delaware limited liability company ("Holdings LLC"); WHEREAS, it is a condition precedent to the making by the Company of a loan to the Grantor under that certain $1,209,340 Non-Recourse Note, dated September 27, 1999 (the "Note"), made by the Grantor to the Company, that the Grantor execute and deliver a pledge and security agreement in substantially the form hereof; and WHEREAS, the Grantor wishes to grant pledges and security interests in the "Collateral" more particularly described hereinbelow in favor of the Company, all as herein provided. NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definition of Terms. All capitalized terms not otherwise defined herein shall have the respective meanings ascribed to such terms in the Note. SECTION 2. Grant of Security Interest. The Grantor hereby pledges and assigns to the Company and grants to the Company a first priority security interest in the following (the "Collateral"): (i) the membership interest held by such Grantor in Holdings LLC (the "LLC Interests"), as set forth in Schedule A attached hereto and incorporated herein, all rights and powers accruing to such LLC Interests, whether by contract, statute or operation of law or otherwise, all certificates (if any) representing such LLC Interests and, subject to the provisions of Section 7 hereof, all dividends, cash, instruments and other property (including, without limitation, all distributions of capital or alternative securities pursuant to any recapitalization, restructuring or dissolution of the Company) from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such LLC Interests; and -6- (ii) the shares of capital stock held by such Grantor in the Company (collectively, the "Grantor Stock"), also as set forth in Schedule A attached hereto and incorporated herein, all rights and powers accruing to such Grantor Stock, whether by contract, statute or operation of law or otherwise, all securities issued in exchange or substitution for such Grantor Stock, all certificates (if any) representing such Grantor Stock and, subject to the provisions of Section 7 hereof, all dividends, cash, instruments and other property (including without limitation all distributions of capital or alternative securities pursuant to any recapitalization, restructuring or dissolution of the Company) from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Grantor Stock. SECTION 3. Security for Obligations. This Agreement and the security interest granted hereby are made in order to secure the payment and performance in full of all payment obligations of the Grantor for principal, interest and expenses arising under the Note (the "Obligations"). SECTION 4. Delivery of Collateral. The Grantor has herewith delivered all certificates or instruments representing or evidencing the Collateral to the Company, accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Company. All additional securities or interests which may hereafter be acquired by the Grantor and become part of the Collateral shall, if certificated, also be delivered to the Company in suitable form for transfer and shall be accompanied by similar executed instruments of transfer or assignments in blank. SECTION 5. Representations and Warranties. The Grantor represents and warrants as follows with respect to the Collateral pledged by such Grantor pursuant to Section 2 hereof: (a) The Grantor has good and marketable title to, and is the legal and beneficial owner of the Collateral attributable to it as shown on Schedule A attached hereto, free and clear of any lien, security interest, option or other charge or encumbrance, except for (i) the restrictions imposed by the Holdings LLC Limited Liability Company Agreement (the "LLC Agreement"), dated as of the ICON Restructuring closing, (ii) the Company Stockholders Agreement (the "Stockholders Agreement"), also dated as of the ICON Restructuring closing, and (iii) the security interests created by this Agreement. (b) The pledge and assignment of the Collateral to the Company pursuant to this Agreement creates a valid security interest in the Collateral, securing the payment of the Obligations. Upon the filing of appropriate financing statements describing the LLC Interests, such security interest will be a perfected first priority security interest as to the LLC Interests. Upon the delivery of the share certificates representing the Grantor Stock, accompanied by stock powers or other appropriate instruments of assignment thereof duly executed in blank by the Grantor, such security interest will be a perfected first priority security interest as to the Grantor Stock. -7- (c) No authorization, consent, approval, or other action by, and no notice to or filing with any person, including, without limitation, any governmental authority or regulatory body, is required for (i) the execution and delivery of, and performance of its obligations under, this Agreement by the Grantor (except such authorizations, consents, approvals, actions, notices or filings which have already been obtained). (d) The Grantor has full power, authority and legal right to execute, deliver and perform its obligations under this Agreement and to pledge and grant a security interest in the Collateral pursuant to this Agreement, and the execution, delivery and performance hereof and the pledge and assignment of a security interest in the Collateral hereunder do not contravene any law, rule or regulation applicable to Grantor, or constitute a violation or breach of any judgment, decree, contract, agreement or instrument to which the Grantor is a party or by which it or any of its properties is bound. (e) This Agreement is the legal, valid and binding obligation of the Grantor enforceable against the Grantor in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general application affecting the rights and remedies of creditors, equitable principles, and, with respect to the availability of remedy of specific enforcement, subject to the discretion of the court before which proceedings therefor may be brought. (f) The principal residence of the Grantor is set forth on the signature page hereto. Grantor will not change the address of its principal place of residence, unless Grantor has given written notice of any such alteration or change to the Company no less than ten (10) business days prior thereto. SECTION 6. Further Assurances. The Grantor agrees that at any time and from time to time it will promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary, or that the Company may reasonably request, in order to defend the right, title and security interest of the Company against the claims and demands of others, to perfect and protect any security interest granted or purported to be granted hereby or to enable the Company to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 7. Voting Rights; Dividends; Etc. (a) So long as no Event of Default under the Note shall have occurred and be continuing: (i) The Grantor shall be entitled to exercise any and all voting and other consensual rights (including without limitation all powers of consent, approval, designation and removal) pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Note. (ii) The Company shall execute and deliver (or cause to be executed and delivered) to the Grantor all such proxies and other instruments as the Grantor may -8- reasonably request for the purpose of enabling it to exercise the voting and other rights which the Grantor is entitled to exercise pursuant to paragraph (i) above. (iii) The Grantor shall be entitled to receive, retain and distribute all regularly scheduled periodic cash dividends on the Grantor Stock (including without limitation any portion thereof received by Holdings LLC and distributed thereunder) and all regularly scheduled periodic cash distributions on the LLC Interests, and, with respect to all other cash dividends or other cash distributions upon the Collateral at any time (including without limitation any portion thereof received by Holdings LLC and distributed thereunder), Grantor shall be entitled to receive, retain and distribute only such amount thereof as is necessary to pay any federal, state or local taxes of any kind required by law to be paid by the Grantor thereon and the remainder thereof, together with all other dividends or other distributions, shall remain as part of the Collateral pursuant to Section 2 hereof. (b) Upon the occurrence and during the continuance of an Event of Default, all rights of the Grantor to exercise the voting and other consensual rights (including without limitation all powers of consent, approval, designation and removal) and to receive dividends or distributions which such Grantor would otherwise be entitled to exercise or receive pursuant to paragraph (a) above shall cease upon written notice from the Company, and all such rights shall thereupon become vested in the Company who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive dividends or distributions. SECTION 8. Transfers and Other Liens. The Grantor agrees that it will not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or suffer to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person, except as provided in the LLC Agreement and Stockholders Agreement and except for the security interests created under this Agreement. SECTION 9. Company Appointed Attorney-in-Fact. The Grantor hereby appoints the Company as its attorney-in-fact, with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Company's discretion, to take any action and to execute any instrument which the Company may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Grantor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same; provided, however, that the Company shall not have the right to exercise its power under this Section 9 until the occurrence and continuance of an Event of Default. SECTION 10. Company May Perform. If a Grantor fails to perform any agreement contained herein within the time provided, the Company may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Company incurred in connection therewith shall be payable by the Grantor under Section 13. -9- SECTION 11. Reasonable Care. The Company shall exercise reasonable care in the custody and preservation of the Collateral in its possession or control, it being understood that the Company shall not have any responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Company has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any parties with respect to any Collateral. It is agreed that, subject to the foregoing, the Company shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if the Company exercises the same care that it exercises with respect to its own property. SECTION 12. Remedies upon Event of Default. If any Event of Default shall have occurred and be continuing: (a) The Company may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the Uniform Commercial Code as adopted and in effect in Utah (the "Code"), and, to the extent permitted by law, the Company may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Company's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as are commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Company shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. At any such sale, the Company may, to the extent permitted by the Code or other applicable law, itself purchase all or any of the Collateral. The Company may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All cash proceeds received by the Company in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Company, be held by the Company as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Company pursuant to Section 13) in whole or in part by the Company against, all or any part of the Obligations in such order as the Company shall elect, to the extent permitted by law. Any surplus of such cash or cash proceeds held by the Company and remaining after payment in full of all the Obligations shall be paid over to the Grantor or to such other persons as may be lawfully entitled to receive such surplus. SECTION 13. Expenses. The Grantor will upon demand pay to the Company the amount of any and all reasonable expenses, including the reasonable fees and expenses of the Company's counsel and of any experts and agents, which the Company may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Company hereunder, or (iv) the failure by the Grantor to perform or observe any of the provisions hereof. -10- SECTION 14. Security Interest Absolute. All rights of the Company and security interests hereunder, and all obligations of the Grantor hereunder, shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of the Note or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations under the Note, or any other amendment or waiver of or any consent to any departure from the Note; (iii) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations; or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Grantor or a third party guarantor. SECTION 15. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Grantor herefrom, shall be effective unless the same shall be in writing and signed by the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 16. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including communication by telecopier) and shall be mailed, telecopied or delivered, at the respective addresses set forth on the signature page hereto, or in any case at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this section. All such notices and other communications shall be effective (i) three (3) days after being deposited in the mails, (ii) when delivered by telecopier (upon electronic confirmation of receipt thereof) or by hand, or (iii) one (1) business day after sending by overnight delivery service, addressed as aforesaid. SECTION 17. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until indefeasible cash payment in full of the all obligations, (ii) be binding upon the Grantor and its successors and assigns, and (iii) inure to the benefit of the Company and its respective successors, transferees and assigns. Upon the cash payment in full of the Obligations, the Grantor shall be entitled to the return, upon its request, of such of the Collateral pledged by the Grantor as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 18. Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Utah, without giving effect to the conflicts of laws principles thereof. EACH PARTY HERETO FOR ITSELF AND ITS PROPERTIES, HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF -11- ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF UTAH FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF, OR WITH RESPECT TO THIS AGREEMENT, AND EXPRESSLY WAIVES ANY OBJECTIONS IT MAY HAVE AS TO VENUE IN SUCH COURTS. THE GRANTOR ALSO HEREBY INTENTIONALLY AND KNOWINGLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS AGREEMENT. Unless otherwise defined herein or in the Loan Agreement, terms defined in Articles 8 and 9 of the Code are used herein as therein defined. * * * * * * * -12- PLEDGE AND SECURITY AGREEMENT Signature Page IN WITNESS WHEREOF, the Grantor and the Company have each executed and delivered this Agreement as an instrument under seal as of the date first above written. Address: GRANTOR: 560 South 1000 East Logan, UT 84321 /s/ Scott R. Watterson ------------------------------ Name: Scott R. Watterson Address: HF HOLDINGS, INC. 1500 South 1000 West Logan, UT 84321 By: /s/ S. Fred Beck --------------------------- Name/Title: S. Fred Beck CFO, Vice President & Treasurer S-1 SCHEDULE A TO PLEDGE AND SECURITY AGREEMENT Description of membership interest in Holdings LLC pledged hereunder: 2,324.3 Units Description of capital stock of the Company pledged hereunder: 375,000 shares of Common Stock EX-10.14 22 EXHIBIT 10.14 Exhibit 10.14 NON-RECOURSE NOTE U.S. $990,660 September 27, 1999 New York, New York FOR VALUE RECEIVED, the undersigned, Gary E. Stevenson (the "Borrower"), hereby promises to pay to HF Holdings, Inc., a Delaware corporation (the "Company"), at the office of the Company located at 1500 South 1000 West, Logan, UT 84321, or such other place as the holder hereof may designate, in immediately available funds, the principal amount of NINE HUNDRED NINETY THOUSAND SIX HUNDRED AND SIXTY DOLLARS ($990,660) on September 26, 2009 (the "Maturity Date"), together with interest on the principal balance hereof from the date of issuance hereof through and including the Maturity Date, at the times and at the rates provided herein. The repayment of the loan evidenced by this Non-Recourse Note (the "Note") shall be subject to the terms and conditions set forth hereinbelow. 1. Interest. Interest shall accrue on the unpaid principal balance of this Note at a rate identical to the rate of interest payable from time to time by ICON Health and Fitness, Inc. ("ICON") under the Revolving Loan portion of the Credit Agreement, dated on even date herewith, among ICON, General Electric Capital Corporation and other lenders, calculated on the basis of a 360-day year consisting of twelve 30-day months. Such interest shall be payable quarterly in cash on the first day of each December, March, June and September. All interest hereunder shall cease to accrue upon the earlier of (i) the last day of the calendar month immediately preceding the date as of which the cumulative consolidated net taxable income of the Company and its subsidiaries (computed by disregarding deductions of the Company and its subsidiaries arising from events and transactions occurring after the closing of the ICON Restructuring (as that term is referred to in the Exchange Offer and Consent Solicitation Statement, dated July 30, 1999, of the Company and ICON, as supplemented), including without limitation any extraordinary transactions, including any acquisitions, effected after the ICON Restructuring) arising on or after the date of the ICON Restructuring exceeds zero dollars ($0), and (ii) May 31, 2000, provided that the consolidated EBITDA (as that term is defined in the Credit Agreement of even date herewith among ICON, General Electric Capital Corporation and the other lenders thereunder, without regard to any amendments thereto) of ICON and its subsidiaries, for ICON's fiscal year then ended, exceeds $64 million. The Borrower and every endorser and guarantor hereof hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and consents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the additional release of any other party or person primarily or secondarily liable. No delay or omission on the part of the holder hereof in exercising any right hereunder shall operate as a waiver of any such right or of any other rights hereunder, nor shall any delay, omission or waiver on any one occasion be construed as a bar to or waiver of the same or any other rights on any future occasion. The Borrower and every endorser and guarantor hereof agree to pay on demand all costs and expenses (including reasonable attorneys' fees and disbursements) which may be incurred or paid by the holder in the collection of this Note or the enforcement of the holder's rights and remedies hereunder. 2. Optional Prepayment. This Note may be prepaid at the option of the Borrower in whole or in part at any time and from time to time without premium or penalty. Any such prepayment on account of principal hereunder shall be recorded by the Company and endorsed on the schedule which is attached to and is part of this Note. The entries on the records of the Company (including any appearing on this Note) shall be prima facie evidence of all principal amounts outstanding hereunder. 3. Mandatory Prepayment. The Borrower shall prepay 100% of the unpaid principal of this Note, together with any accrued and unpaid interest thereon as provided in Section 1 of this Note, upon the occurrence of a Liquidity Event, as such term is defined in the Company Stockholders Agreement, also dated as of an even date herewith. 4. Event of Default. An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Borrower fails to pay any principal or interest under this Note when the same becomes due and payable; or (b) the Borrower fails to perform or comply with any material term or condition contained in this Note (other than nonpayment as described in clause (a) above), and such default continues for more than twenty (20) days after the Borrower has received written notice thereof from the Company; or (c) the Borrower makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they mature or become due, or petitions or applies for the appointment of a trustee or other custodian, liquidator or receiver of the Borrower of any substantial part of its assets, or commences any case or other proceeding relating to the Borrower or any bankruptcy, reorganization, insolvency or similar law of any jurisdiction; or any such involuntary case or proceeding shall be filed or commenced against the Borrower by any third party, and the Borrower shall indicate its approval thereof or consent thereto or such case or proceeding shall not have been dismissed within sixty (60) days following the filing or commencement thereof; or (d) a decree or order is entered appointing any trustee, custodian, liquidator or receiver for the Borrower or its assets, or adjudicating the Borrower a bankrupt or insolvent, or approving a petition in any such case or proceeding, or a decree or order of relief -2- is entered in respect of the Borrower in an involuntary case under federal or state bankruptcy laws as now or hereafter constituted. 5. Remedies on Event of Default. (a) Automatic Acceleration. If an Event of Default described in paragraph (c) or (d) of Section 4 of this Note has occurred, this Note shall thereupon automatically become immediately due and payable. (b) Acceleration by Declaration. If an Event of Default described in paragraph (a) or (b) of Section 4 of this Note has occurred and is continuing, the Company may at any time declare this Note to be immediately due and payable. (c) Effect of Acceleration. Upon this Note becoming due and payable under this Section 5, whether automatically or by declaration, this Note will forthwith mature and the entire unpaid principal amount of this Note, plus all accrued and unpaid interest thereon (to the full extent permitted by applicable law), shall be immediately due and payable. 6. Nonrecourse. All loans made under this Note, and all interest thereon and all costs related thereto, shall be nonrecourse to the Borrower or to any other person, and the holder hereof shall have recourse only to the assets of the Borrower referred to in Section 7 hereof which are being pledged to secure the Borrower's obligations hereunder. 7. Pledge of Collateral. As collateral security for the prompt payment of the indebtedness evidenced hereby and the performance of all obligations hereunder and all amendments and replacements hereof, the Borrower hereby agrees to pledge, assign, deliver and grant a security interest in the Collateral (as defined below) at the time of the making of the initial loan hereunder. The value of such collateral security shall be equal to at least $1,981,320 (the "Minimum Collateral Value Amount"), and shall consist of (i) common stock of the Company held by the Borrower, representing 291,700 of the Company's common stock outstanding immediately after the ICON Restructuring (the "Stock Collateral"), plus (ii) sufficient membership interests held by the Borrower in HF Investment Holdings, LLC, a Delaware limited liability company (the "Membership Interest Collateral"), such that the aggregate value of the Stock Collateral plus the Membership Interest Collateral (collectively, the "Collateral") is not less than the Minimum Collateral Value Amount. For purposes of this Note, the value of the Collateral shall be equal to such value as established at the time of the ICON Restructuring closing. The pledging of the Collateral shall be governed by a Pledge and Security Agreement, substantially in the form attached hereto as Appendix A, which shall be executed and delivered by the Borrower, together with all necessary stock certificates, executed stock powers and executed UCC-1 financing statements, as a condition to the making of the initial loan hereunder. -3- This Non-Recourse Note shall take effect as a sealed instrument, shall be governed by the laws of the State of Utah and shall be binding upon the Borrower and its successors and assigns. BORROWER /s/ Gary E. Stevenson ----------------------- Gary E. Stevenson 4 SCHEDULE TO NON-RECOURSE NOTE OF GARY E. STEVENSON TO HF HOLDINGS, INC. DATED SEPTEMBER 27, 1999 Remaining Principal Unpaid Date of Amount Principal Notation Entry Paid Balance Made by - ------- --------- ---------- -------- -5- Appendix A to Non-Recourse Note PLEDGE AND SECURITY AGREEMENT This Pledge and Security Agreement (the "Agreement"), dated as of September 27, 1999, is made by Gary E. Stevenson, an individual (the "Grantor"), and HF Holdings, Inc., a Delaware corporation (the "Company"). WHEREAS, the Grantor is the legal and beneficial owner of certain capital stock of the Company; WHEREAS, the Grantor is also the legal and beneficial owner of certain membership interests in HF Investment Holdings, LLC, a Delaware limited liability company ("Holdings LLC"); WHEREAS, it is a condition precedent to the making by the Company of a loan to the Grantor under that certain $990,660 Non-Recourse Note, dated September 27, 1999 (the "Note"), made by the Grantor to the Company, that the Grantor execute and deliver a pledge and security agreement in substantially the form hereof; and WHEREAS, the Grantor wishes to grant pledges and security interests in the "Collateral" more particularly described hereinbelow in favor of the Company, all as herein provided. NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definition of Terms. All capitalized terms not otherwise defined herein shall have the respective meanings ascribed to such terms in the Note. SECTION 2. Grant of Security Interest. The Grantor hereby pledges and assigns to the Company and grants to the Company a first priority security interest in the following (the "Collateral"): (i) the membership interest held by such Grantor in Holdings LLC (the "LLC Interests"), as set forth in Schedule A attached hereto and incorporated herein, all rights and powers accruing to such LLC Interests, whether by contract, statute or operation of law or otherwise, all certificates (if any) representing such LLC Interests and, subject to the provisions of Section 7 hereof, all dividends, cash, instruments and other property (including, without limitation, all distributions of capital or alternative securities pursuant to any recapitalization, restructuring or dissolution of the Company) from time 6 to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such LLC Interests; and (ii) the shares of capital stock held by such Grantor in the Company (collectively, the "Grantor Stock"), also as set forth in Schedule A attached hereto and incorporated herein, all rights and powers accruing to such Grantor Stock, whether by contract, statute or operation of law or otherwise, all securities issued in exchange or substitution for such Grantor Stock, all certificates (if any) representing such Grantor Stock and, subject to the provisions of Section 7 hereof, all dividends, cash, instruments and other property (including without limitation all distributions of capital or alternative securities pursuant to any recapitalization, restructuring or dissolution of the Company) from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Grantor Stock. SECTION 3. Security for Obligations. This Agreement and the security interest granted hereby are made in order to secure the payment and performance in full of all payment obligations of the Grantor for principal, interest and expenses arising under the Note (the "Obligations"). SECTION 4. Delivery of Collateral. The Grantor has herewith delivered all certificates or instruments representing or evidencing the Collateral to the Company, accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Company. All additional securities or interests which may hereafter be acquired by the Grantor and become part of the Collateral shall, if certificated, also be delivered to the Company in suitable form for transfer and shall be accompanied by similar executed instruments of transfer or assignments in blank. SECTION 5. Representations and Warranties. The Grantor represents and warrants as follows with respect to the Collateral pledged by such Grantor pursuant to Section 2 hereof: (a) The Grantor has good and marketable title to, and is the legal and beneficial owner of the Collateral attributable to it as shown on Schedule A attached hereto, free and clear of any lien, security interest, option or other charge or encumbrance, except for (i) the restrictions imposed by the Holdings LLC Limited Liability Company Agreement (the "LLC Agreement"), dated as of the ICON Restructuring closing, (ii) the Company Stockholders Agreement (the "Stockholders Agreement"), also dated as of the ICON Restructuring closing, and (iii) the security interests created by this Agreement. (b) The pledge and assignment of the Collateral to the Company pursuant to this Agreement creates a valid security interest in the Collateral, securing the payment of the Obligations. Upon the filing of appropriate financing statements describing the LLC Interests, such security interest will be a perfected first priority security interest as to the LLC Interests. Upon the delivery of the share certificates representing the Grantor Stock, accompanied by stock powers or other appropriate instruments of assignment thereof duly executed in blank by the -7- Grantor, such security interest will be a perfected first priority security interest as to the Grantor Stock. (c) No authorization, consent, approval, or other action by, and no notice to or filing with any person, including, without limitation, any governmental authority or regulatory body, is required for (i) the execution and delivery of, and performance of its obligations under, this Agreement by the Grantor (except such authorizations, consents, approvals, actions, notices or filings which have already been obtained). (d) The Grantor has full power, authority and legal right to execute, deliver and perform its obligations under this Agreement and to pledge and grant a security interest in the Collateral pursuant to this Agreement, and the execution, delivery and performance hereof and the pledge and assignment of a security interest in the Collateral hereunder do not contravene any law, rule or regulation applicable to Grantor, or constitute a violation or breach of any judgment, decree, contract, agreement or instrument to which the Grantor is a party or by which it or any of its properties is bound. (e) This Agreement is the legal, valid and binding obligation of the Grantor enforceable against the Grantor in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general application affecting the rights and remedies of creditors, equitable principles, and, with respect to the availability of remedy of specific enforcement, subject to the discretion of the court before which proceedings therefor may be brought. (f) The principal residence of the Grantor is set forth on the signature page hereto. Grantor will not change the address of its principal place of residence, unless Grantor has given written notice of any such alteration or change to the Company no less than ten (10) business days prior thereto. SECTION 6. Further Assurances. The Grantor agrees that at any time and from time to time it will promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary, or that the Company may reasonably request, in order to defend the right, title and security interest of the Company against the claims and demands of others, to perfect and protect any security interest granted or purported to be granted hereby or to enable the Company to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 7. Voting Rights; Dividends; Etc. (a) So long as no Event of Default under the Note shall have occurred and be continuing: (i) The Grantor shall be entitled to exercise any and all voting and other consensual rights (including without limitation all powers of consent, approval, designation and removal) pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Note. -8- (ii) The Company shall execute and deliver (or cause to be executed and delivered) to the Grantor all such proxies and other instruments as the Grantor may reasonably request for the purpose of enabling it to exercise the voting and other rights which the Grantor is entitled to exercise pursuant to paragraph (i) above. (iii) The Grantor shall be entitled to receive, retain and distribute all regularly scheduled periodic cash dividends on the Grantor Stock (including without limitation any portion thereof received by Holdings LLC and distributed thereunder) and all regularly scheduled periodic cash distributions on the LLC Interests, and, with respect to all other cash dividends or other cash distributions upon the Collateral at any time (including without limitation any portion thereof received by Holdings LLC and distributed thereunder), Grantor shall be entitled to receive, retain and distribute only such amount thereof as is necessary to pay any federal, state or local taxes of any kind required by law to be paid by the Grantor thereon and the remainder thereof, together with all other dividends or other distributions, shall remain as part of the Collateral pursuant to Section 2 hereof. (b) Upon the occurrence and during the continuance of an Event of Default, all rights of the Grantor to exercise the voting and other consensual rights (including without limitation all powers of consent, approval, designation and removal) and to receive dividends or distributions which such Grantor would otherwise be entitled to exercise or receive pursuant to paragraph (a) above shall cease upon written notice from the Company, and all such rights shall thereupon become vested in the Company who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive dividends or distributions. SECTION 8. Transfers and Other Liens. The Grantor agrees that it will not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or suffer to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person, except as provided in the LLC Agreement and Stockholders Agreement and except for the security interests created under this Agreement. SECTION 9. Company Appointed Attorney-in-Fact. The Grantor hereby appoints the Company as its attorney-in-fact, with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Company's discretion, to take any action and to execute any instrument which the Company may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Grantor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same; provided, however, that the Company shall not have the right to exercise its power under this Section 9 until the occurrence and continuance of an Event of Default. SECTION 10. Company May Perform. If a Grantor fails to perform any agreement contained herein within the time provided, the Company may itself perform, or cause -9- performance of, such agreement, and the reasonable expenses of the Company incurred in connection therewith shall be payable by the Grantor under Section 13. SECTION 11. Reasonable Care. The Company shall exercise reasonable care in the custody and preservation of the Collateral in its possession or control, it being understood that the Company shall not have any responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Company has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any parties with respect to any Collateral. It is agreed that, subject to the foregoing, the Company shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if the Company exercises the same care that it exercises with respect to its own property. SECTION 12. Remedies upon Event of Default. If any Event of Default shall have occurred and be continuing: (a) The Company may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the Uniform Commercial Code as adopted and in effect in Utah (the "Code"), and, to the extent permitted by law, the Company may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Company's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as are commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Company shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. At any such sale, the Company may, to the extent permitted by the Code or other applicable law, itself purchase all or any of the Collateral. The Company may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All cash proceeds received by the Company in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Company, be held by the Company as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Company pursuant to Section 13) in whole or in part by the Company against, all or any part of the Obligations in such order as the Company shall elect, to the extent permitted by law. Any surplus of such cash or cash proceeds held by the Company and remaining after payment in full of all the Obligations shall be paid over to the Grantor or to such other persons as may be lawfully entitled to receive such surplus. SECTION 13. Expenses. The Grantor will upon demand pay to the Company the amount of any and all reasonable expenses, including the reasonable fees and expenses of the Company's counsel and of any experts and agents, which the Company may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, -10- collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Company hereunder, or (iv) the failure by the Grantor to perform or observe any of the provisions hereof. SECTION 14. Security Interest Absolute. All rights of the Company and security interests hereunder, and all obligations of the Grantor hereunder, shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of the Note or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations under the Note, or any other amendment or waiver of or any consent to any departure from the Note; (iii) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations; or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Grantor or a third party guarantor. SECTION 15. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Grantor herefrom, shall be effective unless the same shall be in writing and signed by the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 16. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including communication by telecopier) and shall be mailed, telecopied or delivered, at the respective addresses set forth on the signature page hereto, or in any case at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this section. All such notices and other communications shall be effective (i) three (3) days after being deposited in the mails, (ii) when delivered by telecopier (upon electronic confirmation of receipt thereof) or by hand, or (iii) one (1) business day after sending by overnight delivery service, addressed as aforesaid. SECTION 17. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until indefeasible cash payment in full of the all obligations, (ii) be binding upon the Grantor and its successors and assigns, and (iii) inure to the benefit of the Company and its respective successors, transferees and assigns. Upon the cash payment in full of the Obligations, the Grantor shall be entitled to the return, upon its request, of such of the Collateral pledged by the Grantor as shall not have been sold or otherwise applied pursuant to the terms hereof. -11- SECTION 18. Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Utah, without giving effect to the conflicts of laws principles thereof. EACH PARTY HERETO FOR ITSELF AND ITS PROPERTIES, HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF UTAH FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF, OR WITH RESPECT TO THIS AGREEMENT, AND EXPRESSLY WAIVES ANY OBJECTIONS IT MAY HAVE AS TO VENUE IN SUCH COURTS. THE GRANTOR ALSO HEREBY INTENTIONALLY AND KNOWINGLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS AGREEMENT. Unless otherwise defined herein or in the Loan Agreement, terms defined in Articles 8 and 9 of the Code are used herein as therein defined. * * * * * * * -12- PLEDGE AND SECURITY AGREEMENT Signature Page IN WITNESS WHEREOF, the Grantor and the Company have each executed and delivered this Agreement as an instrument under seal as of the date first above written. Address: GRANTOR: 370 Abbey Lane Providence, UT 84332 /s/ Gary E. Stevenson ---------------------------- Name: Gary E. Stevenson Address: HF HOLDINGS, INC. 1500 South 1000 West Logan, UT 84321 By: /s/ S. Fred Beck ------------------------ Name/Title: S. Fred Beck CFO, Vice President & Treasurer S-1 SCHEDULE A TO PLEDGE AND SECURITY AGREEMENT Description of membership interest in Holdings LLC pledged hereunder: 2,807.09 Units Description of capital stock of the Company pledged hereunder: 291,700 shares of Common Stock S-2 EX-10.15 23 EXHIBIT 10.15 Exhibit 10.15 PLEDGE AND SECURITY AGREEMENT This Pledge and Security Agreement (the "Agreement"), dated as of September 27, 1999 is made by Scott R. Watterson, an individual (the "Grantor"), and HF Holdings, Inc., a Delaware corporation (the "Company"). WHEREAS, the Grantor is the legal and beneficial owner of certain capital stock of the Company; WHEREAS, the Grantor is also the legal and beneficial owner of certain membership interests in HF Investment Holdings, LLC, a Delaware limited liability company ("Holdings LLC"); WHEREAS, it is a condition precedent to the making by the Company of a loan to the Grantor under that certain $1,209,340 Non-Recourse Note, dated September 27, 1999 (the "Note"), made by the Grantor to the Company, that the Grantor execute and deliver a pledge and security agreement in substantially the form hereof; and WHEREAS, the Grantor wishes to grant pledges and security interests in the "Collateral" more particularly described hereinbelow in favor of the Company, all as herein provided. NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definition of Terms. All capitalized terms not otherwise defined herein shall have the respective meanings ascribed to such terms in the Note. SECTION 2. Grant of Security Interest. The Grantor hereby pledges and assigns to the Company and grants to the Company a first priority security interest in the following (the "Collateral"): (i) the membership interest held by such Grantor in Holdings LLC (the "LLC Interests"), as set forth in Schedule A attached hereto and incorporated herein, all rights and powers accruing to such LLC Interests, whether by contract, statute or operation of law or otherwise, all certificates (if any) representing such LLC Interests and, subject to the provisions of Section 7 hereof, all dividends, cash, instruments and other property (including, without limitation, all distributions of capital or alternative securities pursuant to any recapitalization, restructuring or dissolution of the Company) from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such LLC Interests; and (ii) the shares of capital stock held by such Grantor in the Company (collectively, the "Grantor Stock"), also as set forth in Schedule A attached hereto and incorporated herein, all rights and powers accruing to such Grantor Stock, whether by contract, statute or operation of law or otherwise, all securities issued in exchange or substitution for such Grantor Stock, all certificates (if any) representing such Grantor Stock and, subject to the provisions of Section 7 hereof, all dividends, cash, instruments and other property (including without limitation all distributions of capital or alternative securities pursuant to any recapitalization, restructuring or dissolution of the Company) from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Grantor Stock. SECTION 3. Security for Obligations. This Agreement and the security interest granted hereby are made in order to secure the payment and performance in full of all payment obligations of the Grantor for principal, interest and expenses arising under the Note (the "Obligations"). SECTION 4. Delivery of Collateral. The Grantor has herewith delivered all certificates or instruments representing or evidencing the Collateral to the Company, accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Company. All additional securities or interests which may hereafter be acquired by the Grantor and become part of the Collateral shall, if certificated, also be delivered to the Company in suitable form for transfer and shall be accompanied by similar executed instruments of transfer or assignments in blank. SECTION 5. Representations and Warranties. The Grantor represents and warrants as follows with respect to the Collateral pledged by such Grantor pursuant to Section 2 hereof: (a) The Grantor has good and marketable title to, and is the legal and beneficial owner of the Collateral attributable to it as shown on Schedule A attached hereto, free and clear of any lien, security interest, option or other charge or encumbrance, except for (i) the restrictions imposed by the Holdings LLC Limited Liability Company Agreement (the "LLC Agreement"), dated as of the ICON Restructuring closing, (ii) the Company Stockholders Agreement (the "Stockholders Agreement"), also dated as of the ICON Restructuring closing, and (iii) the security interests created by this Agreement. (b) The pledge and assignment of the Collateral to the Company pursuant to this Agreement creates a valid security interest in the Collateral, securing the payment of the Obligations. Upon the filing of appropriate financing statements describing the LLC Interests, such security interest will be a perfected first priority security interest as to the LLC Interests. Upon the delivery of the share certificates representing the Grantor Stock, accompanied by stock powers or other appropriate instruments of assignment thereof duly executed in blank by the Grantor, such security interest will be a perfected first priority security interest as to the Grantor Stock. -2- (c) No authorization, consent, approval, or other action by, and no notice to or filing with any person, including, without limitation, any governmental authority or regulatory body, is required for (i) the execution and delivery of, and performance of its obligations under, this Agreement by the Grantor (except such authorizations, consents, approvals, actions, notices or filings which have already been obtained). (d) The Grantor has full power, authority and legal right to execute, deliver and perform its obligations under this Agreement and to pledge and grant a security interest in the Collateral pursuant to this Agreement, and the execution, delivery and performance hereof and the pledge and assignment of a security interest in the Collateral hereunder do not contravene any law, rule or regulation applicable to Grantor, or constitute a violation or breach of any judgment, decree, contract, agreement or instrument to which the Grantor is a party or by which it or any of its properties is bound. (e) This Agreement is the legal, valid and binding obligation of the Grantor enforceable against the Grantor in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general application affecting the rights and remedies of creditors, equitable principles, and, with respect to the availability of remedy of specific enforcement, subject to the discretion of the court before which proceedings therefor may be brought. (f) The principal residence of the Grantor is set forth on the signature page hereto. Grantor will not change the address of its principal place of residence, unless Grantor has given written notice of any such alteration or change to the Company no less than ten (10) business days prior thereto. SECTION 6. Further Assurances. The Grantor agrees that at any time and from time to time it will promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary, or that the Company may reasonably request, in order to defend the right, title and security interest of the Company against the claims and demands of others, to perfect and protect any security interest granted or purported to be granted hereby or to enable the Company to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 7. Voting Rights; Dividends; Etc. (a) So long as no Event of Default under the Note shall have occurred and be continuing: (i) The Grantor shall be entitled to exercise any and all voting and other consensual rights (including without limitation all powers of consent, approval, designation and removal) pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Note. -3- (ii) The Company shall execute and deliver (or cause to be executed and delivered) to the Grantor all such proxies and other instruments as the Grantor may reasonably request for the purpose of enabling it to exercise the voting and other rights which the Grantor is entitled to exercise pursuant to paragraph (i) above. (iii) The Grantor shall be entitled to receive, retain and distribute all regularly scheduled periodic cash dividends on the Grantor Stock (including without limitation any portion thereof received by Holdings LLC and distributed thereunder) and all regularly scheduled periodic cash distributions on the LLC Interests, and, with respect to all other cash dividends or other cash distributions upon the Collateral at any time (including without limitation any portion thereof received by Holdings LLC and distributed thereunder), Grantor shall be entitled to receive, retain and distribute only such amount thereof as is necessary to pay any federal, state or local taxes of any kind required by law to be paid by the Grantor thereon and the remainder thereof, together with all other dividends or other distributions, shall remain as part of the Collateral pursuant to Section 2 hereof. (b) Upon the occurrence and during the continuance of an Event of Default, all rights of the Grantor to exercise the voting and other consensual rights (including without limitation all powers of consent, approval, designation and removal) and to receive dividends or distributions which such Grantor would otherwise be entitled to exercise or receive pursuant to paragraph (a) above shall cease upon written notice from the Company, and all such rights shall thereupon become vested in the Company who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive dividends or distributions. SECTION 8. Transfers and Other Liens. The Grantor agrees that it will not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or suffer to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person, except as provided in the LLC Agreement and Stockholders Agreement and except for the security interests created under this Agreement. SECTION 9. Company Appointed Attorney-in-Fact. The Grantor hereby appoints the Company as its attorney-in-fact, with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Company's discretion, to take any action and to execute any instrument which the Company may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Grantor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same; provided, however, that the Company shall not have the right to exercise its power under this Section 9 until the occurrence and continuance of an Event of Default. -4- SECTION 10. Company May Perform. If a Grantor fails to perform any agreement contained herein within the time provided, the Company may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Company incurred in connection therewith shall be payable by the Grantor under Section 13. SECTION 11. Reasonable Care. The Company shall exercise reasonable care in the custody and preservation of the Collateral in its possession or control, it being understood that the Company shall not have any responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Company has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any parties with respect to any Collateral. It is agreed that, subject to the foregoing, the Company shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if the Company exercises the same care that it exercises with respect to its own property. SECTION 12. Remedies upon Event of Default. If any Event of Default shall have occurred and be continuing: (a) The Company may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the Uniform Commercial Code as adopted and in effect in Utah (the "Code"), and, to the extent permitted by law, the Company may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Company's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as are commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Company shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. At any such sale, the Company may, to the extent permitted by the Code or other applicable law, itself purchase all or any of the Collateral. The Company may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All cash proceeds received by the Company in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Company, be held by the Company as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Company pursuant to Section 13) in whole or in part by the Company against, all or any part of the Obligations in such order as the Company shall elect, to the extent permitted by law. Any surplus of such cash or cash proceeds held by the Company and remaining after payment in full of all the Obligations shall be paid over to the Grantor or to such other persons as may be lawfully entitled to receive such surplus. -5- SECTION 13. Expenses. The Grantor will upon demand pay to the Company the amount of any and all reasonable expenses, including the reasonable fees and expenses of the Company's counsel and of any experts and agents, which the Company may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Company hereunder, or (iv) the failure by the Grantor to perform or observe any of the provisions hereof. SECTION 14. Security Interest Absolute. All rights of the Company and security interests hereunder, and all obligations of the Grantor hereunder, shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of the Note or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations under the Note, or any other amendment or waiver of or any consent to any departure from the Note; (iii) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations; or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Grantor or a third party guarantor. SECTION 15. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Grantor herefrom, shall be effective unless the same shall be in writing and signed by the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 16. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including communication by telecopier) and shall be mailed, telecopied or delivered, at the respective addresses set forth on the signature page hereto, or in any case at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this section. All such notices and other communications shall be effective (i) three (3) days after being deposited in the mails, (ii) when delivered by telecopier (upon electronic confirmation of receipt thereof) or by hand, or (iii) one (1) business day after sending by overnight delivery service, addressed as aforesaid. SECTION 17. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until indefeasible cash payment in full of the all obligations, (ii) be binding upon the Grantor and its successors and -6- assigns, and (iii) inure to the benefit of the Company and its respective successors, transferees and assigns. Upon the cash payment in full of the Obligations, the Grantor shall be entitled to the return, upon its request, of such of the Collateral pledged by the Grantor as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 18. Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Utah, without giving effect to the conflicts of laws principles thereof. EACH PARTY HERETO FOR ITSELF AND ITS PROPERTIES, HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF UTAH FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF, OR WITH RESPECT TO THIS AGREEMENT, AND EXPRESSLY WAIVES ANY OBJECTIONS IT MAY HAVE AS TO VENUE IN SUCH COURTS. THE GRANTOR ALSO HEREBY INTENTIONALLY AND KNOWINGLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS AGREEMENT. Unless otherwise defined herein or in the Loan Agreement, terms defined in Articles 8 and 9 of the Code are used herein as therein defined. * * * * * * * -7- PLEDGE AND SECURITY AGREEMENT Signature Page IN WITNESS WHEREOF, the Grantor and the Company have each executed and delivered this Agreement as an instrument under seal as of the date first above written. Address: GRANTOR: 560 South 1000 East Logan, UT 84321 /s/ Scott R. Watterson ----------------------------------- Name: Scott R. Watterson Address: HF HOLDINGS, INC. 1500 South 1000 West Logan, UT 84321 By: /s/ S. Fred Beck ------------------------------- Name/Title: S. Fred Beck CFO, Vice President & Treasurer SCHEDULE A TO PLEDGE AND SECURITY AGREEMENT Description of membership interest in Holdings LLC pledged hereunder: 2,324.3 Units Description of capital stock of the Company pledged hereunder: 375,000 shares of Common Stock -2- EX-10.16 24 EXHIBIT 10.16 Exhibit 10.16 PLEDGE AND SECURITY AGREEMENT This Pledge and Security Agreement (the "Agreement"), dated as of September 27, 1999, is made by Gary E. Stevenson, an individual (the "Grantor"), and HF Holdings, Inc., a Delaware corporation (the "Company"). WHEREAS, the Grantor is the legal and beneficial owner of certain capital stock of the Company; WHEREAS, the Grantor is also the legal and beneficial owner of certain membership interests in HF Investment Holdings, LLC, a Delaware limited liability company ("Holdings LLC"); WHEREAS, it is a condition precedent to the making by the Company of a loan to the Grantor under that certain $990,660 Non-Recourse Note, dated September 27, 1999 (the "Note"), made by the Grantor to the Company, that the Grantor execute and deliver a pledge and security agreement in substantially the form hereof; and WHEREAS, the Grantor wishes to grant pledges and security interests in the "Collateral" more particularly described hereinbelow in favor of the Company, all as herein provided. NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definition of Terms. All capitalized terms not otherwise defined herein shall have the respective meanings ascribed to such terms in the Note. SECTION 2. Grant of Security Interest. The Grantor hereby pledges and assigns to the Company and grants to the Company a first priority security interest in the following (the "Collateral"): (i) the membership interest held by such Grantor in Holdings LLC (the "LLC Interests"), as set forth in Schedule A attached hereto and incorporated herein, all rights and powers accruing to such LLC Interests, whether by contract, statute or operation of law or otherwise, all certificates (if any) representing such LLC Interests and, subject to the provisions of Section 7 hereof, all dividends, cash, instruments and other property (including, without limitation, all distributions of capital or alternative securities pursuant to any recapitalization, restructuring or dissolution of the Company) from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such LLC Interests; and (ii) the shares of capital stock held by such Grantor in the Company (collectively, the "Grantor Stock"), also as set forth in Schedule A attached hereto and incorporated herein, all rights and powers accruing to such Grantor Stock, whether by contract, statute or operation of law or otherwise, all securities issued in exchange or substitution for such Grantor Stock, all certificates (if any) representing such Grantor Stock and, subject to the provisions of Section 7 hereof, all dividends, cash, instruments and other property (including without limitation all distributions of capital or alternative securities pursuant to any recapitalization, restructuring or dissolution of the Company) from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Grantor Stock. SECTION 3. Security for Obligations. This Agreement and the security interest granted hereby are made in order to secure the payment and performance in full of all payment obligations of the Grantor for principal, interest and expenses arising under the Note (the "Obligations"). SECTION 4. Delivery of Collateral. The Grantor has herewith delivered all certificates or instruments representing or evidencing the Collateral to the Company, accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Company. All additional securities or interests which may hereafter be acquired by the Grantor and become part of the Collateral shall, if certificated, also be delivered to the Company in suitable form for transfer and shall be accompanied by similar executed instruments of transfer or assignments in blank. SECTION 5. Representations and Warranties. The Grantor represents and warrants as follows with respect to the Collateral pledged by such Grantor pursuant to Section 2 hereof: (a) The Grantor has good and marketable title to, and is the legal and beneficial owner of the Collateral attributable to it as shown on Schedule A attached hereto, free and clear of any lien, security interest, option or other charge or encumbrance, except for (i) the restrictions imposed by the Holdings LLC Limited Liability Company Agreement (the "LLC Agreement"), dated as of the ICON Restructuring closing, (ii) the Company Stockholders Agreement (the "Stockholders Agreement"), also dated as of the ICON Restructuring closing, and (iii) the security interests created by this Agreement. (b) The pledge and assignment of the Collateral to the Company pursuant to this Agreement creates a valid security interest in the Collateral, securing the payment of the Obligations. Upon the filing of appropriate financing statements describing the LLC Interests, such security interest will be a perfected first priority security interest as to the LLC Interests. Upon the delivery of the share certificates representing the Grantor Stock, accompanied by stock powers or other appropriate instruments of assignment thereof duly executed in blank by the Grantor, such security interest will be a perfected first priority security interest as to the Grantor Stock. -2- (c) No authorization, consent, approval, or other action by, and no notice to or filing with any person, including, without limitation, any governmental authority or regulatory body, is required for (i) the execution and delivery of, and performance of its obligations under, this Agreement by the Grantor (except such authorizations, consents, approvals, actions, notices or filings which have already been obtained). (d) The Grantor has full power, authority and legal right to execute, deliver and perform its obligations under this Agreement and to pledge and grant a security interest in the Collateral pursuant to this Agreement, and the execution, delivery and performance hereof and the pledge and assignment of a security interest in the Collateral hereunder do not contravene any law, rule or regulation applicable to Grantor, or constitute a violation or breach of any judgment, decree, contract, agreement or instrument to which the Grantor is a party or by which it or any of its properties is bound. (e) This Agreement is the legal, valid and binding obligation of the Grantor enforceable against the Grantor in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general application affecting the rights and remedies of creditors, equitable principles, and, with respect to the availability of remedy of specific enforcement, subject to the discretion of the court before which proceedings therefor may be brought. (f) The principal residence of the Grantor is set forth on the signature page hereto. Grantor will not change the address of its principal place of residence, unless Grantor has given written notice of any such alteration or change to the Company no less than ten (10) business days prior thereto. SECTION 6. Further Assurances. The Grantor agrees that at any time and from time to time it will promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary, or that the Company may reasonably request, in order to defend the right, title and security interest of the Company against the claims and demands of others, to perfect and protect any security interest granted or purported to be granted hereby or to enable the Company to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 7. Voting Rights; Dividends; Etc. (a) So long as no Event of Default under the Note shall have occurred and be continuing: (i) The Grantor shall be entitled to exercise any and all voting and other consensual rights (including without limitation all powers of consent, approval, designation and removal) pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Note. -3- (ii) The Company shall execute and deliver (or cause to be executed and delivered) to the Grantor all such proxies and other instruments as the Grantor may reasonably request for the purpose of enabling it to exercise the voting and other rights which the Grantor is entitled to exercise pursuant to paragraph (i) above. (iii) The Grantor shall be entitled to receive, retain and distribute all regularly scheduled periodic cash dividends on the Grantor Stock (including without limitation any portion thereof received by Holdings LLC and distributed thereunder) and all regularly scheduled periodic cash distributions on the LLC Interests, and, with respect to all other cash dividends or other cash distributions upon the Collateral at any time (including without limitation any portion thereof received by Holdings LLC and distributed thereunder), Grantor shall be entitled to receive, retain and distribute only such amount thereof as is necessary to pay any federal, state or local taxes of any kind required by law to be paid by the Grantor thereon and the remainder thereof, together with all other dividends or other distributions, shall remain as part of the Collateral pursuant to Section 2 hereof. (b) Upon the occurrence and during the continuance of an Event of Default, all rights of the Grantor to exercise the voting and other consensual rights (including without limitation all powers of consent, approval, designation and removal) and to receive dividends or distributions which such Grantor would otherwise be entitled to exercise or receive pursuant to paragraph (a) above shall cease upon written notice from the Company, and all such rights shall thereupon become vested in the Company who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive dividends or distributions. SECTION 8. Transfers and Other Liens. The Grantor agrees that it will not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or suffer to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person, except as provided in the LLC Agreement and Stockholders Agreement and except for the security interests created under this Agreement. SECTION 9. Company Appointed Attorney-in-Fact. The Grantor hereby appoints the Company as its attorney-in-fact, with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Company's discretion, to take any action and to execute any instrument which the Company may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Grantor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same; provided, however, that the Company shall not have the right to exercise its power under this Section 9 until the occurrence and continuance of an Event of Default. -4- SECTION 10. Company May Perform. If a Grantor fails to perform any agreement contained herein within the time provided, the Company may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Company incurred in connection therewith shall be payable by the Grantor under Section 13. SECTION 11. Reasonable Care. The Company shall exercise reasonable care in the custody and preservation of the Collateral in its possession or control, it being understood that the Company shall not have any responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Company has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any parties with respect to any Collateral. It is agreed that, subject to the foregoing, the Company shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if the Company exercises the same care that it exercises with respect to its own property. SECTION 12. Remedies upon Event of Default. If any Event of Default shall have occurred and be continuing: (a) The Company may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the Uniform Commercial Code as adopted and in effect in Utah (the "Code"), and, to the extent permitted by law, the Company may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Company's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as are commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Company shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. At any such sale, the Company may, to the extent permitted by the Code or other applicable law, itself purchase all or any of the Collateral. The Company may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All cash proceeds received by the Company in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Company, be held by the Company as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Company pursuant to Section 13) in whole or in part by the Company against, all or any part of the Obligations in such order as the Company shall elect, to the extent permitted by law. Any surplus of such cash or cash proceeds held by the Company and remaining after payment in full of all the Obligations shall be paid over to the Grantor or to such other persons as may be lawfully entitled to receive such surplus. -5- SECTION 13. Expenses. The Grantor will upon demand pay to the Company the amount of any and all reasonable expenses, including the reasonable fees and expenses of the Company's counsel and of any experts and agents, which the Company may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Company hereunder, or (iv) the failure by the Grantor to perform or observe any of the provisions hereof. SECTION 14. Security Interest Absolute. All rights of the Company and security interests hereunder, and all obligations of the Grantor hereunder, shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of the Note or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations under the Note, or any other amendment or waiver of or any consent to any departure from the Note; (iii) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations; or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Grantor or a third party guarantor. SECTION 15. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Grantor herefrom, shall be effective unless the same shall be in writing and signed by the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 16. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including communication by telecopier) and shall be mailed, telecopied or delivered, at the respective addresses set forth on the signature page hereto, or in any case at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this section. All such notices and other communications shall be effective (i) three (3) days after being deposited in the mails, (ii) when delivered by telecopier (upon electronic confirmation of receipt thereof) or by hand, or (iii) one (1) business day after sending by overnight delivery service, addressed as aforesaid. SECTION 17. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until indefeasible cash payment in full of the all obligations, (ii) be binding upon the Grantor and its successors and -6- assigns, and (iii) inure to the benefit of the Company and its respective successors, transferees and assigns. Upon the cash payment in full of the Obligations, the Grantor shall be entitled to the return, upon its request, of such of the Collateral pledged by the Grantor as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 18. Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Utah, without giving effect to the conflicts of laws principles thereof. EACH PARTY HERETO FOR ITSELF AND ITS PROPERTIES, HEREBY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF UTAH FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF, OR WITH RESPECT TO THIS AGREEMENT, AND EXPRESSLY WAIVES ANY OBJECTIONS IT MAY HAVE AS TO VENUE IN SUCH COURTS. THE GRANTOR ALSO HEREBY INTENTIONALLY AND KNOWINGLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS AGREEMENT. Unless otherwise defined herein or in the Loan Agreement, terms defined in Articles 8 and 9 of the Code are used herein as therein defined. * * * * * * * -7- PLEDGE AND SECURITY AGREEMENT Signature Page IN WITNESS WHEREOF, the Grantor and the Company have each executed and delivered this Agreement as an instrument under seal as of the date first above written. Address: GRANTOR: 370 Abbey Lane Providence, UT 84332 /s/ Gary E. Stevenson --------------------------------------- Name: Gary E. Stevenson Address: HF HOLDINGS, INC. 1500 South 1000 West Logan, UT 84321 By: /s/ S. Fred Beck ------------------------------------ Name/Title: S. Fred Beck CFO, Vice President & Treasurer S-1 SCHEDULE A TO PLEDGE AND SECURITY AGREEMENT Description of membership interest in Holdings LLC pledged hereunder: 2,807.09 Units Description of capital stock of the Company pledged hereunder: 291,700 shares of Common Stock EX-10.17 25 EXHIBIT 10.17 Exhibit 10.17 HF HOLDINGS, INC. 1999 JUNIOR MANAGEMENT STOCK OPTION PLAN 1. PURPOSE The purpose of this Stock Option Plan (the "Plan") is to advance the interests of HF Holdings, Inc., a Delaware corporation (the "Company"), by enhancing the ability of the Company and its subsidiaries (if any) to attract and retain able employees of the Company; to reward such individuals for their contributions; and to encourage such individuals to take into account the long-term interests of the Company through interests in shares of the Company's Common Stock, $.001 par value per share (the "Stock"). Any employee selected to receive an award under the Plan is referred to as a "participant". No option granted pursuant to the Plan shall be an incentive stock option, as defined in section 422 of the Internal Revenue Code of 1986, as amended. 2. ADMINISTRATION The Plan shall be administered by the Board of Directors (the "Board") of the Company. The Board shall have discretionary authority, not inconsistent with the express provisions of the Plan, (a) to grant option awards to such eligible persons as the Board may select; (b) to determine the time or times when awards shall be granted and the number of shares of Stock subject to each award; (c) to determine the terms and conditions of each award; (d) to prescribe the form or forms of any instruments evidencing awards and any other instruments required under the Plan and to change such forms from time to time; (e) to adopt, amend, and rescind rules and regulations for the administration of the Plan; and (f) to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Board shall be conclusive and shall bind all parties. Subject to Section 9 the Board shall also have the authority, both generally and in particular instances, to waive compliance by a participant with any obligation to be performed by him or her under an award, to waive any condition or provision of an award, and to amend or cancel any award (and if an award is cancelled, to grant a new award on such terms as the Board shall specify), except that the Board may not take any action with respect to an outstanding award that would adversely affect the rights of the participant under such award without such participant's consent. Nothing in the preceding sentence shall be construed as limiting the power of the Board to make adjustments required by Section 4(c) and Section 6(g). The Board may, in its discretion, delegate some or all of its powers with respect to the Plan to a committee (the "Committee"), in which event all references (as appropriate) to the Board hereunder shall be deemed to refer to the Committee. The Committee, if one is appointed, shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. On and after registration of the Stock under the Securities Exchange Act of 1934 (the "1934 Act"), the Board shall delegate the power to select directors and officers to receive awards under the Plan and the timing, pricing, and amount of such awards to a Committee, all members of which shall be disinterested persons within the meaning of Rule 16b-3 under the 1934 Act and "outside directors" within the meaning of section 162(m)(4)(c)(i) of the Code. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan shall become effective on September 27, 1999. No awards shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN (a) NUMBER OF SHARES. Subject to adjustment as provided in Section 4(c), the aggregate number of shares of Stock that may be the subject of awards granted under the Plan shall be 333,000. If any award granted under the Plan terminates without having been exercised in full, or upon exercise is satisfied other than by delivery of Stock, the number of shares of Stock as to which such award was not exercised shall not be available for future grants. No employee shall be entitled to grants of options in excess of 330,000 shares, subject to adjustment in accordance with Section 4(c). (b) SHARES TO BE DELIVERED. Shares delivered under the Plan shall be authorized but unissued Stock, or if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in its treasury. No fractional shares of Stock shall be delivered under the Plan. (c) CHANGES IN STOCK. In the event of a stock dividend, stock split or combination of shares, recapitalization, or other change in the Company's capital stock, the number and kind of shares of stock or securities of the Company subject to awards then outstanding or subsequently granted under the Plan, the exercise price of such awards, the maximum number of shares or securities that may be delivered under the Plan, and other relevant provisions shall be appropriately adjusted by the Board, whose determination shall be binding on all persons. -2- The Board may also adjust the number of shares subject to outstanding awards, the exercise price of outstanding awards, and the terms of outstanding awards, to take into consideration material changes in accounting practices or principles, extraordinary dividends, consolidations or mergers (except those described in Section 6(g)), acquisitions or dispositions of stock or property, or any other event if it is determined by the Board that such adjustment is appropriate to avoid distortion in the operation of the Plan. 5. AWARDS; ETC. Persons eligible to receive awards under the Plan shall be those employees who, in the opinion of the Board, are in a position to make a significant contribution to the success of the Company and its subsidiaries. A subsidiary for purposes of the Plan shall be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. 6. TERMS AND CONDITIONS OF OPTIONS (a) EXERCISE PRICE OF OPTIONS. The exercise price of each option shall be determined by the Board, but the exercise price shall not be less, in the case of an original issue of authorized stock, than par value. (b) DURATION OF OPTIONS. An option shall be exercisable during such period or periods as the Board may specify. The latest date on which an option may be exercised (the "Expiration Date") shall be the date which is ten years from the date the option was granted or such earlier date as may be specified by the Board at the time the option is granted. (c) EXERCISE OF OPTIONS. (1) An option shall become exercisable at such time or times and upon such conditions as the Board shall specify. In the case of an option not immediately exercisable in full, the Board may at any time accelerate the time at which all or any part of the option may be exercised. (2) Any exercise of an option shall be in writing, signed by the proper person and furnished to the Company, accompanied by (i) such documents as may be required by the Board and (ii) payment in full as specified below in Section 6(d) for the number of shares for which the option is exercised. (3) The Board shall have the right to require that the participant exercising the option remit to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or make other arrangements satisfactory to the Company with regard to such taxes) prior to the delivery of any Stock pursuant to the exercise of the option. If permitted by the Board, either at the time of the -3- grant of the option or in connection with exercise, the participant may elect, at such time and in such manner as the Board may prescribe, to satisfy such withholding obligation by (i) delivering to the Company Stock owned by such individual having a fair market value equal to such withholding obligation, or (ii) requesting that the Company withhold from the shares of Stock to be delivered upon the exercise a number of shares of Stock having a fair market value equal to such withholding obligation. In addition, if at the time the option is exercised the Board determines that under applicable law and regulations the Company could be liable for the withholding of any federal or state tax with respect to a disposition of the Stock received upon exercise, the Board may require as a condition of exercise that the participant exercising the option agree to give such security as the Board deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Board to preserve the adequacy of such security. (4) If an option is exercised by the executor or administrator of a deceased participant, or by the person or persons to whom the option has been transferred by the participant's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. (d) PAYMENT FOR AND DELIVERY OF STOCK. Stock purchased upon exercise of an option under the Plan shall be paid for as follows: (i) in cash, check acceptable to the Company (determined in accordance with such guidelines as the Board may prescribe), or money order payable to the order of the Company, or (ii) if so permitted by the Board, (A) through the delivery of shares of Stock (which, in the case of Stock acquired from the Company, shall have been held for at least six months unless the Board specifies a shorter period) having a fair market value on the last business day preceding the date of exercise equal to the purchase price, or (B) by delivery of a promissory note of the participant to the Company, such note to be payable on such terms as are specified by the Board, or (C) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (D) by any combination of the permissible forms of payment; provided, that if the Stock delivered upon exercise of the option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock shall be paid other than with a personal check or promissory note of the person exercising the option. (e) DELIVERY OF STOCK. A participant shall not have the rights of a stockholder with regard to awards under the Plan except as to Stock actually received by him under the Plan. -4- The Company shall not be obligated to deliver any shares of Stock (i) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, (ii) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (iii) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (f) NONTRANSFERABILITY OF AWARDS. No award may be transferred other than by will or by the laws of descent and distribution, and during a participant's lifetime an award may be exercised only by him or her. (g) MERGERS, ETC. In the event of any merger, consolidation, dissolution, or liquidation of the Company, the Board in its sole discretion may, as to any outstanding awards, make such substitution or adjustment in the aggregate number of shares reserved for issuance under the Plan and in the number and purchase price (if any) of shares subject to such awards as it may determine, or accelerate, amend, or terminate such awards upon such terms and conditions as it shall provide (which, in the case of the termination of the vested portion of any award, shall require payment or other consideration which the Board deems equitable in the circumstances). 7. TERMINATION OF EMPLOYMENT If a participant's employment or other service relationship with the Company terminates prior to the Expiration Date the following shall apply: (a) Options that are not exercisable immediately prior to the termination shall terminate, except that the Board may in its sole discretion provide that the participant or beneficiary receive in cash, with respect to each share of Stock to which an option relates, the excess of (i) the share's fair market value on the date of the participant's termination, over (ii) the option exercise price. (b) To the extent exercisable immediately prior to termination of employment or other service, the option shall continue to be exercisable thereafter during the period prior to the Expiration Date and within 60 days following the termination (180 days in the event that a participant's service terminates by reason of death), unless the participant's employment or other service is terminated "for cause" as defined in (c) below, in which case all awards shall terminate immediately. Except as otherwise provided in an award, after completion of the 60-day (or 180-day) period, such awards shall terminate to the extent not previously exercised, expired, or terminated. -5- (c) The following, as determined by the Board in its reasonable judgment, shall constitute "cause" termination: (i) a participant's failure to perform, or negligence in the performance of, his or her duties and responsibilities to the Company; (ii) a participant's fraud, embezzlement or other material dishonesty with respect to the Company; or (iii) other conduct by a participant that is harmful to the business, interest, or reputation of the Company; PROVIDED, HOWEVER, that, if the participant and the Company are parties to an employment agreement relating to the employment of such participant by the Company and such employment agreement contains a definition of "Cause" (or other similar term) similar in intent to the immediately preceding definition and relating to the termination by the Company of such employment, such definition in such employment agreement shall be substituted for such immediately foregoing definition for purposes of this Plan, but only with respect to such participant. No option shall be exercised or surrendered in exchange for a cash payment after the Expiration Date. In the case of any award, the Board may provide in the case of any award for post-termination exercise provisions different from those expressly set forth in this Section 7, including without limitation terms allowing a later exercise by a former employee (or, in the case of a former employee who is deceased, the person or persons to whom the award is transferred by will or the laws of descent and distribution) as to all or any portion of the award not exercisable immediately prior to termination of employment or other service, but in no case may an award be exercised after the Expiration Date. 8. EMPLOYMENT RIGHTS Neither the adoption of the Plan nor the grant of awards shall confer upon any participant any right to continue as an employee of, or consultant or adviser to, the Company, its parent, or any subsidiary or affect in any way the right of the Company, its parent, or a subsidiary to terminate the participant's relationship at any time. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in awards granted under this Plan shall not constitute an element of damages in the event of termination of the relationship of a participant even if the termination is in violation of an obligation of the Company to the participant by contract or otherwise. 9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT, AND TERMINATION Neither adoption of the Plan nor the grant of awards to a participant shall affect the Company's right to make awards to such participant that are not subject to the Plan, to issue to such participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued. -6- The Board may at any time or times amend the Plan or any outstanding award for the purpose of satisfying the requirements of section 422 of the Code or of any changes in applicable laws or regulations or for any other purpose that may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of awards; provided that, except to the extent expressly required by the Plan, no such amendment shall adversely affect the rights of any participant (without his or her consent) under any award previously granted, nor shall such amendment, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify under Rule 16b-3 promulgated under Section 16 of the 1934 Act. -7- HF HOLDINGS, INC. 1999 JUNIOR MANAGEMENT STOCK OPTION PLAN THE SHARES RECEIVED UPON EXERCISE OF THIS OPTION SHALL BE SUBJECT TO THE RIGHTS, RESTRICTIONS AND OBLIGATIONS APPLICABLE TO SUCH SHARES, ALL AS PROVIDED IN THE STOCKHOLDERS AGREEMENT DATED AS OF SEPTEMBER 27, 1999 AMONG THE COMPANY AND CERTAIN OTHER PARTIES THERETO AS AMENDED AND IN EFFECT FROM TIME TO TIME, AND IN THE JOINDER AND SUPPLEMENT TO STOCKHOLDERS AGREEMENT, A COPY OF WHICH IS ATTACHED HERETO. THIS OPTION IS NOT TRANSFERABLE BY THE OPTIONEE OTHER THAN BY WILL OR THE LAWS OF DESCENT AND DISTRIBUTION, AND IS EXERCISABLE DURING THE OPTIONEE'S LIFETIME ONLY BY THE OPTIONEE. [FORM OF] Non-Incentive Option Certificate -------------------------------- Stock option granted by HF Holdings, Inc., a Delaware corporation (the "Company"), to ___________ (the "Optionee"), pursuant to the Company's 1999 Junior Management Stock Option Plan (the "Plan"). All initially capitalized terms not otherwise defined herein shall have the meaning provided in the Plan. 1. Grant of Option This certificate evidences the grant by the Company on September 27, 1999 to the Optionee of an option to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of __________ shares of Common Stock of the Company (the "Shares") at $5.83 per Share. The latest date on which this option may be exercised (the "Final Exercise Date") is the earlier of September 27, 2009 or a Termination Event as defined in clause (ii) of Section 1.9 of the Joinder and Supplement to Stockholders Agreement attached hereto as Exhibit A. The option evidenced by this certificate is not an incentive stock option. This option is subject to the vesting schedule set forth on Schedule 1 hereto and shall become exercisable as set forth thereon. 2. Exercise of Option. Each election to exercise this option shall be in writing, signed by the Optionee or by his or her executor or administrator or by the person or persons to whom this option is transferred by will or the applicable laws of descent and distribution (the "Legal Representative"), and received by the Company at its principal office, accompanied by payment in full and by such additional documentation evidencing the right to exercise (or, in the case of a Legal Representative, of the authority of such person) as the Company may require. Such notice of election to exercise will include a commitment by the Optionee or Legal Representative to provide the Company with notice as required by Section 8 hereof. The purchase price may be paid (i) in cash or by personal check, bank check or money order payable to the order of the Company, (ii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the sale of the shares of Stock to be issued sufficient funds to pay the exercise price, or (iii) by any combination of the permissible forms of payment; provided, that so much of the purchase price as equals the par value of the Shares being purchased shall be paid other than by personal check. 3. Stockholders Agreement The stock option evidenced by this certificate and any Shares transferred pursuant to the exercise of this option shall be subject to the Stockholders Agreement dated as of September 27, 1999 among the Company and certain other parties thereto as amended and in effect from time to time (the "Stockholders Agreement"), and no grant of options shall become effective unless and until the Optionee shall have executed a Joinder and Supplement to Stockholders Agreement substantially in the form of Exhibit A hereto. The option, and shares received upon exercise of the option, shall be subject to the rights, restrictions and obligations applicable to such options and shares all as provided from time to time in such Stockholders Agreement and the Joinder and Supplement to the Stockholders Agreement. 4. Restrictions on Transfer In addition to the provisions of Section 3 above, if at the time this option is exercised the Company is a party to any agreement restricting the transfer of any outstanding shares of its Common Stock, this option may be exercised only if the Shares so acquired are made subject to the transfer restrictions set forth in that agreement (or if more than one such agreement is then in effect, the agreement specified by the Board). Certificates evidencing any shares purchased by an Optionee upon exercise of options granted hereby may bear the following legends, in addition to any legends which may be required by any agreement referred to in the immediately preceding paragraph: "The shares of stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred, except pursuant to an effective registration, or exemption from registration under said Act." "The shares of stock represented by this certificate are subject to restrictions on voting and transfer set forth in the Stockholders Agreement dated as of September 27, 1999, -2- as amended and in effect from time to time. The Company will furnish a copy of such agreement to the holder of this certificate without charge upon written request." "The shares of stock represented by this certificate are also subject to certain call rights as provided in the Joinder and Supplement to Stockholders Agreement, dated as of __________, 1999, as amended and in effect from time to time, and were originally issued to, or were issued in respect of shares originally issued to, the following Junior Management Investor: ____________. 5. Withholding No Shares will be transferred pursuant to the exercise of this option unless and until the person exercising this option shall have remitted to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements, or shall have made other arrangements satisfactory to the Company with respect to such taxes. 6. Status Change Upon the termination of the Optionee's employment, this option shall terminate as to any Shares for which it was not exercisable immediately prior to termination; provided, that the Board in its sole discretion may provide (either prior to or following termination) that any or all of such portion of this option not otherwise exercisable prior to termination shall be treated as having become exercisable immediately prior to termination. As to that number of Shares for which the option was exercisable, or deemed exercisable by action of the Board, immediately prior to termination, it shall remain exercisable as follows: (i) if termination occurs for any reason other than death, for a period of 60 days following the date of termination, except as provided in clause (ii) below, but in no event beyond the Final Exercise Date, or (ii) following death, for a period of 180 days thereafter, but not beyond the Final Exercise Date. Notwithstanding the foregoing, if the Optionee is terminated for cause (as provided in the Plan) the option shall immediately terminate as to all Shares subject to the option. 7. Nontransferability of Option. Except as set forth in Sections 6 and 7 of the Stockholders Agreement, this option is not transferable by the Optionee other than by will or the applicable laws of descent and distribution, and is exercisable during the Optionee's lifetime only by the Optionee. -3- 8. Effect on Employment. Neither the grant of Options hereunder, nor the issuance of the Shares upon exercise of such Options, shall give the Optionee any right to be retained in the employ of the Company, affect the right of the Company to discharge or discipline such Optionee at any time, or affect any right of such Optionee to terminate his or her employment at any time. 9. Provisions of the Plan. This option is subject in its entirety to the provisions of the Plan, a copy of which is furnished to the Optionee with this option. [THIS SPACE INTENTIONALLY LEFT BLANK] -4- [Jr. Management Stock Option Plan] IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. HF HOLDINGS, INC. By:___________________________ Title: Dated: _______________ Schedule 1 to Option Agreement under 1999 Junior Management Stock Option Plan The following vesting schedule will apply: 25% of the total number of Shares first indicated above shall become immediately exercisable on the date hereof. 25% of the total number of Shares first indicated above shall become exercisable on each of September 27, 2000, September 27, 2001 and September 27, 2002. 100% of the total number of Shares from time to time outstanding but not yet exercisable shall become exercisable upon a Liquidity Event (as defined in the Stockholders Agreement). EX-10.18 26 EXHIBIT 10.18 Exhibit 10.18 ICON HEALTH & FITNESS, INC. JUNIOR MANAGEMENT DEFERRED BONUS PLAN (EFFECTIVE SEPTEMBER 27, 1999) 1. PURPOSE AND EFFECTIVE DATE The purpose of this Plan is to set forth the terms and conditions under which certain members of management will become entitled to an amount of deferred bonus (the "Deferred Bonus Amount") in consideration for their past service to the Company. This Plan is effective September 27, 1999. The Plan is intended to be "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and shall be administered in a manner consistent with that intent. 2. DEFINITIONS (a) "Beneficiary" means the person (which may include trusts and is not limited to one person) designated by the Participant, in such manner as prescribed by the Plan Administrator, who shall be entitled to receive payment of the Participant's Deferred Bonus Account in the event of the Participant's death. If no such designation is made, or if the designated person predeceases the Participant, payment shall be made to the Participant's estate. (b) "Code" means the Internal Revenue Code of 1986 as amended from time to time. (c) "Committee" means the Compensation Committee of the Board of Directors of the Company or if no such committee has been designated, the Board. (d) "Company" means ICON Health & Fitness, Inc. (e) "Deferred Bonus Account" means the account described in Section 3. (f) "Effective Date" means September 27, 1999. (g) "Liquidity Event" has the meaning set forth in the Stockholders Agreement. (h) "Participant" means each of the members of management of the Company listed on the schedules hereto. (i) "Plan" means the ICON Health & Fitness, Inc. 1999 Junior Management Deferred Bonus Plan as set forth herein and as from time to time amended. (j) "Plan Administrator" means the Committee. (k) "Option Agreements" means the Non-Incentive Option Certificates dated as of September 27, 1999 between HF Holdings, Inc. and each of the Participants. (l) "Stockholders Agreement" means the Stockholders Agreement dated as of September 27, 1999 among the Company, HF Holdings, Inc. and the stockholders of HF Holdings, Inc. Other terms are defined as provided throughout this Plan. 3. DEFERRED BONUS ACCOUNT The Company shall establish on its books a Deferred Bonus Account for each Participant as of the Effective Date. The amount credited to each such Account shall be the amount set forth on Schedule A hereto, and shall not be adjusted for interest or otherwise, except to reflect distributions made to a Participant or his or her Beneficiary. 25% of the amount credited to such Account shall be fully vested as of the Effective Date, and 25% of such amount shall become vested on the each of the first, second and third anniversaries of the Effective Date, provided the Participant remains employed by HF Holdings, Inc., the Company or any of their subsidiaries on each such date, and provided further that upon the termination of the Plan, or the termination of any Participant's participation pursuant to Section 12, prior to the third anniversary of the Effective Date, 100% of the amount credited to such Account shall become fully vested if the Participant is then so employed. The entire amount credited to a Participant's Deferred Bonus Account shall become vested upon the occurrence of a Liquidity Event, provided the Participant remains employed by HF Holdings, Inc., the Company or any of their subsidiaries on such date. 4. DISTRIBUTIONS. The vested amount credited to a Participant's Deferred Bonus Account shall become payable to the Participant (or the Participant's Beneficiary, in the event of death) upon the earliest to occur after the date hereof (each, a "Payment Date") of (i) a Liquidity Event in which the consideration received by holders of the common stock of HF Holdings, Inc. in respect of each share of such common stock is greater than the exercise price at that time in effect under the Option Agreement between HF Holdings, Inc. and such Participant, provided the Participant is at such time employed by HF Holdings, Inc., the Company or any of their subsidiaries, (ii) ten years and one hundred and eighty (180) days after the date hereof, provided the Participant is at such time employed by HF Holdings, Inc., the Company or any of their subsidiaries, or (iii) an exercise by the Company of a call option pursuant to Section 3 of the Joinder and Supplement to Stockholders Agreement among the Company, HF Holdings, Inc. and such Participant. 5. FORM OF PAYMENT; TIMING The Company shall pay, or cause one or more of its affiliates to pay, the amount due to a Participant or Beneficiary hereunder in cash in a single lump sum payment as soon as administratably practicable following a Payment Date with respect to the Participant, which in no case shall be more than 30 days following the Payment Date. The Participant's Deferred Bonus Account will be reduced by the amount of the payment (including any amount under Section 9 below). 6. ADMINISTRATION OF THE PLAN This Plan shall be administered by the Committee, which shall have full discretion to administer and interpret the Plan in accordance with its terms in all respects. 7. NATURE OF CLAIM FOR PAYMENTS Except as herein provided, the Company shall not be required to set aside or segregate any assets of any kind to meet any of its obligations hereunder, and all obligations of the Company hereunder shall be reflected by book entries only. The Participant shall have no rights on account of this Plan in or to any specific assets of the Company. Any rights that the Participant may have on account of this Plan shall be those of a general, unsecured creditor of the Company. 8. RIGHTS ARE NON-ASSIGNABLE Other than by will or the laws of descent and distribution, neither the Participant nor any Beneficiary nor any other person shall have any right to assign or otherwise alienate the right to receive payments hereunder, in whole or in part, which payments are expressly agreed to be non-assignable and non-transferable, whether voluntarily or involuntarily. 9. TAXES If the Company is required to withhold taxes from payments under the Plan pursuant to federal, state or local law, the amounts payable to Participants shall be reduced by the tax so withheld. 10. TERMINATION; AMENDMENTS The Plan shall continue in effect until terminated by action of the Company's Board of Directors. Upon termination of the Plan, no individual not a Participant as of the date of termination shall become a Participant thereafter. If, at the time of termination, there is any Participant or Beneficiary of a Participant who is or will be entitled to a payment hereunder, the Plan Administrator shall elect either (a) to make payments to such Participants or beneficiaries in the normal course as if the Plan had continued in effect, or (b) to pay to such Participants or beneficiaries the balance in the Participant's Deferred Bonus Account in a single lump-sum payment. The Committee and Participants entitled to a majority of the aggregate Deferred Bonus Accounts may at any time and from time to time amend the Plan in any manner; provided that, subject to Section 12, without the consent of a Participant, no such action shall materially and adversely affect the rights of such Participant with respect to any rights to payment of amounts credited to such Participant's Deferred Account, including by reducing the amounts previously credited to the Deferred Bonus Account of such Participant or otherwise. 11. EMPLOYMENT RIGHTS Nothing in this Plan shall give any Participant any right to be employed or to continue employment by HF Holdings, Inc., the Company or any of their subsidiaries. 12. CHANGE IN OR INTERPRETATION OF LAW In the event of any change in or interpretation of law which, in the opinion of counsel acceptable to the Plan Administrator, would cause the Plan to be other than an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees (such an unfunded plan being hereinafter referred to as an "exempt plan") and to be subject to the funding requirements of Title I of ERISA, the Plan Administrator may terminate the participation of such Participants as may be necessary to preserve or restore the Plan's status as an exempt plan and may accelerate payment of their Deferred Bonus Accounts or take such other action as may be necessary to preserve or restore such status, provided that in any such case the Company shall use its reasonable best efforts to provide any affected Participant with benefits reasonably equivalent to those to which he or she would have been entitled pursuant to the Plan. 13. GOVERNING LAW The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware. 14. SUCCESSORS This Plan shall inure to the benefit of and be binding upon the Participant and the Company and their respective personal or legal representatives, executors, administrators, and successors and assigns, including successors to all or substantially all of the stock, business and/or assets, of the Company. 15. CONSENT TO JURISDICTION Each party to this Agreement, by its execution hereof, (x) hereby irrevocably submits to the non-exclusive jurisdiction of the state courts of the State of Utah sitting in the County of Salt Lake or the United States District Court of Utah for the purpose of any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof, (y) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, and agrees not to allow any of its subsidiaries to assert, by way of motion, as a defense or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceeding brought in one of the above-named courts is improper, or that this Agreement or the subject matter hereof or thereof may not be enforced in or by such court and (z) hereby agrees not to make any motion or take any other action seeking or intending to cause the transfer or removal of any such action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation to any court other than one of the above-named courts whether on the grounds of inconvenient forum or otherwise. Each party hereto hereby consents to service of process in any such proceeding in any manner permitted by Utah law, and agrees that service of process by registered or certified mail, return receipt requested, at its address specified pursuant to the Stockholders Agreement is reasonably calculated to give actual notice. 16. WAIVER OF JURY TRIAL TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH PARTICIPANT HERETO HEREBY WAIVES AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION, CLAIM, CAUSE OF ACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE), INQUIRY, PROCEEDING OR INVESTIGATION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING. THE COMPANY AND EACH PARTICIPANT ACKNOWLEDGES THAT IT HAS BEEN INFORMED THAT THIS SECTION 16 CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH THEY ARE RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT. THE COMPANY AND EACH PARTICIPANT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 16 WITH ANY COURT AS WRITTEN EVIDENCE OF CONSENT TO THE WAIVER OF THE RIGHT TO TRIAL BY JURY. 17. ATTORNEYS FEES In the event of a dispute by the Company, the Participant or others as to the validity or enforceability of, or liability under, any provision of this Plan, the Company shall reimburse the Participant for all legal fees and expenses incurred by him or her in connection with such dispute to the extent the Participant shall prevail in such dispute. [THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK] [Jr. Management Deferred Bonus Plan] ICON HEALTH & FITNESS, INC. By: /s/ S. FRED BECK ------------------------------- Name: S. Fred Beck Title: Treasurer and CFO Date: September 27, 1999 EX-10.19 27 EXHIBIT 10.19 Exhibit 10.19 MANAGEMENT AGREEMENT This Management Agreement (this "Agreement") is entered into as of the 27th day of September, 1999, by and between Icon Health & Fitness, Inc., a Delaware corporation ("ICON"), HF Holdings, Inc., a Delaware corporation ("Holdings" and, together with ICON and each of its other direct and indirect subsidiaries signatory hereto or hereafter becoming party hereto by executing a counterpart signature page hereof, the "Company") and Bain Capital Partners IV, L.P., a Delaware limited partnership ("Bain"). Whereas, Holdings was formed for the purpose of effecting an overall plan to restructure the capitalization of ICON (the "Restructuring") and becoming a direct parent of ICON, all on terms and subject to the conditions of (a) the Exchange Offer and Consent Solicitation Statement, dated July 30, 1999, for all outstanding 13% Senior Subordinated Notes due 2002 of ICON, 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc., a Delaware corporation ("IHF"), and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation, a Delaware corporation, and (b) the Agreement and Plan of Merger, dated as of September 24, 1999, among Holdings, HF Acquisition, Inc., a Delaware corporation, and ICON. Whereas, Bain is providing advisory and other services in connection with the senior secured financing (the "Senior Financing") being provided for the Restructuring pursuant to a Credit Agreement dated on or about the date hereof by General Electric Capital Corporation and Fleet National Bank, as agents, and the lending institutions from time to time party thereto (the "Credit Agreement"); Whereas, certain funds (the "Bain Funds") affiliated with Bain are providing equity financing (the "Equity Investments") in connection with the Restructuring; and Whereas, subject to the terms and conditions of this Agreement, the Company desires to retain Bain to provide certain management and advisory services to the Company, and Bain desires to provide such services; Now, therefore, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Services. Bain hereby agrees that, during the term of this Agreement (the "Term"), it will: (a) provide the Company with advice in connection with the negotiation and consummation of agreements, contracts, documents and instruments necessary to provide the Company with financing from banks or other financial institutions or other entities on terms and conditions satisfactory to the Company; and (b) provide ICON with financial, managerial and operational advice in connection with its day-to-day operations, including, without limitation: (i) advice with respect to the investment of funds; and (ii) advice with respect to the development and implementation of strategies for improving the operating, marketing and financial performance of ICON. 2. Payment of Fees. The Company hereby agrees to: (a) pay to Bain (or an affiliate of Bain designated by it) a fee in the amount of $2,202,000 in connection with the structuring of the Senior Financing for the Restructuring, together with reimbursement of Bain's expenses incurred on behalf of the Company through the Closing Date (as defined in the Merger Agreement) in connection with the Restructuring, such fees and expenses being payable by ICON at the closing of the Restructuring or, if the Restructuring is not consummated, promptly after the time the Company has abandoned the Restructuring; (b) subject to the terms of the credit agreement from time to time in effect providing for working capital financing to ICON, during the Term, pay to Bain (or an affiliate of Bain designated by it) a management fee in an amount not to exceed $366,500 per annum in exchange for the services provided to the Company by Bain, as more fully described in Section 1, such fee being payable by ICON quarterly in arrears, with each payment being made sixty (60) days after the end of each fiscal quarter of the Company; and (c) during the Term, allow Bain to participate in the negotiation and consummation of senior financing for any recapitalization or acquisition or other similar transactions by the Company, and pay to Bain (or an affiliate of Bain designated by it) a fee in connection therewith equal to one percent (1%) of the gross purchase price of the transaction (including all liabilities assumed or otherwise included in the transaction), such fee to be due and payable for the foregoing services at the closing of such transaction, whether or not any such senior financing is actually committed or drawn upon; provided, however, that (i) Bain shall not be entitled to such fee with respect to any acquisition by the Company in which such gross purchase price is less than $10,000,000 and (ii) in the case of a Liquidity Event (as defined in the Stockholders Agreement) Bain shall provide Credit Suisse First Boston an opportunity to provide services in connection with such transaction and to receive in respect thereof a fee of up to one half (1/2) the fee otherwise payable to Bain pursuant to this Section, such -2- fee of Credit Suisse First Boston to reduce such fee otherwise payable to Bain under this section but not by more than one-half (1/2) of such fee otherwise payable to Bain. Each payment made pursuant to this Section 2 shall be paid by wire transfer of immediately available federal funds to the account specified on Schedule 1 hereto, or to such other account(s) as Bain may specify to the Company in writing prior to such payment. 3. Term. This Agreement shall commence on the Closing Date and continue in full force and effect, unless and until terminated by mutual consent of the parties, for so long as Bain (or any successor or permitted assign, as the case may be) continues to carry on the business of providing services of the type described in Section 1; provided, however, that (a) either party may terminate this Agreement following a material breach of the terms of this Agreement by the other party hereto and a failure to cure such breach within 30 days following written notice thereof and (b) Bain may terminate this Agreement upon not less than 60 days written notice to the Company; and provided further that each of (x) the obligations of the Company under Section 4, (y) any and all accrued and unpaid obligations of the Company owed under Section 2 and (z) the provisions of Section 7 shall survive any termination of this Agreement to the maximum extent permitted under applicable law. 4. Expenses; Indemnification. (a) Expenses. The Company agrees to pay on demand all expenses incurred by Bain, the Bain Funds and Bain Capital, Inc. (or any of them) in connection with this Agreement, the Restructuring and such other transactions and all operations hereunder or in respect of the Equity Investments or otherwise incurred in connection with the Restructuring or the Company, including but not limited to (i) the fees and disbursements of: (A) Ropes & Gray, special counsel to Bain Capital, Inc. and the Bain Funds, (B) PricewaterhouseCoopers LLP, accountant to Bain Capital, Inc. and the Bain Funds and (C) any other consultants or advisors retained by Bain, Bain Capital, Inc., the Bain Funds or either of the parties identified in clauses (A) and (B) arising in connection therewith (including but not limited to the preparation, negotiation and execution of this Agreement and any other agreement executed in connection herewith or in connection with the Restructuring, the Senior Financing or the consummation of the other transactions contemplated hereby (and any and all amendments, modifications, restructurings and waivers, and exercises and preservations of rights and remedies hereunder or thereunder) and the operations of the Company) and (ii) any out-of-pocket expenses incurred by Bain, the Bain Funds and Bain Capital, Inc. (or any of them) in connection with the provision of -3- services hereunder or the attendance at any meeting of the board of directors (or any committee thereof) of the Company or any of its affiliates. (b) Indemnity and Liability. In consideration of the execution and delivery of this Agreement by Bain and the provision of the Equity Investments by the Bain Funds, the Company hereby agrees to indemnify, exonerate and hold each of Bain, Bain Capital, Inc. and each Bain Fund, and each of their respective partners, shareholders, affiliates, directors, officers, fiduciaries, employees and agents and each of the partners, shareholders, affiliates, directors, officers, fiduciaries, employees, agents, advisors and attorneys of each of the foregoing (collectively, the "Indemnitees") free and harmless from and against any and all actions, causes of action, suits, losses, liabilities and damages, and expenses in connection therewith, including without limitation attorneys' fees and disbursements (collectively, "Liabilities"), incurred by the Indemnitees or any of them as a result of, or arising out of, or relating to the Restructuring, the execution, delivery, performance, enforcement or existence of this Agreement or the transactions contemplated hereby (including but not limited to any indemnification obligations assumed or incurred by any Indemnitee) or the role or status of any of the foregoing as an officer, director or shareholder of ICON, Holdings, IHF Capital, Inc., ICON Fitness Corporation, IHF Holdings, Inc., ICON of Canada, Inc., ICON International Holdings, Inc., Universal Technical Services, or JumpKing, Inc. (collectively, the "Indemnified Liabilities") except for any such Indemnified Liabilities arising on account of such Indemnitee's willful misconduct, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law; provided, however, that the Indemnified Liabilities shall not include any losses solely attributable to a decrease in value of any equity investment by the Bain Funds in Holdings. 5. Assignment, etc. Except as provided below, neither party shall have the right to assign this Agreement. Bain acknowledges that its services under this Agreement are unique. Accordingly, any purported assignment by Bain (other than as provided below) shall be void. Notwithstanding the foregoing, (a) Bain may assign all or part of its rights and obligations hereunder to any affiliate of Bain which provides services similar to those called for by this Agreement, in which event Bain shall be released of all of its rights and obligations hereunder and (b) the provisions hereof for the benefit of the Bain Funds shall inure to the benefit of their successors and assigns. 6. Amendments and Waivers. No amendment or waiver of any term, provision or condition of this Agreement shall be effective, unless in writing and executed by each of Bain and the Company. No waiver on any one occasion shall extend to or effect or -4- be construed as a waiver of any right or remedy on any future occasion. No course of dealing of any person nor any delay or omission in exercising any right or remedy shall constitute an amendment of this Agreement or a waiver of any right or remedy of any party hereto. 7. Miscellaneous. (a) Choice of Law. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of The Commonwealth of Massachusetts without giving effect to any choice or conflict of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. (b) Consent to Jurisdiction. Each of the parties agrees that all actions, suits or proceedings arising out of or based upon this Agreement or the subject matter hereof shall be brought and maintained exclusively in the federal and state courts of The Commonwealth of Massachusetts. Each of the parties hereto by execution hereof (i) hereby irrevocably submits to the jurisdiction of the federal and state courts in The Commonwealth of Massachusetts for the purpose of any action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that it is immune from extraterritorial injunctive relief or other injunctive relief, that its property is exempt or immune from attachment or execution, that any such action, suit or proceeding may not be brought or maintained in one of the above-named courts, that any such action, suit or proceeding brought or maintained in one of the above-named courts should be dismissed on grounds of forum non conveniens, should be transferred to any court other than one of the above-named courts, should be stayed by virtue of the pendency of any other action, suit or proceeding in any court other than one of the above-named courts, or that this Agreement or the subject matter hereof may not be enforced in or by any of the above-named courts. Each of the parties hereto hereby consents to service of process in any such suit, action or proceeding in any manner permitted by the laws of The Commonwealth of Massachusetts, agrees that service of process by registered or certified mail, return receipt requested, at the address specified in or pursuant to Section 9 is reasonably calculated to give actual notice and waives and agrees not to assert by way of motion, as a defense or otherwise, in any such action, suit or proceeding any claim that service of process made in accordance with Section 9 does not constitute good and sufficient service of process. The provisions of this Section 7(b) shall not restrict the ability of any -5- party to enforce in any court any judgment obtained in a federal or state court of The Commonwealth of Massachusetts. (c) Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF THE PARTIES HERETO HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT, OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, CAUSE OF ACTION, ACTION, SUIT OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR OTHERWISE. Each of the parties hereto acknowledges that it has been informed by each other party that the provisions of this Section 7(c) constitute a material inducement upon which such party is relying and will rely in entering into this Agreement and the transactions contemplated hereby. Any of the parties hereto may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of each of the parties hereto to the waiver of its right to trial by jury. 8. Merger/Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior communication or agreement with respect thereto, including without limitation the Management and Advisory Agreement dated as of November 14, 1994 between ICON, IHF, IHF Capital, Inc., a Delaware corporation, and Bain (the "1994 Management Agreement"); provided, however, that the provisions of Section 3.2 of the 1994 Management Agreement shall continue in full force and effect and shall survive any termination of this Agreement. 9. Notice. All notices, demands, and communications of any kind which any party may require or desire to serve upon any other party under this Agreement shall be in writing and shall be served upon such other party and such other party's copied persons as specified below by personal delivery to the address set forth for it below or to such other address as such party shall have specified by notice to each other party or by mailing a copy thereof by certified or registered mail, or by Federal Express or any other reputable overnight courier service, postage prepaid, with return receipt requested, addressed to such party and copied persons at such addresses. In the case of service by personal delivery, it shall be deemed complete on the first business day after the date of actual delivery to such address. In case of service by mail or by overnight courier, it shall be deemed complete, whether or not received, on the third day after the date of mailing as shown by the registered or certified mail receipt or courier service receipt. Notwithstanding the foregoing, notice to any party or copied person of change of address shall be deemed complete only upon actual receipt by an officer or agent of such party or copied person. -6- If to the Company, to it at: ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Attention: Chief Executive Officer with a copy to: Bain Capital Partners IV, L.P. Two Copley Place, 7th Floor Boston, MA 02116 Attention: Robert C. Gay Ronald P. Mika If to Bain, to it at: Two Copley Place, 7th Floor Boston, MA 02116 Attention: Robert C. Gay Ronald P. Mika with a copy to: Ropes & Gray One International Place Boston, MA 02110 Attention: R. Newcomb Stillwell 10. Severability. If in any judicial or arbitral proceedings a court or arbitrator shall refuse to enforce any provision of this Agreement, then such unenforceable provision shall be deemed eliminated from this Agreement for the purpose of such proceedings to the extent necessary to permit the remaining provisions to be enforced. To the full extent, however, that the provisions of any applicable law may be waived, they are hereby waived to the end that this Agreement be deemed to be valid and binding agreement enforceable in accordance with its terms, and in the event that any provision hereof shall be found to be invalid or unenforceable, such provision shall be construed by limiting it so as to be valid and enforceable to the maximum extent consistent with and possible under applicable law. -7- 11. Disclaimer and Limitation of Liability. (a) Disclaimer. Bain makes no representations or warranties, express or implied, in respect of the services to be provided by it hereunder. (b) Standard of Care. Neither Bain nor any other Indemnitee shall be liable to the Company or any of its affiliates for any act, alleged act, omission or alleged omission suffered or taken by Bain or any other Indemnitee that does not constitute willful misconduct. (c) Freedom to Pursue Opportunities, Etc. In anticipation that the Company and Bain (or one or more affiliates, associated investment funds or portfolio companies, or clients of Bain) may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, and in recognition of the benefits to be derived by the Company from the services to be provided under this Agreement and in recognition of the difficulties which may confront any advisor who desires and endeavors fully to satisfy such advisor's duties in determining the full scope of such duties in any particular situation, the provisions of this clause (c) are set forth to regulate, define and guide the conduct of certain affairs of the Company as they may involve Bain. Except as Bain may otherwise agree in writing after the date hereof: (i) Bain shall have the right to, and shall have no duty (contractual or otherwise) not to, directly or indirectly: (A) engage in the same or similar business activities or lines of business as the Company, including those competing with the Company and (B) do business with any client or customer of the Company; (ii) Neither Bain nor any officer, director, employee, partner, affiliate or associated entity thereof shall be liable to the Company or its affiliates for breach of any duty (contractual or otherwise) by reason of any such activities of or of such person's participation therein; and (iii) In the event that Bain acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both the Company and Bain or any other person, Bain shall have no duty (contractual or otherwise) to communicate or present such corporate opportunity to the Company and, notwithstanding any provision of this Agreement to the contrary, shall not be liable to the Company or its affiliates for breach of any duty (contractual or otherwise) by reason of the fact that Bain directly or indirectly pursues or acquires such opportunity for itself, -8- directs such opportunity to another person, or does not present such opportunity to the Company. (d) Limitation of Liability. In no event will either party hereto be liable to the other for any indirect, special, incidental or consequential damages, including lost profits or savings, whether or not such damages are foreseeable, or in respect of any Liabilities relating to any third party claims (whether based in contract, tort or otherwise) other than the Indemnified Liabilities, relating to the services to be provided by Bain hereunder. 12. Counterparts. This Agreement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which together shall constitute one and the same agreement. -9- [Management Agreement] IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf as an instrument under seal as of the date first above written by its officer or representative thereunto duly authorized. THE COMPANY: ICON HEALTH & FITNESS, INC. By /s/ S. Fred Beck ------------------------------------- Name: S. Fred Beck Title: CFO, V.P. and Treasurer HF HOLDINGS, INC. By /s/ S. Fred Beck ------------------------------------- Name: S. Fred Beck Title: CFO, V.P. and Treasurer BAIN: BAIN CAPITAL PARTNERS IV, L.P. By Bain Capital Investors, Inc., its general partner By /s/ Robert Gay ---------------------------------- Name: Robert Gay Title: Managing Director Accepted and agreed: IHF HOLDINGS, INC. By /s/ S. Fred Beck ------------------------------- Name: S. Fred Beck Title: CFO IHF CAPITAL, INC. By /s/ S. Fred Beck ------------------------------- Name: S. Fred Beck Title: CFO -10- EX-10.20 28 EXHIBIT 10.20 Exhibit 10.20 MANAGEMENT AGREEMENT This Management Agreement (this "Agreement") is entered into as of the 27th day of September, 1999, by and between ICON Health & Fitness, Inc., a Delaware corporation ("ICON"), HF Holdings, Inc., a Delaware corporation ("Holdings" and, together with ICON and each of its other direct and indirect subsidiaries signatory hereto or hereafter becoming party hereto by executing a counterpart signature page hereof, the "Company") and Scott R. Watterson ("Watterson"). WHEREAS, Holdings was formed for the purpose of effecting an overall plan to restructure the capitalization of ICON (the "Restructuring"), and becoming a direct parent of ICON on terms and subject to the conditions of (a) the Exchange Offer and Consent Solicitation Statement, dated July 30, 1999, as supplemented, for all outstanding 13% Senior Subordinated Notes due 2002 of ICON, 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc., a Delaware corporation, and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation, a Delaware corporation, and (b) the Agreement and Plan of Merger, dated as of September 27, 1999, among Holdings, HF Acquisition, Inc., a Delaware corporation, and ICON. WHEREAS, Watterson has provided advisory and other services, and is providing equity financing (the "Equity Investment"), in connection with the Restructuring; and WHEREAS, subject to the terms and conditions of this Agreement, the Company desires to retain Watterson to be available to provide certain management and advisory services to the Company as requested, and Watterson desires to provide such services; NOW, THEREFORE, in consideration of the mutual covenants contained herein, the making of the Equity Investment, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Services. Watterson agrees that, during the term of this Agreement (the "Term"), and separate and apart from any employment arrangement with the Company or any continuation of such employment, he will: (a) provide the Company, at its request, with advice in connection with the negotiation and consummation of agreements, contracts, documents and instruments necessary to provide the Company with financing from banks or other financial institutions or other entities on terms and conditions satisfactory to the Company; and (b) provide ICON, at its request, with financial, managerial and operational advice in connection with its day-to-day operations, including, without limitation, advice with respect to the development and implementation of strategies for improving the operating, marketing and financial performance of ICON. 2. Payment of Fees. The Company hereby agrees to: (a) pay to Watterson a fee in the amount of $208,500 in connection with the Restructuring, together with reimbursement of the fees and disbursements of Hutchins, Wheeler & Dittmar, P.C., counsel to Watterson incurred by Watterson in connection with the Restructuring through the Closing Date (as defined in the Merger Agreement) in connection with the Restructuring, such fees and expenses being payable by ICON at the closing of the Restructuring or, if the Restructuring is not consummated, promptly after the time the Company has abandoned the Restructuring; and (b) subject to the terms of the credit agreement from time to time in effect providing for working capital financing to ICON, during the Term, pay to Watterson a management fee in an amount not to exceed $33,500 per annum, such fee being payable by ICON quarterly in arrears, with each payment being made sixty (60) days after the end of each fiscal quarter of the Company. Each payment made pursuant to this Section 2 shall, at the request of Watterson, be paid by wire transfer of immediately available federal funds to such account(s) as Watterson may specify to the Company in writing prior to such payment. 3. Term. This Agreement shall commence on the Closing Date and continue in full force and effect, unless and until terminated by mutual consent of the parties, for so long as Watterson remains available and willing to carry on the business of providing services of the type described in Section 1, regardless of his continued employment by the Company or any affiliate thereof; provided, however, that (a) either party may terminate this Agreement following a material breach of the terms of this Agreement by the other party hereto and a failure to cure such breach within 30 days following written notice thereof, (b) Watterson may terminate this Agreement upon not less than 60 days written notice to the Company and (c) the Company may terminate this Agreement upon the termination (as opposed to any assignment) of the Management Agreement entered into between Bain Capital Partners IV, L.P. and the Company, dated an even date herewith; and provided further that each of (x) the obligations of the Company under Section 4, (y) any and all accrued and unpaid obligations of the Company owed under Section 2 and (z) the provisions of Section 7 shall survive any termination of this Agreement to the maximum extent permitted under applicable law. 4. Expenses; Indemnification. (a) Expenses. The Company agrees to pay on demand all legal expenses incurred by Watterson in connection with this Agreement (including all legal expenses incurred in the collection of fees hereunder) and in connection with such transactions as are approved by the Board of Directors of the Company, ICON or Holdings; provided, however, that Watterson's right to receive payment of any such legal expenses is limited to (i) such expenses being incurred at such time as Watterson is not employed by the Company, and (ii) a total payment to Watterson for such expenses incurred in any one year of no more than $10,000. 2 (b) Indemnity and Liability. In consideration of the execution and delivery of this Agreement and the provision of the Equity Investment by Watterson, the companies constituting the "Company" hereby jointly and severally agree to indemnify, exonerate and hold Watterson and his agents, advisors and attorneys (collectively, the "Indemnitees") free and harmless from and against any and all actions, causes of action, suits, losses, liabilities and damages, and expenses in connection therewith, including without limitation attorneys' fees and disbursements (collectively, "Liabilities"), incurred by the Indemnitees or any of them solely as a result of Watterson's role or status as an officer, director or shareholder of ICON, Holdings, IHF Capital, Inc., ICON Fitness Corporation, IHF Holdings, Inc., ICON of Canada, Inc., ICON International Holdings, Inc., Universal Technical Services, and Jumpking, Inc. (collectively, the "Indemnified Liabilities"), except for any such Indemnified Liabilities arising on account of such Indemnitee's willful misconduct or by reason of any agreement to which Watterson at any time is or was or becomes a party in his own individual capacity, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the companies constituting the "Company" hereby jointly and severally agree to make the maximum contribution to the payment and satisfaction of such otherwise payable Indemnified Liabilities which is permissible under applicable law. 5. Assignment, etc. Except as provided below, neither party shall have the right to assign this Agreement. Watterson acknowledges that his services under this Agreement are unique. Accordingly, any purported assignment by Watterson (other than as provided below) shall be void. Notwithstanding the foregoing, (a) Watterson may assign all or part of his rights and obligations hereunder to any affiliate of Watterson which provides services similar to those called for by this Agreement, in which event Watterson shall be released of all of his rights and obligations hereunder and (b) the provisions hereof for the benefit of Watterson shall inure to the benefit of his successors and assigns. 6. Amendments and Waivers. No amendment or waiver of any term, provision or condition of this Agreement shall be effective, unless in writing and executed by each of Watterson and the Company. No waiver on any one occasion shall extend to or effect or be construed as a waiver of any right or remedy on any future occasion. No course of dealing of any person nor any delay or omission in exercising any right or remedy shall constitute an amendment of this Agreement or a waiver of any right or remedy of any party hereto. 7. Miscellaneous. (a) Choice of Law. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. (b) Consent to Jurisdiction. Each of the parties agrees that all actions, suits or proceedings arising out of or based upon this Agreement or the subject matter hereof shall be brought and maintained exclusively in the federal and state courts of the State of Utah. Each of the parties hereto by execution hereof (i) hereby irrevocably submits to the jurisdiction of the federal and state courts in the State 3 of Utah for the purpose of any action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that such party is not subject personally to the jurisdiction of the above-named courts, that it or he is immune from extraterritorial injunctive relief or other injunctive relief, that its or his property is exempt or immune from attachment or execution, that any such action, suit or proceeding may not be brought or maintained in one of the above-named courts, that any such action, suit or proceeding brought or maintained in one of the above-named courts should be dismissed on grounds of forum non conveniens, should be transferred to any court other than one of the above-named courts, should be stayed by virtue of the pendency of any other action, suit or proceeding in any court other than one of the above-named courts, or that this Agreement or the subject matter hereof may not be enforced in or by any of the above-named courts. Each of the parties hereto hereby consents to service of process in any such suit, action or proceeding in any manner permitted by the laws of the State of Utah, agrees that service of process by registered or certified mail, return receipt requested, at the address specified in or pursuant to Section 9 is reasonably calculated to give actual notice and waives and agrees not to assert by way of motion, as a defense or otherwise, in any such action, suit or proceeding any claim that service of process made in accordance with Section 9 does not constitute good and sufficient service of process. The provisions of this Section 7(b) shall not restrict the ability of any party to enforce in any court any judgment obtained in a federal or state court of the State of Utah. (c) Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF THE PARTIES HERETO HEREBY WAIVES, AND COVENANTS THAT SUCH PARTY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT, OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, CAUSE OF ACTION, ACTION, SUIT OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR OTHERWISE. Each of the parties hereto acknowledges that such party has been informed by each other party that the provisions of this Section 7(c) constitute a material inducement upon which such party is relying and will rely in entering into this Agreement and the transactions contemplated hereby. Any of the parties hereto may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of each of the parties hereto to the waiver of such party's right to trial by jury. (d) Withholding. The Company shall have the right to withhold, from or in respect of any payment due to Watterson hereunder, any federal, state or local taxes of any kind required by law to be withheld with respect thereto. 4 8. Merger/Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior communication or agreement with respect thereto. 9. Notice. All notices, demands, and communications of any kind which any party may require or desire to serve upon any other party under this Agreement shall be in writing and shall be served upon such other party and such other party's copied persons as specified below by personal delivery to the address set forth for such party below or to such other address as such party shall have specified by notice to each other party or by mailing a copy thereof by certified or registered mail, or by Federal Express or any other reputable overnight courier service, postage prepaid, with return receipt requested, addressed to such party and copied persons at such addresses. In the case of service by personal delivery, it shall be deemed complete on the first business day after the date of actual delivery to such address. In case of service by mail or by overnight courier, it shall be deemed complete, whether or not received, on the third day after the date of mailing as shown by the registered or certified mail receipt or courier service receipt. Notwithstanding the foregoing, notice to any party or copied person of change of address shall be deemed complete only upon actual receipt by an officer or agent of such party or copied person. If to the Company, to it at: HF Holdings, Inc. 1500 South 1000 West Logan, Utah 84321 Attention: Chief Executive Officer with a copy, if he is then employed by the Company, to: Each member of the Board of Directors (at such addresses to which notices are sent for meetings of the Board of Directors) If to Watterson, to him at: Scott R. Watterson 560 South 1000 East Logan, Utah 84321 with a copy to: Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02110 Attention: Charles W. Robins 10. Severability. If in any judicial or arbitral proceedings a court or arbitrator shall refuse to enforce any provision of this Agreement, then such unenforceable provision shall be deemed eliminated from this Agreement for the purpose of such proceedings to the extent necessary to 5 permit the remaining provisions to be enforced. To the full extent, however, that the provisions of any applicable law may be waived, they are hereby waived to the end that this Agreement be deemed to be a valid and binding agreement enforceable in accordance with its terms, and in the event that any provision hereof shall be found to be invalid or unenforceable, such provision shall be construed by limiting it so as to be valid and enforceable to the maximum extent consistent with and possible under applicable law. 11. Disclaimer and Limitation of Liability. (a) Disclaimer. Watterson makes no representations or warranties, express or implied, in respect of the services to be provided by him hereunder. (b) Standard of Care. Neither Watterson nor any other Indemnitee shall be liable to the Company or any of its affiliates for any act, alleged act, omission or alleged omission suffered or taken by Watterson hereunder or any other Indemnitee hereunder that does not constitute willful misconduct. (c) Limitation of Liability. In no event will either party hereto be liable to the other for any indirect, special, incidental or consequential damages, including lost profits or savings, whether or not such damages are foreseeable, or in respect of any liabilities relating to any third party claims (whether based in contract, tort or otherwise) other than the Indemnified Liabilities to the extent provided in Section 4(b), relating to the services to be provided by Watterson hereunder. (d) Employment Agreements. Neither (i) this Agreement, as the same may be amended from time to time, or the performance by Watterson of any services hereunder, nor (ii) any investment by Watterson in HF Investment Holdings, LLC ("HF LLC"), a Delaware limited liability company, or the performance by Watterson of any services under the HF LLC Limited Liability Company Agreement, as the same may be amended from time to time, shall constitute a violation of any employment agreement between Watterson and Holdings, ICON or the Company, or any of their affiliates, including, but not limited to, the Employment Agreement between Watterson and the Company, dated an even date herewith, as the same may be amended from time to time. 12. Counterparts. This Agreement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which together shall constitute one and the same agreement. 6 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf as an instrument under seal as of the date first above written by its officer or representative thereunto duly authorized. THE COMPANY: HF Holdings, Inc. By /s/ S. Fred Beck ------------------------------------- Name: S. Fred Beck Title: CFO, V.P. and Treasurer ICON HEALTH & FITNESS, INC. By /s/ S. Fred Beck ------------------------------------- Name: S. Fred Beck Title: CFO, V.P. and Treasurer WATTERSON: /s/ Scott R. Watterson ------------------------------------- Scott R. Watterson 7 EX-10.21 29 EXHIBIT 10.21 Exhibit 10.21 MANAGEMENT AGREEMENT This Management Agreement (this "Agreement") is entered into as of the 27th day of September, 1999, by and between ICON Health & Fitness, Inc., a Delaware corporation ("ICON"), HF Holdings, Inc., a Delaware corporation ("Holdings" and, together with ICON and each of its other direct and indirect subsidiaries signatory hereto or hereafter becoming party hereto by executing a counterpart signature page hereof, the "Company") and Gary E. Stevenson ("Stevenson"). WHEREAS, Holdings was formed for the purpose of effecting an overall plan to restructure the capitalization of ICON (the "Restructuring"), and becoming a direct parent of ICON on terms and subject to the conditions of (a) the Exchange Offer and Consent Solicitation Statement, dated July 30, 1999, as supplemented, for all outstanding 13% Senior Subordinated Notes due 2002 of ICON, 15% Senior Secured Discount Notes due 2004 of IHF Holdings, Inc., a Delaware corporation, and 14% Senior Discount Notes due 2006 of ICON Fitness Corporation, a Delaware corporation, and (b) the Agreement and Plan of Merger, dated as of September 27, 1999, among Holdings, HF Acquisition, Inc., a Delaware corporation, and ICON. WHEREAS, Stevenson has provided advisory and other services, and is providing equity financing (the "Equity Investment"), in connection with the Restructuring; and WHEREAS, subject to the terms and conditions of this Agreement, the Company desires to retain Stevenson to be available to provide certain management and advisory services to the Company as requested, and Stevenson desires to provide such services; NOW, THEREFORE, in consideration of the mutual covenants contained herein, the making of the Equity Investment, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Services. Stevenson agrees that, during the term of this Agreement (the "Term"), and separate and apart from any employment arrangement with the Company or any continuation of such employment, he will: (a) provide the Company, at its request, with advice in connection with the negotiation and consummation of agreements, contracts, documents and instruments necessary to provide the Company with financing from banks or other financial institutions or other entities on terms and conditions satisfactory to the Company; and (b) provide ICON, at its request, with financial, managerial and operational advice in connection with its day-to-day operations, including, without limitation, advice with respect to the development and implementation of strategies for improving the operating, marketing and financial performance of ICON. 2. Payment of Fees. The Company hereby agrees to: (a) pay to Stevenson a fee in the amount of $208,500 in connection with the Restructuring, together with reimbursement of the fees and disbursements of Hutchins, Wheeler & Dittmar, P.C., counsel to Stevenson incurred by Stevenson in connection with the Restructuring through the Closing Date (as defined in the Merger Agreement) in connection with the Restructuring, such fees and expenses being payable by ICON at the closing of the Restructuring or, if the Restructuring is not consummated, promptly after the time the Company has abandoned the Restructuring; and (b) subject to the terms of the credit agreement from time to time in effect providing for working capital financing to ICON, during the Term, pay to Stevenson a management fee in an amount not to exceed $33,500 per annum, such fee being payable by ICON quarterly in arrears, with each payment being made sixty (60) days after the end of each fiscal quarter of the Company. Each payment made pursuant to this Section 2 shall, at the request of Stevenson, be paid by wire transfer of immediately available federal funds to such account(s) as Stevenson may specify to the Company in writing prior to such payment. 3. Term. This Agreement shall commence on the Closing Date and continue in full force and effect, unless and until terminated by mutual consent of the parties, for so long as Stevenson remains available and willing to carry on the business of providing services of the type described in Section 1, regardless of his continued employment by the Company or any affiliate thereof; provided, however, that (a) either party may terminate this Agreement following a material breach of the terms of this Agreement by the other party hereto and a failure to cure such breach within 30 days following written notice thereof, (b) Stevenson may terminate this Agreement upon not less than 60 days written notice to the Company and (c) the Company may terminate this Agreement upon the termination (as opposed to any assignment) of the Management Agreement entered into between Bain Capital Partners IV, L.P. and the Company, dated an even date herewith; and provided further that each of (x) the obligations of the Company under Section 4, (y) any and all accrued and unpaid obligations of the Company owed under Section 2 and (z) the provisions of Section 7 shall survive any termination of this Agreement to the maximum extent permitted under applicable law. 4. Expenses; Indemnification. (a) Expenses. The Company agrees to pay on demand all legal expenses incurred by Stevenson in connection with this Agreement (including all legal expenses incurred in the collection of fees hereunder) and in connection with such transactions as are approved by the Board of Directors of the Company, ICON or Holdings ; provided, however, that Stevenson's right to receive payment of any such legal expenses is limited to (i) such expenses being incurred at such time as Stevenson is not employed by the Company, and (ii) a total payment to Stevenson for such expenses incurred in any one year of no more than $10,000. 2 (b) Indemnity and Liability. In consideration of the execution and delivery of this Agreement and the provision of the Equity Investment by Stevenson, the companies constituting the "Company" hereby jointly and severally agree to indemnify, exonerate and hold Stevenson and his agents, advisors and attorneys (collectively, the "Indemnitees") free and harmless from and against any and all actions, causes of action, suits, losses, liabilities and damages, and expenses in connection therewith, including without limitation attorneys' fees and disbursements (collectively, "Liabilities"), incurred by the Indemnitees or any of them solely as a result of Stevenson's role or status as an officer, director or shareholder of ICON, Holdings, IHF Capital, Inc., ICON Fitness Corporation, IHF Holdings, Inc., ICON of Canada, Inc., ICON International Holdings, Inc., Universal Technical Services, and Jumpking, Inc. (collectively, the "Indemnified Liabilities"), except for any such Indemnified Liabilities arising on account of such Indemnitee's willful misconduct or by reason of any agreement to which Stevenson at any time is or was or becomes a party in his own individual capacity, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the companies constituting the "Company" hereby jointly and severally agree to make the maximum contribution to the payment and satisfaction of such otherwise payable Indemnified Liabilities which is permissible under applicable law. 5. Assignment, etc. Except as provided below, neither party shall have the right to assign this Agreement. Stevenson acknowledges that his services under this Agreement are unique. Accordingly, any purported assignment by Stevenson (other than as provided below) shall be void. Notwithstanding the foregoing, (a) Stevenson may assign all or part of his rights and obligations hereunder to any affiliate of Stevenson which provides services similar to those called for by this Agreement, in which event Stevenson shall be released of all of his rights and obligations hereunder and (b) the provisions hereof for the benefit of Stevenson shall inure to the benefit of his successors and assigns. 6. Amendments and Waivers. No amendment or waiver of any term, provision or condition of this Agreement shall be effective, unless in writing and executed by each of Stevenson and the Company. No waiver on any one occasion shall extend to or effect or be construed as a waiver of any right or remedy on any future occasion. No course of dealing of any person nor any delay or omission in exercising any right or remedy shall constitute an amendment of this Agreement or a waiver of any right or remedy of any party hereto. 7. Miscellaneous. (a) Choice of Law. This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. (b) Consent to Jurisdiction. Each of the parties agrees that all actions, suits or proceedings arising out of or based upon this Agreement or the subject matter hereof shall be brought and maintained exclusively in the federal and state courts of the State of Utah. Each of the parties hereto by execution hereof (i) hereby irrevocably submits to the jurisdiction of the federal and state courts in the State 3 of Utah for the purpose of any action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that such party is not subject personally to the jurisdiction of the above-named courts, that it or he is immune from extraterritorial injunctive relief or other injunctive relief, that its or his property is exempt or immune from attachment or execution, that any such action, suit or proceeding may not be brought or maintained in one of the above-named courts, that any such action, suit or proceeding brought or maintained in one of the above-named courts should be dismissed on grounds of forum non conveniens, should be transferred to any court other than one of the above-named courts, should be stayed by virtue of the pendency of any other action, suit or proceeding in any court other than one of the above-named courts, or that this Agreement or the subject matter hereof may not be enforced in or by any of the above-named courts. Each of the parties hereto hereby consents to service of process in any such suit, action or proceeding in any manner permitted by the laws of the State of Utah, agrees that service of process by registered or certified mail, return receipt requested, at the address specified in or pursuant to Section 9 is reasonably calculated to give actual notice and waives and agrees not to assert by way of motion, as a defense or otherwise, in any such action, suit or proceeding any claim that service of process made in accordance with Section 9 does not constitute good and sufficient service of process. The provisions of this Section 7(b) shall not restrict the ability of any party to enforce in any court any judgment obtained in a federal or state court of the State of Utah. (c) Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF THE PARTIES HERETO HEREBY WAIVES, AND COVENANTS THAT SUCH PARTY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT, OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, CAUSE OF ACTION, ACTION, SUIT OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR OTHERWISE. Each of the parties hereto acknowledges that such party has been informed by each other party that the provisions of this Section 7(c) constitute a material inducement upon which such party is relying and will rely in entering into this Agreement and the transactions contemplated hereby. Any of the parties hereto may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of each of the parties hereto to the waiver of such party's right to trial by jury. (d) Withholding. The Company shall have the right to withhold, from or in respect of any payment due to Stevenson hereunder, any federal, state or local taxes of any kind required by law to be withheld with respect thereto. 4 8. Merger/Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior communication or agreement with respect thereto. 9. Notice. All notices, demands, and communications of any kind which any party may require or desire to serve upon any other party under this Agreement shall be in writing and shall be served upon such other party and such other party's copied persons as specified below by personal delivery to the address set forth for such party below or to such other address as such party shall have specified by notice to each other party or by mailing a copy thereof by certified or registered mail, or by Federal Express or any other reputable overnight courier service, postage prepaid, with return receipt requested, addressed to such party and copied persons at such addresses. In the case of service by personal delivery, it shall be deemed complete on the first business day after the date of actual delivery to such address. In case of service by mail or by overnight courier, it shall be deemed complete, whether or not received, on the third day after the date of mailing as shown by the registered or certified mail receipt or courier service receipt. Notwithstanding the foregoing, notice to any party or copied person of change of address shall be deemed complete only upon actual receipt by an officer or agent of such party or copied person. If to the Company, to it at: HF Holdings, Inc. 1500 South 1000 West Logan, Utah 84321 Attention: Chief Executive Officer with a copy, if he is then employed by the Company, to: Each member of the Board of Directors (at such addresses to which notices are sent for meetings of the Board of Directors) If to Stevenson, to him at: Gary E. Stevenson 370 Abbey Lane Providence, Utah 84332 with a copy to: Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02110 Attention: Charles W. Robins 10. Severability. If in any judicial or arbitral proceedings a court or arbitrator shall refuse to enforce any provision of this Agreement, then such unenforceable provision shall be deemed eliminated from this Agreement for the purpose of such proceedings to the extent necessary to 5 permit the remaining provisions to be enforced. To the full extent, however, that the provisions of any applicable law may be waived, they are hereby waived to the end that this Agreement be deemed to be a valid and binding agreement enforceable in accordance with its terms, and in the event that any provision hereof shall be found to be invalid or unenforceable, such provision shall be construed by limiting it so as to be valid and enforceable to the maximum extent consistent with and possible under applicable law. 11. Disclaimer and Limitation of Liability. (a) Disclaimer. Stevenson makes no representations or warranties, express or implied, in respect of the services to be provided by him hereunder. (b) Standard of Care. Neither Stevenson nor any other Indemnitee shall be liable to the Company or any of its affiliates for any act, alleged act, omission or alleged omission suffered or taken by Stevenson hereunder or any other Indemnitee hereunder that does not constitute willful misconduct. (c) Limitation of Liability. In no event will either party hereto be liable to the other for any indirect, special, incidental or consequential damages, including lost profits or savings, whether or not such damages are foreseeable, or in respect of any liabilities relating to any third party claims (whether based in contract, tort or otherwise) other than the Indemnified Liabilities to the extent provided in Section 4(b), relating to the services to be provided by Stevenson hereunder. (d) Employment Agreements. Neither (i) this Agreement, as the same may be amended from time to time, or the performance by Stevenson of any services hereunder, nor (ii) any investment by Stevenson in HF Investment Holdings, LLC ("HF LLC"), a Delaware limited liability company, or the performance by Stevenson of any services under the HF LLC Limited Liability Company Agreement, as the same may be amended from time to time, shall constitute a violation of any employment agreement between Stevenson and Holdings, ICON or the Company, or any of their affiliates, including, but not limited to, the Employment Agreement between Stevenson and the Company, dated an even date herewith, as the same may be amended from time to time. 12. Counterparts. This Agreement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which together shall constitute one and the same agreement. 6 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf as an instrument under seal as of the date first above written by its officer or representative thereunto duly authorized. THE COMPANY: HF Holdings, Inc. By /s/ S. Fred Beck ------------------------------------- Name: S. Fred Beck Title: CFO, V.P. and Treasurer ICON HEALTH & FITNESS, INC. By /s/ S. Fred Beck ------------------------------------- Name: S. Fred Beck Title: CFO, V.P. and Treasurer STEVENSON: /s/ Gary E. Stevenson --------------------------------------- Gary E. Stevenson 7 EX-10.22 30 EXHIBIT 10.22 Exhibit 10.22 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of September 27, 1999, by and between HF Holdings, Inc., a Delaware corporation (the "Parent"), HF Acquisition, Inc., a Delaware corporation ("MergerSub") and Icon Health & Fitness, Inc., a Delaware corporation ("ICON"). WHEREAS, the Boards of Directors of the respective parties hereto deem it advisable and in the best interests of ICON and its stockholders to merge MergerSub with and into ICON (the "Merger") in accordance with Section 251 of the Delaware General Corporation Law (the "DGCL") and pursuant to this Agreement and the Certificate of Merger attached hereto as Annex I and incorporated herein (the "Certificate"); NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree that MergerSub shall be merged with and into ICON, which shall be the corporation surviving the Merger, and that the terms and conditions of the Merger, the mode of carrying it into effect, and the manner of converting and exchanging shares shall be as follows: ARTICLE I THE MERGER (a) At the Effective Time (as defined below in Article VI), MergerSub shall be merged with and into ICON (the "Merger"), the separate existence of MergerSub shall cease, ICON shall continue as the surviving corporation and the Merger shall in all respects have the effects provided for by the DGCL. ICON, as the surviving corporation after the Merger, is hereinafter sometimes referred to as the "Surviving Corporation." (b) Prior to and after the Effective Time, Parent, ICON and MergerSub, respectively, shall take all such actions as may be necessary or appropriate in order to effectuate the Merger. In the event that at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the officers and directors of each of the Parent, ICON and MergerSub as of the Effective Time shall take all such further action. ARTICLE II TERMS OF CONVERSION AND EXCHANGE OF SHARES At the Effective Time, by virtue of the Merger and without any action on the part of any holder thereof: (a) Each share of common stock, $.001 par value, of Merger Sub issued and outstanding immediately prior to the Merger ("MergerSub Common Stock") shall be converted into one share of common stock of the Surviving Corporation. (b) Each share of common stock, $.01 par value, of ICON issued and outstanding immediately prior to the Merger ("ICON Common Stock") shall be converted into, one outstanding share of common stock of Parent, $.001 par value. ARTICLE III CERTIFICATE OF INCORPORATION AND BY-LAWS From and after the Effective Time, and until thereafter amended as provided by law, the Certificate of Incorporation of ICON as in effect immediately prior to the Merger shall be and continue to be the Certificate of Incorporation of the Surviving Corporation. From and after the Effective Time, the By-laws of ICON shall be and continue to be the By-laws of the Surviving Corporation until amended in accordance with law. ARTICLE IV DIRECTORS AND OFFICERS The persons who are directors and officers of ICON immediately prior to the Merger shall continue as directors and officers, respectively, of the Surviving Corporation and shall continue to hold office as provided in the By-laws of the Surviving Corporation. If, at or following the Effective Time, a vacancy shall exist in the Board of Directors or in the position of any officer of the Surviving Corporation, such vacancy may be filled in the manner provided in the By-laws of the Surviving Corporation. 2 ARTICLE V AMENDMENT AND TERMINATION The parties hereto by mutual consent of their respective Boards of Directors may amend, modify or supplement this Agreement in such manner as may be agreed upon by them in writing, at any time before or after approval of this Agreement by the stockholders of Parent, ICON or MergerSub; provided, however, that no such amendment, modification or supplement shall, in the sole judgment of the Board of Directors of ICON or MergerSub, as applicable, materially and adversely affect the rights of the stockholders of ICON or MergerSub, as applicable. This Agreement may be terminated and the Merger and other transactions herein provided for abandoned at any time, whether before or after approval of this Agreement by the stockholders of ICON or MergerSub, by action of the Board of Directors of either ICON or MergerSub if the Board of Directors for such corporation determines for any reason that the consummation of the transactions provided for herein would for any reason be inadvisable or not in the best interests of such corporation or its stockholders. ARTICLE VI EFFECTIVE TIME OF THE MERGER Subject to the terms and conditions set forth in this Agreement, ICON shall cause the Certificate to be executed and thereafter delivered to the Secretary of State of Delaware for filing, as provided in Section 251 of the DGCL. The Merger shall become effective at such time as the Certificate is filed as required by law with the Secretary of State of Delaware (the "Effective Time"). ARTICLE VII MISCELLANEOUS This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 3 [Agreement & Plan of Merger] IN WITNESS WHEREOF, Parent, ICON and MergerSub, pursuant to approval and authorization duly given by resolutions adopted by their respective Boards of Directors, have each caused this Agreement and Plan of Merger to be executed by an authorized officer as of the date first written above by. HF HOLDINGS, INC. By: /s/ S. Fred Beck ------------------------------------ ICON HEALTH & FITNESS, INC. By: /s/ S. Fred Beck ------------------------------------ HF ACQUISITION, INC. By: /s/ S. Fred Beck ------------------------------------ 4 EX-10.23 31 EXHIBIT 10.23 Exhibit 10.23 TAX AGREEMENT TAX AGREEMENT, made and entered into and effective as of the 27th day of September, 1999 (the "Tax Agreement") by and among HF Holdings, Inc., a Delaware corporation ("Parent"), and its subsidiaries, including ICON Health & Fitness, Inc., a Delaware corporation, Jumpking, Inc., a Utah corporation, Universal Technical Services, Inc., a Utah corporation, ICON International Holdings, Inc., a Delaware corporation, and ICON IP, Inc., a Delaware corporation (hereinafter each referred to individually as "Subsidiary" and collectively as "Subsidiaries"). WHEREAS, Parent and Subsidiaries are part of an Affiliated Group (as hereafter defined) that will elect to file consolidated Federal income tax returns and certain consolidated, combined, or unitary state or local income tax returns; and WHEREAS, Parent and Subsidiaries desire to set forth their agreement with respect to the allocation and payment of Federal, state, and local income taxes attributable to each of them, and the allocation of all responsibilities, liabilities and benefits relating thereto, for the taxable years in which Parent and Subsidiaries are jointly included in a single consolidated, combined, or unitary Federal, state, or local income tax return; WHEREAS, Parent, Parent and Subsidiaries desire to set forth their agreement with respect to the allocation and payment of Federal, state, and local income taxes attributable to each of them, and the allocation of all responsibilities, liabilities and benefits relating thereto, for the taxable years in which Parent and Subsidiaries are jointly included in a single consolidated, combined, or unitary Federal, state, or local income tax return; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereby agree as follows: 1. Definitions. (a) As used in this Tax Agreement: "Affiliated Companies" shall mean, for each taxable year, all Members of the Affiliated Group, other than the common parent corporation. "Affiliated Group" shall mean an affiliated group of corporations within the meaning of Code section 1504(a) for the taxable year in question. "Alternative Minimum Tax" shall mean the tax imposed by Section 55 of the Code. "Code" shall mean the Internal Revenue Code of 1986, as amended and in effect for the taxable year in question. "Federal Separate Return Tax Liability" shall have the meaning set forth in Section 3 below. "Final Determination" with respect to any tax liability for a taxable period shall mean the final resolution of such tax liability (including all related interest and penalties) for such taxable period, by (A) a binding agreement without reservation on Internal Revenue Service Form 870-AD (or any successor form thereto), or by a comparable agreement form under the laws of other jurisdictions; (B) a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (C) a closing agreement or offer in compromise under Sections 7121 or 7122 of the Code, or comparable agreements under the laws of other jurisdictions; (D) any allowance of a refund or credit for such taxable period, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the tax imposing jurisdiction; or (E) any other final disposition of the tax liability for such period by reason of the expiration of the applicable statute of limitations. "IRS" means the United States Internal Revenue Service or any successor thereto, including, but not limited to, its agents, representatives and attorneys. "Members" shall mean, for each taxable year, each includible member of the Parent Affiliated Group. "Separate Return Year" shall mean any taxable year for which a Member is not included in the Parent Affiliated Group consolidated Federal income tax return. "Tax Attributes" shall mean income, gain, loss, deduction and credit, and all items entering into the computation thereof, for Federal income tax purposes. "Treasury Regulations" shall mean the income tax regulations promulgated under the Code applicable to the taxable year in question. (b) Any term used in this Tax Agreement that is not defined in this Tax Agreement shall, unless the context otherwise requires, have the meaning assigned in the Code or in the Treasury Regulations thereunder. 2. Filing of Consolidated Federal Income Tax Returns. Parent and its Affiliated Companies will elect to be included in a single consolidated Federal income tax return for such taxable years for which they are eligible or required to do so under the Code and Treasury Regulations, unless Parent shall request otherwise. Such returns shall include all of the income, gain, loss, deductions and credits and similar items of Parent and its Affiliated Companies for the period during which such companies are Members of the Parent Affiliated Group. Parent shall prepare the return and shall have the right to -2- exercise all the powers and shall have all the duties of a common parent as are conferred upon it by the Code and Treasury Regulations. Parent and its Affiliated Companies shall execute and file such consents, elections and other documents that may be required or appropriate for the proper filing and defense of such returns. 3. Federal Separate Return Tax Liability. The Federal Separate Return Tax Liability of each Member of the Parent Affiliated Group shall be computed as if each Member had filed a separate Federal income tax return for the taxable year with the following modifications: (a) Any dividends received by one Member from another Member will be assumed to qualify for the 100 percent dividends received deduction of Section 243 of the Code, or shall be eliminated from such calculation in accordance with Section 1.1502-14(a)(1) of the Treasury Regulations. (b) Gain or loss on intercompany transactions, whether deferred or not, shall be treated by each Member in the manner required by Section 1.1502-13 of the Treasury Regulations. Excess losses shall be included in income as provided in Section 1.1502-19 of the Treasury Regulations as if a consolidated Federal line tax return had been filed for the year. (c) Limitations on utilization of Tax Attributes, such as the calculation of a deduction or the utilization of tax credits or the calculation of a tax liability, shall be made on a consolidated basis. Accordingly, for example, the limitations provided in Section 38(c) (relating to general business credit); Section 53 (relating to minimum tax credit) 170(b)(2) (relating to charitable contribution deduction), Section 172(b)(2) (relating to net operating loss deduction) and Section 904 (relating to foreign tax credit) of the Code and similar limitations shall be applied on a consolidated basis. Under the principles of Revenue Ruling 66-374, 1966-2 C.B. 427, the "net operating loss" of a Member is the deduction which such Member would have had available if it actually filed a separate return for the year, but not including any portion of a net operating loss sustained in a prior or subsequent year. The rules stated above in this paragraph (c) regarding carryover net operating losses will also apply in the computation of other Tax Attribute carryover items such as general business credits, foreign tax credits, alternative minimum tax credits and charitable contribution deductions. However, no benefit shall be granted a Member for a Tax Attribute unless the Tax Attribute is availed of in reducing the consolidated Federal income tax liability. (d) Elections as to tax credits and tax computations which may have been different from the consolidated treatment if separate returns had been filed shall be made on an annual basis by Parent. Certain items of Tax Attributes shall be apportioned among the Members, as set forth on an apportionment schedule prepared by Parent and delivered to each Affiliated Company. For purposes of calculating estimated tax payments, Parent will deliver to each Affiliated Company by April 1 of each year a preliminary allocation schedule for use by such -3- Affiliated Company in the current tax year. If such schedule has not been received by April 1 in any tax year, the items shall be apportioned on the basis of the most recent schedule delivered by Parent to such Members. (e) In calculating any benefit from a carryback or carryover of net operating losses, adjustments shall be made to such prior or subsequent year's Federal Separate Return Tax Liability as required under Section 172(b)(2) and 172(d) of the Code. 4. Payments. (a) Each Affiliated Company shall pay Parent its Federal Separate Return Tax Liability (if greater than zero) determined under Section 3 of this Tax Agreement. Parent shall pay each Affiliated Company with Tax Attributes used by the Parent Affiliated Group during the taxable year for such Member's allocable share of the tax benefit to the Parent Affiliated Group of the utilization of such Tax Attributes. Such tax benefit shall be determined on a marginal tax basis (calculating consolidated tax liability with and without use of such Tax Attributes), and allocated to each Affiliated Company whose Tax Attributes are used by the Parent Affiliated Group during the taxable year pursuant to a consistent method which reasonably reflects the utilization of such Tax Attributes (such consistency and allocation to be determined by Parent). Any payments required by this Section 4(a) shall be made on or before such payment is required to be made to the IRS (or in the case of a refund (or credit) shortly after such refund (or credit) is received from the IRS), except as may otherwise be agreed to by Parent and the appropriate Member and shall include interest and penalties equal to the amount that is actually paid to (or received from) the IRS attributable to such Member. (b) Each Affiliated Company shall also pay Parent its share of estimated tax payments to be made on its share of projected consolidated Federal income tax liability for each year determined based on the principles of Paragraph (a) of this Section 4. Payment to Parent shall be made on or before the estimated tax payment is required to be paid to the IRS, except as may otherwise be agreed to by Parent and the appropriate Member. Such Member will receive credit for such estimated taxes in the year-end computation under Paragraph (a) of this Section 4 of the Tax Agreement. (c) If part or all of an unused consolidated Tax Attribute is allocated to a Member of the Parent Affiliated Group pursuant to Section 1.1502-79 of the Treasury Regulations or otherwise, and it is carried back or forward to a year in which such Member filed or files a separate income tax return or a consolidated Federal income tax return with another Affiliated Group, any refund or reduction in tax liability arising from the carryback or carryover shall be retained by such Member. Notwithstanding the above, Parent shall determine whether an election shall be made not to carry back any consolidated net operating loss or other Tax Attribute arising in a consolidated return year (including any portion allocated to a Member under Section 1.1502-79 of the Treasury Regulations) in accordance with Section 172(b)(3)(C) of the Code or other applicable provision. -4- (d) Any payments by one party to the other which are not made when due shall bear interest, compounded daily, at a rate equal to the rate established by the Secretary of the Treasury pursuant to Section 6621(a)(1) of the Code. (e) All amounts paid pursuant to this Tax Agreement by one party to another shall be treated by such parties for all tax and book purposes as intercompany settlements of liabilities. It is acknowledged that any allocation of tax liability in excess of that under Section 1552 of the Code will be regarded solely for federal income tax purposes as distributions with respect to stock, contributions to capital, or combinations thereof, as appropriate. 5. Tax Indemnity. Except as otherwise agreed, Parent shall be liable for, and shall indemnify and hold each Affiliated Company harmless (subject to setoff for any unpaid amount under Sections 4 and 6 of this Tax Agreement) against any and all Federal income tax, interest and penalties for periods in which it is included in the Parent Affiliated Group consolidated Federal income tax return. Each Affiliated Company shall be liable for, and shall indemnify and hold each other Member harmless against, any and all Federal income tax for periods in which it is not included in the Parent Affiliated Group consolidated Federal income tax return. 6. Adjustment to Federal Income Tax Liability. (a) Parent shall control all decisions as to tax audits and proceedings as exclusive agent of each of the Affiliated Companies. (b) Except as otherwise provided in this Tax Agreement, if the consolidated Federal income tax liability of the Parent Affiliated Group is adjusted for any taxable year, whether by means of a an amended return, claim for refund, or after tax audit by the IRS, upon a Final Determination thereof, the Federal Separate Return Liability of each such Member shall be recomputed under this Tax Agreement to give effect to such adjustments. In the case of a refund, Parent shall make payment to each such Member for its share of the refund, determined in the same manner as in Section 4 of this Tax Agreement, shortly after the refund is received by Parent, and in the case of an increase in tax liability, each such Member shall pay to Parent its allocable share of such increased tax liability within on or before such liability is due. If any interest is to be paid or received as a result of a consolidated Federal income tax deficiency or refund, such interest shall be allocated to the Members in the ratio each such Member's change in consolidated Federal income tax liability bears to the total change in tax liability. Any penalty shall be allocated upon such basis as Parent deems just and proper in view of all applicable circumstances. -5- 7. Certain State and Local Income Tax Liabilities. (a) Each Member shall file its own separate company state, local or foreign income and other tax returns and shall pay all such separate company taxes required to be paid to the relevant taxing authorities (and shall retain the rights to all refunds with respect thereto). (b) Parent shall include certain Affiliated Companies in certain consolidated, combined, or unitary state or local income tax returns to the extent required or elected by Parent. To the extent appropriate and subject to the provisions of Section 7(c) hereof, rules similar to the provisions of Sections 2, 3, 4, 5 and 6 of this Tax Agreement (to the extent the law is the same) shall be applied to the filing of returns, contests and claims for refund and reimbursements with respect to state and local franchise or income tax liabilities to which any Member of the Parent Affiliated Group are subject and which are required to be determined on a unitary, combined or consolidated basis. (c) If the parties are, after negotiation in good faith, unable to agree upon the appropriate application of such rules with respect to such franchise or income tax liabilities, the controversy shall be settled by Parent's regular independent outside accounting firm. 8. Election under Section 1552 of the Code. This Agreement is not intended to establish the method by which the earnings and profits of each member of the Group will be determined. Parent reserves the right to elect the method for allocating tax liability for the purposes of determining earnings and profits as set forth in Sections 1.1552-1(a) and 1.1502-33(d) of the Treasury Regulations. 9. Mutual Cooperation. Parent and the Affiliated Companies shall provide each other with such assistance as may be reasonably requested by either of them in connection with the preparation and execution of any tax return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to any tax liability, and each will retain and, upon the request of the other, provide the other with any records or information which may be relevant to such return, audit or examination proceedings. Parent and the Affiliated Companies agree to take whatever reasonable action is necessary to minimize the aggregate tax liabilities of each of the Members, including filing tax returns on a consolidated, combined or unitary basis, or not filing on such basis. 10. Miscellaneous. (a) Injunctions. The parties acknowledge that irreparable damage would occur in the event that any of the provisions of this Tax Agreement were not performed in accordance with its specific terms or were otherwise breached. The parties hereto shall be entitled to an -6- injunction or injunctions to prevent breaches of the provisions of this Tax Agreement and to enforce specifically the terms and provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which they may be entitled at law or equity. (b) Assignment. Except by operation of law or in connection with the sale of all or substantially all the assets of a party hereto, this Tax Agreement shall not be assignable, in whole or in part, directly or indirectly, by any party hereto without the written consent of the other parties; and any attempt to assign any rights or obligations arising under this Tax Agreement without such consent shall be void; provided, however, that the provisions of this Tax Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns, but no assignment shall relieve any party's obligations hereunder without the written consent of the other parties. (c) Further Assurances. Subject to the provisions hereof, the parties hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions, as may be reasonably required in order to effectuate the purposes of this Tax Agreement and to consummate the transactions contemplated hereby. Subject to the provisions hereof, each of the parties shall, in connection with entering into this Tax Agreement, performing its obligations hereunder and taking any and all actions relating hereto, comply with all applicable laws, regulations, orders and decrees, obtain all required consents and approvals and make all required filings with any governmental agency, other regulatory or administrative agency, commission or similar authority and promptly provide the other parties with all such information as they may reasonably request in order to be able to comply with the provisions of this paragraph. (d) Parties in Interest. Except as herein otherwise specifically provided, nothing in this Tax Agreement expressed or implied is intended to confer any right or benefit upon any person, firm or corporation other than the parties and their respective successors and permitted assigns. (e) Waivers, Etc.. No failure or delay on the part of the parties in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No modification or waiver of any provision of this Tax Agreement nor consent to any departure by the parties therefrom shall in any event be effective unless the same shall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. (f) Setoff. All payments to be made by any party under this Tax Agreement shall, except to the extent otherwise specifically provided herein, be made without setoff, counterclaim or withholding, all of which are expressly waived. -7- (g) Change of Law. Any alteration, modification, addition, deletion, or other change in the consolidated income tax return provisions of the Code or the Treasury Regulations shall automatically be applicable to this Tax Agreement mutatis mutandis. If, due to any change in applicable law or regulations interpretation thereof by any court of law or other governing body having jurisdiction subsequent to the date of this Tax Agreement, performance of any provision of this Tax Agreement or any transaction contemplated thereby shall become impracticable or impossible, the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such provision. (h) Departing Members. Any Member corporation which leaves the Parent Affiliated Group shall be bound by this Tax Agreement. Failure of one or more parties hereto to qualify by meeting the definition of Member of the Parent Affiliated Group shall not operate to terminate this Tax Agreement with respect to the other parties as long as two or more parties hereto continue so to qualify. (i) New Members. The Members hereto specifically recognize that from time to time other companies may become Members of the Parent Affiliated Group and hereby agree that such new Members must become parties to this Tax Agreement by executing the master copy of the Tax Agreement which shall be maintained at Parent's headquarters. It will not be necessary for all the other Members to resign the Tax Agreement, but the new Member may simply sign the existing Tax Agreement and it will be effective as if the old Members had resigned. (j) Amendment of this Tax Agreement. This Tax Agreement constitutes the entire agreement between the parties and shall, except as provided in Section 8 of this Tax Agreement, supersede any other tax-sharing or tax-allocation agreement or arrangement (whether written or oral) in effect between the parties hereto prior to the effective date hereof with respect to the matters expressly dealt with herein. This Tax Agreement may not be altered, changed, modified, or terminated orally; any modification or revision of this Tax Agreement shall be accomplished only through a writing clearly denominated as an amendment to this Tax Agreement signed by the parties hereto. (k) Confidentiality. Subject to any contrary requirement of law or regulation and the right of each party to enforce its rights hereunder in any legal action, each party agrees that it shall keep strictly confidential, and shall cause its employees and agents to keep strictly confidential, any information which it or any of its agents or employees may acquire pursuant to, or in the course of performing its obligations under, any provision of this Tax Agreement; provided, however, that such obligation to maintain confidentiality shall not apply to information which (1) at the time of disclosure was in the public domain not as a result of acts by the Receiving Party or (2) was in the possession of the Receiving Party at the time of disclosure. -8- (l) Headings. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Tax Agreement. (m) Counterparts. For the convenience of the parties, any number of counterparts of this Tax Agreement may be executed by the parties hereto, and each such executed counterpart shall be, and shall be deemed to be, an original instrument. (n) Governing Law. This Tax Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed therein. (o) Records and Workpapers. Each party will retain all returns, schedules and workpapers, and all material records and other documents relating thereto, until (i) Parent notifies such party that such returns and other documents may be destroyed after such returns and other documents are offered to Parent, (ii) the expiration of the statute of limitations (including extensions) of the taxable years to which such returns and other documents relate or there has been a Final Determination of all tax for such years, and (iii) there has been a final settlement of all payments which may be required under this Tax Agreement for such years. -9- IN WITNESS WHEREOF, the parties hereto have caused this Tax Agreement to be duly executed by their respective officers, each of whom is duly authorized, all as of the day and year first above written. HF Holdings, Inc. By: /s/ S. Fred Beck ------------------------------------- Title: CFO, V.P. and Treasurer ICON Health & Fitness, Inc. By: /s/ S. Fred Beck ------------------------------------- Title: CFO, V.P. and Treasurer Jumpking, Inc. By: /s/ S. Fred Beck ------------------------------------- Title: President Universal Technical Services, Inc. By: /s/ S. Fred Beck ------------------------------------- Title: Vice President ICON International Holdings, Inc. By: /s/ S. Fred Beck ------------------------------------- Title: V.P. and Treasurer ICON IP, Inc. By: /s/ S. Fred Beck ------------------------------------- Title: EX-21.1 32 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF HF HOLDINGS, INC.
Jurisdiction of Name Incorporation Trade Names - ---- ---------------- ----------- ICON Health & Fitness, Inc Delaware Proform Fitness Products Proform Fitness Proform PROFORM PFP Proform/Weslo Legend American Physical Therapy APT WEIDERCARE Legend Sporting Goods Legend Sporting Goods, Inc. Workout Warehouse Image Image ICON, Inc. IMAGE Weslo WESLO Legend Silicone Products SPI HealthRider HEALTHRIDER Bodyhealth NordicTrack NORDICTRACK
SUBSIDIARIES OF ICON HEALTH & FITNESS, INC.
Jurisdiction of Name Incorporation Trade Names - ---- ---------------- ----------- Jumpking, Inc. Utah Jumpking Universal Products, Inc. Utah Universal UTS ICON International Holdings, Inc. Delaware ICON OS, Inc. Virgin Islands IHF (Holdings) Ltd. United Kingdom ICON Fitness Lifestyle Ltd. United Kingdom ICON Health & Fitness France Sarl France ICON Health & Fitness France SA France
ICON Health & Fitness Italia Srl Italy ICON du Canada Quebec, Canada
EX-23.1 33 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-4 of ICON Health & Fitness, Inc. of our report dated September 27, 1999 relating to the financial statements and financial statement schedule of ICON Health & Fitness, Inc., which appears in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. PricewaterhouseCoopers LLP Salt Lake City, Utah March 31, 2000 EX-25.1 34 EXHIBIT 25.1 Exhibit 25.1 ================================================================================ FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) |__| ---------- THE BANK OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-5160382 (State of incorporation (I.R.S. employer if not a U.S. national bank) identification no.) One Wall Street, New York, N.Y. 10286 (Address of principal executive offices) (Zip code) ---------- ICON HEALTH & FITNESS, INC. (Exact name of obligor as specified in its charter) Delaware 87-0531206 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) Jumpking, Inc. (Exact name of obligor as specified in its charter) Utah 87-0481821 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 510152 N.B. Ltd. (Exact name of obligor as specified in its charter) Canada N/A (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) Universal Technical Services, Inc. (Exact name of obligor as specified in its charter) Utah 87-0468754 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) ICON International Holdings, Inc. (Exact name of obligor as specified in its charter) Delaware 84-1425493 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1500 South, 1000 West Logan, Utah 84321 (Address of principal executive offices) (Zip code) ---------- 12% Notes due 2005 (Title of the indenture securities) ================================================================================ 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. - -------------------------------------------------------------------------------- Name Address - -------------------------------------------------------------------------------- Superintendent of Banks of the 2 Rector Street, New York, State of New York N.Y. 10006, and Albany, N.Y. 12203 Federal Reserve Bank of New York 33 Liberty Plaza, New York, N.Y. 10045 Federal Deposit Insurance Corporation Washington, D.C. 20429 New York Clearing House Association New York, New York 10005 (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Yes. 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. None. 16. LIST OF EXHIBITS. EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R. 229.10(d). 1. A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637.) 4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1 filed with Registration Statement No. 33-31019.) 6. The consent of the Trustee required by Section 321(b) of the Act. (Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.) 7. A copy of the latest report of condition of the Trustee published pursuant to law or to the requirements of its supervising or examining authority. -3- SIGNATURE Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in The City of New York, and State of New York, on the 28th day of March, 2000. THE BANK OF NEW YORK By: /s/ MARY LAGUMINA ------------------------------- Name: MARY LAGUMINA Title: ASSISTANT VICE PRESIDENT -4- - -------------------------------------------------------------------------------- Consolidated Report of Condition of THE BANK OF NEW YORK of One Wall Street, New York, N.Y. 10286 And Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business December 31, 1999, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act.
ASSETS Dollar Amounts In Thousands Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin. $ 3,247,576 Interest-bearing balances.......................... 6,207,543 Securities: Held-to-maturity securities........................ 827,248 Available-for-sale securities...................... 5,092,464 Federal funds sold and Securities purchased under agreements to resell............................... 5,306,926 Loans and lease financing receivables: Loans and leases, net of unearned income...............37,734,000 LESS: Allowance for loan and lease losses............575,224 LESS: Allocated transfer risk reserve........................13,278 Loans and leases, net of unearned income, allowance, and reserve........................... 37,145,498 Trading Assets........................................ 8,573,870 Premises and fixed assets (including capitalized leases)............................................ 723,214 Other real estate owned............................... 10,962 Investments in unconsolidated subsidiaries and associated companies............................... 215,006 Customers' liability to this bank on acceptances outstanding........................................ 682,590 Intangible assets..................................... 1,219,736 Other assets.......................................... 2,542,157 ----------- Total assets.......................................... $71,794,790 =========== LIABILITIES Deposits: In domestic offices................................ $27,551,017 Noninterest-bearing......................11,354,172 Interest-bearing.........................16,196,845 In foreign offices, Edge and Agreement subsidiaries, and IBFs........................... 27,950,004 Noninterest-bearing.........................639,410 Interest-bearing.........................27,310,594 Federal funds purchased and Securities sold under agreements to repurchase........................... 1,349,708 Demand notes issued to the U.S.Treasury............... 300,000 Trading liabilities................................... 2,339,554 Other borrowed money: With remaining maturity of one year or less........ 638,106 With remaining maturity of more than one year through three years.............................. 449 With remaining maturity of more than three years... 31,080 Bank's liability on acceptances executed and outstanding........................................ 684,185 Subordinated notes and debentures..................... 1,552,000 Other liabilities..................................... 3,704,252 Total liabilities..................................... 66,100,355 EQUITY CAPITAL Common stock.......................................... 1,135,284 Surplus............................................... 866,947 Undivided profits and capital reserves................ 3,765,900 Net unrealized holding gains (losses) on available-for-sale securities...................... (44,599) Cumulative foreign currency translation adjustments... (29,097) ----------- Total equity capital.................................. 5,694,435 ----------- Total liabilities and equity capital.................. $71,794,790 ===========
I, Thomas J. Mastro, Senior Vice President and Comptroller of the above-named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Thomas J. Mastro We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. Thomas A. Renyi ) Alan R. Griffith ) Directors Gerald L. Hassell ) - -------------------------------------------------------------------------------- EX-27.3 35 EXHIBIT 27.3
5 This schedule contains summary financial information extracted from the November 27, 1999 Financial Statements included in the Company's Form S-4 and is qualified in its entirety by reference to such Form S-4. 0000934798 ICON HEALTH & FITNESS INC. 1,000 6-MOS MAY-31-2000 JUN-01-1999 NOV-27-1999 5,749 0 224,898 12,218 139,748 369,129 83,312 38,625 463,948 158,773 324,388 0 0 204,267 (223,480) 463,948 334,308 334,308 243,735 77,677 2,065 0 16,970 (6,139) 2,804 (8,943) 0 (1,174) 0 (10,117) 0 0
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