-----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, G8M5KHpEZ5lT52EOrzY2o3J51dCzV5emMbt/8GVFN6croz6TfLz+j1g/GfPOXCqd 4PldoeKV/RvaS0y6sPzf+g== 0000927016-02-003091.txt : 20020531 0000927016-02-003091.hdr.sgml : 20020531 20020530213824 ACCESSION NUMBER: 0000927016-02-003091 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 26 FILED AS OF DATE: 20020531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICON INTERNATIONAL HOLDINGS INC CENTRAL INDEX KEY: 0000785312 IRS NUMBER: 841425493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-89440-06 FILM NUMBER: 02667024 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: NORDICTRACK INC CENTRAL INDEX KEY: 0001174470 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-89440-01 FILM NUMBER: 02667019 BUSINESS ADDRESS: STREET 1: 1500 SOUTH STREET 2: 1000 WEST CITY: LOGAN STATE: UT ZIP: 86321 MAIL ADDRESS: STREET 1: 1500 SOUTH STREET 2: 1000 WEST CITY: LOGAN STATE: UT ZIP: 86321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREE MOTION FITNESS INC CENTRAL INDEX KEY: 0001174469 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-89440-02 FILM NUMBER: 02667020 BUSINESS ADDRESS: STREET 1: 1500 SOUTH STREET 2: 1000 WEST CITY: LOGAN STATE: UT ZIP: 86321 MAIL ADDRESS: STREET 1: 1500 SOUTH STREET 2: 1000 WEST CITY: LOGAN STATE: UT ZIP: 86321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 510152 N B LTD CENTRAL INDEX KEY: 0001101202 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-89440-03 FILM NUMBER: 02667021 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 IRS NUMBER: 870481821 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-89440-04 FILM NUMBER: 02667022 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: UNIVERSAL TECHNICAL SERVICES INC CENTRAL INDEX KEY: 0001101200 IRS NUMBER: 870468754 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-89440-05 FILM NUMBER: 02667023 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 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 SEC ACT: 1933 Act SEC FILE NUMBER: 333-89440 FILM NUMBER: 02667018 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 1 ds4.txt FORM S-4 As filed with the Securities and Exchange Commission on May 31, 2002 Registration No. ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- 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 (Primary Standard (I.R.S. jurisdiction Industrial Classification Employer Identification of Incorporation or Code Number) No.) Organization)
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: Charles W. Robins, Esq. Hutchins, Wheeler & Dittmar A Professional Corporation 101 Federal Street Boston, Massachusetts 02110 (617) 951-6600 ------------- 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. [_] (Additional registrants on next page) ------------- CALCULATION OF REGISTRATION FEE ================================================================================
Proposed Proposed Maximum Maximum Title of each Class of Amount to be Amount of Aggregate Amount of Securities to be Registered Registered(1) Offering Price Offering Price(1) Registration Fee(1) - ------------------------------------------------------------------------------------------------------ 11.25% Notes due 2012.............. $155,000,000 100% $155,000,000 $14,260 - ------------------------------------------------------------------------------------------------------ Guarantees of 11.25% Notes due 2012 $155,000,000 None(2) None(2) None(2)
================================================================================ (1) Estimated solely for the purpose of calculating the registration fee. (2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is payable with respect to the guarantees. ------------- 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. ================================================================================
Primary Standard Industrial I.R.S. Employer State of Classification Identification Name of Additional Registrants* Incorporation Code 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 NordicTrack, Inc........................ Utah 3949 87-0674680 Free Motion Fitness..................... Utah 3949 87-0666332
- -------- * Address and telephone number of principal executive offices are the same as ICON Health & Fitness, Inc. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL 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, , 2002. ICON HEALTH & FITNESS, INC. EXCHANGE OFFER $155,000,000 11.25% SENIOR SUBORDINATED NOTES DUE 2012 This exchange offer will expire at 5:00 pm, New York City Time, on , 2002, unless extended. TERMS OF THE EXCHANGE OFFER: . We are offering a total of $155,000,000 of exchange notes, which are registered with the Securities and Exchange Commission, to all holders of initial notes. . We will exchange the exchange notes for all initial notes that are validly tendered and not withdrawn prior to the expiration of the exchange offer. . You may withdraw tenders of initial 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 initial notes, except for transfer restrictions and registration rights relating to the initial notes. . The initial 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 for more information about the exchange notes. THIS INVESTMENT INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK FACTORS" THAT BEGINS ON PAGE FOR A DISCUSSION OF THE RISKS THAT YOU SHOULD CONSIDER PRIOR TO TENDERING YOUR INITIAL 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 , 2002 TABLE OF CONTENTS
Page ---- Forward-Looking Statements.......................................................... 1 Trademarks.......................................................................... 1 Prospectus Summary.................................................................. 2 Summary of Exchange Offer........................................................... 6 Summary of the Exchange Notes....................................................... 9 Risk Factors........................................................................ 12 The Exchange Offer.................................................................. 22 Use of Proceeds..................................................................... 30 Capitalization...................................................................... 31 Selected Historical Consolidated Financial Data..................................... 36 Management's Discussion and Analysis of Financial Condition and Results of Operation 39 Business............................................................................ 54 Management.......................................................................... 64 Executive Compensation.............................................................. 66 Security Ownership of Certain Beneficial Owners and Management...................... 69 Certain Relationships and Related Party Transactions................................ 72 Description of Senior Indebtedness.................................................. 74 Description of the Exchange Notes................................................... 77 Certain United States Federal Income Tax Considerations............................. 120 Plan of Distribution................................................................ 122 Legal Matters....................................................................... 122 Experts............................................................................. 122 Available Information............................................................... 122 Index to Consolidated Financial Statements.......................................... F-1
- -------- You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Until 2002 all dealers effecting transactions in these securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future results. When we use words in this document, such as "anticipates," "intends," "plans," "believes," "estimates," "expects," and similar expressions, we do so to identify forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements. These forward-looking statements are affected by risks, uncertainties, and assumptions that we make, including, among other things, the factors that are described in "Risk Factors" and: . price and product changes, . promotional activity by competitors, . the loss, or material change in the financial condition, of a significant customer, . capacity limitations, . the difficulties of integrating acquisitions, . adverse publicity and product liability claims, . industry trends and conditions, . technological advances, our level of debt, . interest rate fluctuations, . future cash flows, . dependence on key employees, . highly competitive nature of the fitness industry, and . general economic conditions which impact the level of consumer spending. You should keep in mind that any forward-looking statement made by us in this prospectus or elsewhere speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We do not intend to update or revise the forward-looking statements in this prospectus unless the securities laws require us to do so. In light of these risks and uncertainties, you should not place undue reliance upon any forward-looking statement made in this prospectus. TRADEMARKS We have proprietary rights to a number of trademarks important to our businesses, such as: ProForm(R), NordicTrack(TM), HealthRider(R), Image(TM), Weslo(R), JumpKing(R), Ground Zero(TM), Free Motion(TM), Workout Warehouse(TM), iFIT.com(TM), iFIT(TM), SpaceSaver(TM), Cross Trainer(TM), Cross Walk(TM), Cardioglide(R), Incline Trainer(TM), Hiker(TM), QuickSpeed(TM), QuickIncline(TM), EKG Grip Pulse(TM), SoftDeck(TM), PowerIncline(TM), PowerRamp(TM), and CustomCushioning(TM), all of which are owned by us, and Reebok, Weider and Gold's Gym, which are used by us under license agreements with the owners of such trademarks. 1 PROSPECTUS SUMMARY This summary contains basic information about us and this exchange offer but may not contain all the information that is important to you. We encourage you to read the more detailed information and financial statements appearing elsewhere in this prospectus. Unless the context requires otherwise: . "We," "us" and "the Company" refer to ICON Health & Fitness, Inc. and its subsidiaries on a consolidated basis; . Our market share, measured by retail sales dollars, refers to our share of the total United States home fitness equipment market according to the Sports Market Research Group ("SMRG"); . Historical and projected retail sales of home fitness equipment, including various product categories of home fitness equipment, and the growth rates of such historical retail sales are according to the National Sporting Goods Association ("NSGA"); . Historical and projected data regarding the size of the institutional market for fitness equipment and the consumer usage levels are according to The Sporting Goods Manufacturers' Association ("SGMA"); . "CAGR" refers to compound annual growth rate; and . Our fiscal year refers to the twelve-month period ended May 31 of the stated year. . The terms "initial notes" or "old notes" refer to the 11.25% Senior Subordinated Notes due 2012 which we issued in April 2002. . The terms "notes," "new notes," or "exchange notes" refer to the 11.25% Senior Subordinated Notes due 2012 offered in this prospectus. Our Company We manufacture and distribute a broad line of products in the fitness equipment market. These fall into two product categories, namely: cardiovascular and other equipment, and strength training equipment. We are one of the largest manufacturers and marketers of home fitness equipment in the United States. In addition, we manufacture and distribute an innovative line of products for the institutional fitness equipment market in both our cardiovascular and other equipment category and our strength training equipment category. We are one of the few manufacturers with a broad product line in each of our principal product categories. Our brand names include: ProForm, NordicTrack, HealthRider, Weslo, Image, JumpKing, Free Motion Fitness and, under license, Reebok, Weider and Gold's Gym. For the nine month period ended March 2, 2002, we generated net sales of $715.1 million resulting in net income of $29.1 million and EBITDA (as defined herein) of $69.9 million. See "Selected Historical Consolidated Financial Data." Home fitness equipment is one of the fastest growing segments of the sporting goods industry. Retail sales of home fitness equipment have increased at a CAGR of 12.7% from $311 million in 1980 to an estimated $3.8 billion in 2001, according to NSGA. We believe that there are several leading reasons for this growth. First, there has been a significant increase in the United States population ages 45 to 64, which age group accounts for the majority of home fitness equipment purchases in the United States. Second, the number of Americans participating in fitness activities has increased from 42.3 million in 1987 to 51.6 million in 2000, we believe, in part, because Americans have become aware of the compelling medical evidence of the benefits of exercise. Third, from 1990 to 2000, the percentage of Americans who use equipment during their cardiovascular and strength training exercise routines has increased by 41% and 69%, respectively. Finally, we believe that consumers are dedicating more of their disposable income to activities at home, including fitness. 2 Our Products We manufacture and distribute a broad line of fitness equipment for the fitness market in the following product categories: . Cardiovascular and Other Fitness Equipment. This category consists of products aimed at providing the user with a calorie burning endurance workout. Primary products within this category include treadmills, ellipticals, and exercise bikes. Sales of cardiovascular fitness equipment has grown from $769.1 million in 1987 to $2.9 billion in 2000. This category also includes other related products we manufacture, including (i) fitness accessories (ii) trampolines and (iii) relaxation products such as spas. We believe these products complement our primary product offerings. . Strength Training Equipment. Strength training equipment is designed to develop muscle tone and strength. Primary products within this category include multi-purpose gyms, free weights, weight benches and cages. Retail sales of anaerobic strength training products industry-wide have increased from $208.7 million in 1980 to $856.9 million in 2000, a CAGR of 7.3%. In addition, we recently introduced a full line of fitness equipment for the institutional market that includes our innovative line of Free Motion strength training equipment and treadmills, Incline Trainers and other cardiovascular equipment sold to health clubs, elite athlete training centers and corporate wellness centers under our NordicTrack and Free Motion Fitness brand. Our Brands and Distribution Channels We market a complete line of products under multiple brands through multiple distribution channels to reach a wide range of consumers at various price points. We have some of the strongest brands in the industry, including NordicTrack which ranks among the top seven most widely recognized sporting goods brands according to American Sports Data. Our ProForm brand was ranked number one in terms of fitness market share by SMRG in 2000. We market our products through each distribution channel in which home fitness equipment products are sold, including: department stores, mass retailers and warehouse clubs, sporting goods and specialty fitness retailers, and direct-to-consumer sales through catalogs, infomercials, the Internet and our company-owned NordicTrack stores. Our History Our predecessor company, Weslo, was founded in 1977 by Scott Watterson, our Chairman and Chief Executive Officer, and Gary Stevenson, our President and Chief Operating Officer. In 1987, we acquired ProForm, and in 1988 we were acquired by Weider Health and Fitness ("Weider"). In 1994, affiliates of Bain Capital, LLC formed ICON Health & Fitness, Inc. and obtained control of us in a recapitalization transaction. As part of that transaction, we incurred substantial indebtedness and issued common and preferred stock to Weider. In 1996, we acquired HealthRider and CanCo, a Weider affiliated Canadian manufacturing firm, and we repurchased the common and preferred stock that had been issued to Weider in that recapitalization. We funded these transactions with additional indebtedness. In addition, in 1998 we acquired the assets of NordicTrack, Inc. In 1999, we consummated a recapitalization that included a $40.0 million cash contribution of capital, the exchange of our then-existing debt securities for cash and new debt and equity securities and the refinancing of our senior credit facility. 3 Our Competitive Strengths We attribute our market leadership, opportunities for continued growth and increased profitability to the following competitive strengths: . Leading Market Position. We are well positioned to grow as the overall industry grows. Our broad range of product offerings in each of our two product categories enables us to appeal to consumers with varying fitness needs and incomes, which reduces our dependence on any single product and enables us to respond quickly to changes in consumer preferences. In addition, we are well-positioned to serve retailers that want to increase their sales of home fitness products, while reducing their number of vendors; . Unique Multi-Brand, Multi-Channel Distribution Capability. Our ability to serve multiple distribution channels with multiple products and well-known brand names differentiates us from many of our competitors, insulates us from the impact of a downturn in any single channel and allows us to make products with varying designs and innovative features that address the pricing strategies of our customers. In addition, we are able to leverage our product development capabilities to maximize product lifecycles by repositioning products into new channels and under different brand names as they mature; . Strong Customer Relationships. We have strong, long-term relationships with many leading retailers. We have been a supplier to Sears since 1984. We have served Wal-Mart and The Sports Authority since 1985 and 1988, respectively. We have received numerous awards and recognition from our customers. These include, among others: Sears' Vendor of the Year in 2000 and their annual Partner in Progress award eleven times since 1985; Wal-Mart's Vendor of the Quarter award once in each of fiscal 1999 and fiscal 2000; and the SPARC Award ("Supplier Performance Awards by Retail Category"), awarded by Discount Store News magazine and based on votes by mass retailers, five times including the last four years consecutively; . Strong Commitment to Research and Development and Product Innovation. We are dedicated to product innovation. We hold, or have pending, an aggregate 250 United States and foreign patents and 711 United States and foreign trademarks. Our vertically integrated in-house research and development capabilities enable us to develop a product from concept to fully functional prototype and to launch products rapidly; . Flexible Manufacturing Capability. We have four manufacturing facilities in Utah, one in Texas and three in Canada. All of our manufacturing, warehouse and logistical facilities in Utah are ISO 9001 certified. We also have two suppliers in China dedicated exclusively to us from whom we source some of our product requirements. Our facilities are flexible and permit us to shift our product mix quickly and efficiently to meet customer needs; and . Experienced Management Team with Significant Equity Ownership. Our top 12 senior executives have an average of approximately 15 years of experience with us, which, we believe, makes them among the most experienced management teams in the industry. Our senior management owns approximately 18.6% of our fully diluted shares outstanding. 4 Our Business Strategy We plan to increase our net sales and EBITDA by continuing to pursue a business strategy that has the following principal components: . Participate in Industry Growth. We intend to continue to participate in the dynamic home fitness equipment industry by continuing to develop innovative products in our existing product lines as well as new product lines, such as ellipticals. In addition, we intend to continue our multi-brand, multi-channel distribution strategy. . Increase Direct-to-Consumer Sales. We intend to continue to participate in direct-to-consumer sales, which we believe also enhances our retail sell-through and strengthens our brands. Our direct product and service offerings sold through television and print advertising and the Internet include selections from our core categories of treadmills, aerobic and anaerobic equipment, and our iFIT products and services. Our patented iFIT remote control interactive technology allows us to offer users the opportunity to work with a personal trainer online and prepare customized workout programs for a fee. . Increase Our Presence in the Institutional Fitness Equipment Market. According to SGMA, sales of fitness equipment to health clubs, spas, hotels and other institutions have grown at a CAGR of 20.9% from $77.0 million in 1988 to $750.0 million in 2000. This increase largely reflects the growth in fitness club memberships in the United States, from 17.0 million in 1987 to 32.8 million in 2000, according to the International Health, Racquet and Sportsclub Association. In order to gain entry into this growing market, we acquired the Free Motion Fitness business in December 2000. This new division offers a full line of innovative institutional fitness equipment including patented strength training equipment under the Free Motion brand, and treadmills and aerobic equipment under the NordicTrack brand name. . Increase Our International Sales. We believe that we are positioned to capitalize on our brands in order to increase our sales in several international markets. In Europe, we intend to leverage our significant sales and distribution infrastructure in France, Germany, Italy and the United Kingdom. . Selectively Pursue Acquisitions. The home and institutional fitness equipment markets are highly fragmented, and we believe that there may be attractive acquisition opportunities for us. We will selectively seek opportunities to leverage our strong manufacturing, product development, distribution and marketing capabilities to increase the cashflow from acquired businesses. 5 SUMMARY OF THE EXCHANGE OFFER As of the date of this prospectus, $155,000,000 aggregate principal amount of unregistered notes are outstanding. Simultaneously with the issuance of the initial notes, we entered into a registration rights agreement with the initial holders of the notes in which we agreed to deliver this prospectus to you and to complete the exchange offer no later than 30 business days after the effective date of the registration statement of which this prospectus is a part, which effective date must occur on or prior to October 7, 2002. If we do not complete the exchange offer before this date, the annual interest rate on the initial notes will increase in incremental amounts, up to a maximum increase of 1.5% over the original interest rate of the notes until the exchange offer is completed. 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 11.25% notes due 2012 which have been registered under the Securities Act for each $1,000 principal amount of our outstanding 11.25% notes due 2012 which were issued in April, 2002 in a private offering. In order to be exchanged, an initial note must be properly tendered and accepted. We will exchange all initial notes validly tendered and not validly withdrawn. Expiration and Exchange Dates This offer will expire at 5:00 PM, New York City time, on , 2002, 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 initial 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 initial notes tendered by the deadline. Withdrawal Rights........... You may withdraw your tender of initial notes at any time before the offer expires. Federal Income Tax Consequences.............. The exchange should not be a taxable event for United States federal income tax purposes. You should 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; 6 . 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 initial 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 exchange 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 initial 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 initial 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 certain 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." Failure to Exchange will affect you adversely...... If you are eligible to participate in the exchange offer and you do not tender your initial notes, you will not have any further registration or exchange rights and your initial notes will continue to be subject to some restrictions on transfer. Accordingly, the liquidity of the initial notes could be adversely affected. 7 Special Procedures for Beneficial Owners......... If you beneficially own initial notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your initial 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 initial 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. 8 SUMMARY OF THE EXCHANGE NOTES Interest.................... The notes will bear interest at an annual rate of 11.25%. Interest is payable semi-annually in arrears on January 1 and July 1 of each year, beginning July 1, 2002. Maturity Date............... April 1, 2012 Ranking..................... The notes and subsidiary guarantees will rank: . junior to all of our and the guarantors' existing and future senior indebtedness, including any borrowings under the new credit agreement; . equally with any of our and the guarantors' future senior subordinated indebtedness; . senior to any of our and the guarantors' future subordinated indebtedness; and . effectively junior to all existing and future liabilities, including trade payables, of our non-guarantor subsidiaries. Optional Redemption......... We may redeem the notes at any time on or after April 1, 2007, in whole or in part, in cash at the redemption prices described in this offering circular, plus accrued and unpaid interest and additional interest, if any, to the date of redemption. In addition, on or before April 1, 2005, we may redeem up to 35% of the aggregate principal amount of notes originally issued, and any additional notes issued under the same indenture governing the notes, at a redemption price of 111.25% with the proceeds of specified equity offerings. Change of Control........... Upon the occurrence of specified change of control events, we will be required to make an offer to repurchase the notes at a purchase price equal to 101% of the principal amount of the notes on the date of repurchase, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase. See "Description of Notes--Repurchase at Option of Holders--Change of Control." Our ability to complete the change of control repurchase may be limited by the terms of our new credit agreement and our other indebtedness. Subsidiary Guarantees....... The notes will be jointly and severally guaranteed on an unsecured, senior subordinated basis by our existing and future Domestic Subsidiaries (as defined herein). Certain Covenants........... The indenture governing the notes will contain covenants that will, among other things, limit our ability and the ability of our restricted subsidiaries to: . incur additional indebtedness; . create certain liens; . pay dividends or make other equity distributions; 9 . purchase or redeem capital stock; . make certain investments; . sell assets or consolidate or merge with or into other companies; . engage in transactions with affiliates; and . enter into certain sale and leaseback transactions However, these limitations will be subject to a number of important qualifications and exceptions. See "Description of Notes." 10 Summary Historical Consolidated Financial Data The following table shows our summary historical consolidated financial data for the fiscal years ended May 31, 1999, 2000 and 2001 and for the nine month periods ended March 3, 2001 and March 2, 2002. Our summary historical consolidated financial data for the fiscal years ended May 31, 1999, 2000 and 2001 were derived from our audited consolidated financial statements, included elsewhere in this prospectus. Our summary historical consolidated financial data for the nine month periods ended March 3, 2001 and March 2, 2002 were derived from our unaudited consolidated financial statements included elsewhere in this prospectus. This summary financial data should be read in conjunction with, and is qualified in its entirety by, "Use of Proceeds," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and accompanying notes included elsewhere in this prospectus.
For the Nine Month For the Years Ended May 31, Periods Ended --------------------------- -------------------------- 1999 2000 2001 March 3, 2001 March 2, 2002 ------ ------ ------ ------------- ------------- (in millions) Operating Data: Net sales............................ $710.2 $733.0 $820.5 $660.1 $715.1 Cost of sales........................ 514.0 531.6 580.5 467.7 506.4 Gross profit......................... 196.2 201.4 240.0 192.4 208.7 Operating expenses................... 168.7 166.0 184.1 136.7 152.5 Income from operations............... 27.5 35.4 55.9 55.7 56.2 Interest expense..................... 33.1 33.9 34.8 27.1 19.7 Amortization of deferred financing fees............................... 7.0 2.7 3.2 2.3 2.7 Net income (loss).................... (24.7) (6.6) 13.3 14.3 29.1 Other Financial Data: Depreciation and amortization........ $ 17.4 $ 16.7 $ 17.4 $ 12.3 $ 13.7 Capital expenditures(1).............. 11.6 12.9 16.1 11.1 8.9 Supplemental Data: EBITDA(2)............................ $ 44.9 $ 52.5 $ 72.1 $ 68.0 $ 69.9 Adjusted EBITDA(2)................... 55.4 63.4 72.1 68.0 69.9 Ratio of EBITDA to pro forma cash interest expense................... 2.9 x Ratio of pro forma total debt to EBITDA............................. 3.8 x Pro forma cash interest expense(3)... 24.2 Balance Sheet Data (at the end of the period): Cash................................. $ 4.3 $ 5.9 $ 3.3 $ 5.4 $ 11.4 Working capital(4)................... 110.9 137.4 165.6 204.0 165.5 Total assets......................... 331.9 368.1 405.5 471.4 448.7 Total indebtedness(5)................ 260.6 247.6 260.4 299.1 260.5
- -------- (1) Excludes purchases of intangibles, trademarks and acquisitions of $8.5 million for fiscal year 1999, $4.4 million for fiscal year 2000, $6.7 million for the fiscal year 2001, $5.4 million for the nine month period ended March 3, 2001 and $5.3 for the nine month period ended March 2, 2002. (2) EBITDA means earnings before net interest expense, income taxes, depreciation, amortization and extraordinary loss on extinguishment of debt. Adjusted EBITDA represents EBITDA after adjustments for non-recurring charges as identified by us. EBITDA and Adjusted EBITDA are presented because we believe they are indicators of our ability to incur and service debt and are used by our lenders in determining compliance with financial covenants. However, EBITDA and Adjusted EBITDA should not be considered as alternatives to cash flow from operating activities as measures of liquidity or as alternatives to net income as measures of operating results in accordance with generally accepted accounting principles. Our definition of EBITDA and Adjusted EBITDA may differ from definitions of EBITDA and Adjusted EBITDA used by other companies. For a reconciliation of EBITDA to Adjusted EBITDA see "Selected Historical Consolidated Financial Data." (3) Calculation based on average revolver balance of $119.3 million for the twelve months ended March 2, 2002, as adjusted for this transaction. (4) Working capital is defined as current assets, excluding cash, less current liabilities, excluding the current portion of long-term debt. (5) Excludes unamortized net gain in the redemption of our 13% senior subordinated notes due 2002 in connection with our recapitalization in September 1999, in the amount of $5.6 million at May 31, 2000 and $4.3 million at May 31, 2001, $4.7 million at March 3, 2001 and $3.4 million at March 2, 2002. Also excludes debt of our parent companies prior to our recapitalization in September 1999 in the amount of $163.8 million at May 31, 1997, $192.2 million at May 31, 1998 and $220.8 million at May 31, 1999. 11 RISK FACTORS You should carefully consider the risk factors set forth below, as well as the other information contained in this prospectus, before purchasing the notes offered pursuant to this prospectus. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. Any of the following risks could materially adversely affect our business, financial condition, cash flows or results of operations. In such case, you may lose all or part of your original investment. Risks Relating to this Offering Our substantial leverage could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes. We are, and will continue after this offering to be, highly leveraged. After giving pro forma effect to: . the issuance in April 2002 of the initial notes, . our initial borrowings under the new credit facility, . the repayment of our old credit facility, . the redemption of our 12% subordinated notes due 2005, and . the payment of the transaction fees and expenses related to the issuance of the initial notes and to our new credit facility, we had on March 2, 2002 total indebtedness of approximately $270.1 million (of which $152.8 million consisted of the initial notes and $117.3 million consisted of secured borrowings under our new credit facility), and stockholders' deficit of approximately $20.1 million. Also, after giving pro forma effect to the same items, our ratio of earnings to fixed charges would have been 2.1 to 1.0 for the fiscal year ended May 31, 2001 and 2.7 to 1.0 for the nine months ended March 2, 2002. In addition, we and our subsidiaries will be permitted to incur substantial additional indebtedness in the future. Our substantial indebtedness could have important consequences to you. For example, it could: . make it more difficult or render us unable to satisfy our obligations with respect to the notes; . increase our vulnerability to general adverse economic and industry conditions; . limit our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our business plan; . require us to dedicate a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures or other general corporate purposes, or to carry out other aspects of our planning for our business plan; . limit our flexibility in executing our business strategy or in reacting to changes in our business and the industry; . place us at a competitive disadvantage compared to our competitors that have less debt; and . limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds. Also, failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us. 12 In addition, the indenture and our new credit facility contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts. The notes and the guarantees are junior to our and the guarantors' senior debt, respectively. The notes and the guarantees are subordinated in right of payment to all of our and the guarantors' current and future senior debt, respectively. Upon any distribution to our or the guarantors' creditors in a liquidation or dissolution of us or the guarantors or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to us, the guarantors or our or their property, the holders of senior debt will be entitled to be paid in full before any payment may be made with respect to the notes or the guarantees, as applicable. In addition, the subordination provisions of the indenture will provide that payments with respect to the notes will be blocked in the event of a payment default on senior debt and may be blocked for up to 179 days each year in the event of certain non-payment defaults on senior debt. In the event of our or the guarantors' bankruptcy, liquidation or reorganization or similar proceeding, holders of the notes will participate ratably with all holders of subordinated indebtedness that is deemed to be of the same class as the notes and the guarantees, as applicable, and potentially with all other general creditors, based upon the respective amounts owed to each holder or creditor, in our or the guarantors remaining assets, as applicable. In any of the foregoing events, there can be no assurance that there would be sufficient assets to pay amounts due on the notes. As a result, holders of notes may receive less, ratably, than the holders of senior debt. In addition, under the subordination provisions of the indenture, payments that would otherwise be made to holders of the notes will instead be paid to holders of senior debt under certain circumstances. As a result of these provisions, other creditors (including trade creditors) that are not holders of senior debt may recover more, ratably, than the holders of the notes. In addition, the notes are effectively subordinated to all outstanding obligations of any of our subsidiaries that does not guarantee the notes. The notes will not be guaranteed by any unrestricted subsidiary under the indenture or by our foreign subsidiaries (other than our Canadian subsidiaries). Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage. We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indenture allow for additional indebtedness under specified conditions and do not fully prohibit us or our subsidiaries from doing so. As of March 2, 2002, subject to borrowing base limitations and after giving pro forma effect to: . the issuance in April 2002 of the initial notes, . our initial borrowings under our credit facility, . the repayment of our old credit facility, . the redemption of our 12% subordinated notes due 2005, and . the payment of fees and expenses related to the issuance of the initial notes and to our credit facility, our new credit facility would have permitted additional borrowings of up to $117.7 million and all of such borrowings would have ranked senior to the initial notes and the subsidiary guarantees. If new debt is added to our and our subsidiaries' current debt levels, the related risks that we and they now face could intensify. To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. Our ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, our indebtedness, including the notes, or to fund planned capital expenditures will depend on our ability to generate 13 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, management believes that cash flow from operations and available cash, together with available borrowings under our new credit facility, will be adequate to meet our future liquidity needs for at least the next few years. We may, however, need to refinance all or a portion of the principal amount of the notes on or prior to maturity. We cannot assure you, however, that our business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under our new credit facility in an amount sufficient to enable us to service our indebtedness, including the notes, or to fund our other liquidity needs. In addition, we cannot assure you that we will be able to refinance any of our indebtedness, including our new credit facility or the notes, on commercially reasonable terms or at all. The terms of the new credit facility and the indenture relating to the notes restrict our current and future operations, particularly our ability to respond to changes or to take some actions. The new credit facility contains numerous operating and financial covenants, and any future refinancing of the new credit facility likely would contain a number of restrictive covenants, that impose significant operating and financial restrictions on us. The new credit facility includes covenants restricting, among other things, our ability to: . incur additional indebtedness; . pay dividends and make restricted payments; . create liens; . use the proceeds from sales of assets and subsidiary stock; . enter into sale and leaseback transactions; . enter into transactions with affiliates; and . enter into certain mergers, consolidations and transfers of all or potentially all of our assets. The new credit facility also includes financial covenants, including requirements that we maintain a minimum debt service coverage ratio. The indenture relating to the notes also contains numerous operating and financial covenants including, among other things, restrictions on our ability to: . incur additional indebtedness; . create liens or other encumbrances; . make certain payments and investments; . enter into sale and leaseback transactions; . sell or otherwise dispose of assets; and . merge or consolidate with another entity. A failure by us to comply with covenants contained in the new credit facility or the indenture could result in an event of default which could materially and adversely affect our operating results and our financial condition. 14 We may not have the ability to raise the funds necessary to finance any change of control offer required by the indenture governing the notes. Upon the occurrence of certain specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of the principal amount thereof plus accrued and unpaid interest and additional interest, if any, to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make any required repurchases of notes or that restrictions in our new credit facility will not allow such repurchases. In addition, certain important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a "Change of Control" under the indenture. Federal and state statutes allow courts, under specific circumstances, to void guarantees and require noteholders to return payments received from guarantors. Under federal bankruptcy law or comparable provisions of state fraudulent transfer laws, a note or guarantee could be voided. Further, claims in respect of a note or guarantee could be subordinated to all other debts of us or those of the guarantor, as the case may be, if, among other things, we or the guarantor, at the time of incurring the indebtedness evidenced by the note or the guarantee: . received less than reasonably equivalent value or fair consideration for the incurrence of such indebtedness; and . was insolvent or rendered insolvent by reason of such incurrence; or . was engaged in a business or transaction for which our or the guarantor's remaining assets constituted unreasonably small capital; or . intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. In addition, any payment made by us pursuant to the notes or by a guarantor pursuant to a subsidiary guarantee could be voided and required to be returned to the person making such payment, or to a fund for the benefit of our creditors or creditors of the guarantors, as the case may be. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, we or a guarantor would be considered insolvent if: . the sum of its debts, including contingent liabilities, were greater than the saleable value of all of its assets; or . if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or . it could not pay its debts as they become due. If an active trading market for the notes does not develop, the liquidity and value of the notes could be harmed. Prior to this offering, there was no public market for these notes. We have been informed by the initial purchasers that they intend to make a market in these notes after this offering is completed. However, the initial purchasers may cease their market-making at any time. In addition, the liquidity of the trading market in these notes, and the market price quoted for these notes, may be adversely affected by changes in the overall market for high yield securities and by changes in our financial performance or prospects or in the prospects for 15 companies in our industry generally. As a result, you cannot be sure that an active trading market will develop for these notes. If no active trading market develops, you may not be able to resell your notes at their fair market value or at all. The trading price of the notes may be volatile. The trading price of the notes could be subject to significant fluctuation in response to, among other factors, variations in operating results, developments in industries in which we do business, general economic conditions, changes in securities analysts' recommendations regarding our securities and changes in the market for noninvestment grade securities generally. This volatility may adversely affect the market price of the notes. Consequences Of Failure To Exchange Holders of initial notes who are eligible to participate in the exchange offer but who do not tender their notes will not have any further registration rights, and their initial notes will continue to be subject to restrictions on transfer. Accordingly, such 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. Risks Relating to our Business 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 largest customer, Sears, accounted for approximately 39.1%, 42.4% and 45.1% of our net sales in fiscal years 2000, 2001 and the nine months ended March 2, 2002, respectively. The level of our sales to this customer depends in large part on consumers' continuing commitment to home fitness equipment products and on the success of the customer's 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. There can be no assurance that we will be able to maintain our current level of sales to this customer or that we will be able to sell our products to other customers on terms that will be favorable. 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 and financial condition. Our relationship with Wal-Mart is subject to review by Wal-Mart at all times. Our sales to Wal-Mart depend on our maintaining competitive pricing and good product quality. We cannot assure you that in the future Wal-Mart will not identify alternative vendors or manufacturers with better pricing or superior product mix. The loss of a significant amount of our sales to Wal-Mart may have a material adverse effect on our business and financial condition. We rely heavily on product innovation. Product life cycles can be short in the home fitness industry and innovation is an important component of the competitive nature of the industry. While we emphasize new product innovation and product repositioning 16 (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 to consumers, we cannot ensure that interest in any particular fitness activity will be sustained. We are dependent on the sale of our treadmills. The sale of motorized treadmills accounts for a significant portion of our net sales. 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. Additionally, we could become dependent upon other product categories in the future which may evolve due to shifts in consumer trends. We operate in a very competitive business environment. Competition in the field of home fitness equipment is intense. The home fitness equipment market is served by a variety of entities including (i) manufacturers such as Life Fitness, Precor, Direct Focus, Fitness Quest, Keys and Horizon Fitness; (ii) retailers such as Omnifitness and Exercise Equipment Company and (iii) Asian direct exporters and international direct importers--such as Direct Focus, Tunturi and Helmut Kettler. Our primary competitors in the institutional fitness market include manufacturers such as Life Fitness, Precor, StarTrac and Cybex. Because of their greater resources, many of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the promotion and sale of their products than we can, or consummate strategic acquisitions. Many of these competitors may also have long-standing relationships with key suppliers and may offer other products and/or services which we do not provide. Providers of home fitness equipment have traditionally competed on the bases of price, quality, brand name recognition, product innovation and customer service. As we seek to maintain our position as one of the principal members of the home fitness equipment industry, we compete on price, product innovation and design, unique multi-channel distribution, our principal brand names and our strong customer relationships. We believe that developing and maintaining a competitive advantage will require our continued investment in research and development and sales and marketing. We cannot assure you that we will have sufficient resources to make the necessary investments to do so, nor can we assure you that we will be able to compete successfully in this market or against such competitors. We plan to increase our use of direct response advertising. We plan to increase our use of direct response advertising primarily through infomercials. Our principal competitors include Direct Focus, Fitness Quest and Thane. This form of advertising can have costs significantly higher than other types which we may not be able to recover if these advertising initiatives fail to produce sufficient sales. Our direct response advertising expenses were $7.1 million and $7.3 million for fiscal 2001 and the nine month period ended March 2, 2002, respectively. We cannot be certain that these initiatives will produce sufficient sales to cover these costs. Our sales are highly price sensitive, which can prevent us from passing cost increases on to our customers. Sales to mass retailers, which are among our primary customers, are highly price sensitive. We set many product prices on an annual basis but we typically purchase raw materials and components under purchase orders with periods of less than one year. Accordingly, we often must set prices for many products before production costs have been firmly established, before we have complete knowledge of the costs of raw materials and components and sometimes before product development is complete. 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. 17 We are dependent on key suppliers. We rely on several key suppliers for component parts used in the manufacture of our products. Our agreements with these suppliers are terminable at will by either party. In the event that any of our key suppliers terminated our relationship we may not be able to identify suitable replacement suppliers on similar or favorable terms. Our reliance on foreign suppliers exposes us to the general risks of doing business abroad. 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 applicable customs rules and regulations, disputes and litigation arising from applicable customs regulations, changes in foreign regulations, changes in most-favored-nation status and political instability. For example, we depend on manufacturers in mainland China for approximately 20% of our products (by dollar value). The Bush administration recently announced proposed increased tariffs on steel imported from certain countries into the United States. Steel is a primary raw material used in the manufacture of components used in our finished products. Increased steel tariffs may increase our cost of sales. The ultimate impact that this tariff proposal will have on our results of operations, if any, remains uncertain. There can be no assurance that foreign governments will not adopt regulations or take other actions that have a direct or indirect adverse impact on our business or that market opportunities within such countries will continue to be available to us. 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 certain finished products. The occurrence of any material negative 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 are unable to ensure that we would be able to obtain products and supplies on substantially similar terms should any of these risks materialize. Fluctuations in foreign exchange rates could adversely affect our results of operations. Our functional currency is the U.S. dollar. A significant weakening of the currencies in which we generate sales relative to the U.S. dollar may adversely affect our ability to meet our U.S. dollar obligations. In addition, our results of operations are reported in U.S. dollars. A weakening of the currencies in which we generate sales relative to the U.S. dollar will cause our reported results to decline. In all jurisdictions in which we operate, we are also subject to laws and regulations that govern foreign investment, foreign trade and currency exchange transactions. These laws and regulations may limit our ability to repatriate cash as dividends or otherwise to the United States and may limit our ability to convert foreign currency cash flows into U.S. dollars. Outside the United States, our sales and costs are denominated in a variety of currencies including the euro and the British pound. A weakening of the currencies in which we generate sales relative to the currencies in which our costs are denominated may decrease our operating profits and cash flows. 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 guarantee that an economic downturn would not have a material adverse effect on our customers and, therefore, on us. On January 22, 2002, Kmart filed for bankruptcy protection from its creditors. At the time of the bankruptcy filing we had unsecured receivables outstanding with Kmart totaling $12.1 million. We have reserved $1.7 million against these receivables as of March 2, 2002. There can be no assurance that we will be able to collect 18 any portion of our outstanding accounts receivable. In the fiscal year ended May 31, 2001, we had net sales to Kmart of approximately $38.9 million, representing approximately 4.7% of our total net sales for such fiscal year, and for the nine month period ended March 2, 2002 we had total net sales to Kmart of approximately $31.2 million, representing approximately 4.4% of our total net sales for such period. Also, Kmart has secured debtor in possession financing and continues to operate in bankruptcy. We resumed shipments to Kmart on February 5, 2002. There can be no assurance that Kmart would continue to operate in bankruptcy. There can be no assurance that we will be able to resume the same level of business we maintained with Kmart prior to their bankruptcy filing. Lastly, there can be no assurance that we would be able to identify or secure a customer or customers to replace any loss of sales to Kmart. The growth of the fitness industry may not continue. While the home fitness industry has grown from $311 million in 1980 to an estimated $3.8 billion in 2001, we cannot be certain consumers' interest in fitness will be sufficient to sustain continued growth in the future. If consumers' interest in fitness activity declines, we cannot assure you that such a decline would not have a material adverse effect on our results of operations, cash flow and financial condition. Our sales fluctuate by season, which can have a material adverse effect on our operating results and cash flow. In fiscal years 1999, 2000 and 2001, we sold approximately 62.1%, 64.3% and 64.7%, respectively, of our products to our customers in our second and third quarters (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 increased consumer purchases. We have frequently incurred operating losses in the first and fourth quarters of our fiscal year. Such variations in demand could have a material adverse effect on the timing of our cash flows and therefore our ability to service our obligations with respect to the notes. The timing of large orders from customers and the mix of products sold may also contribute to quarterly or other periodic fluctuations. If actual sales in our second and third fiscal quarters 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 as we increase inventory levels during our busy season. We may enter similar businesses outside our core business lines. We may, through acquisitions or otherwise, decide to enter into businesses outside the scope of our core business lines. We cannot be certain that these businesses would be successful and will not adversely affect us due to the diversion of management's attention from our core business lines. Also, there can be no assurance that the costs incurred with entering these new businesses will not have a material adverse affect on us. 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 Messrs. Watterson and Stevenson are parties to employment agreements through May 31, 2003, Messrs. Watterson and Stevenson may terminate such employment without cause upon six months' notice or, under certain circumstances, upon 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, 19 LLC own 59.8% of the membership interests of HF Investment Holdings (49.8% on a fully diluted basis). Additionally, Credit Suisse First Boston Corporation owns both membership interests in HF Investment Holdings and shares of our parent HF Holdings. 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, LLC and Credit Suisse First Boston Corporation have the ability to elect a majority of the Boards of Directors of HF Holdings and us and to determine the outcome of significant corporate transactions or other matters submitted to stockholders for approval. HF Holdings has no separate operations and its only asset is our capital stock. Circumstances may occur in which the interests of these stockholders could be in conflict with the holders of notes. In addition, such concentration of ownership may have the effect of preventing a change of control. 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 25, 2001 to October 1, 2002 of up to $5.0 million per occurrence and $5.0 million in the aggregate. The policy has a deductible on each claim of up to $500,000. 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 guarantee that our product liability insurance is or will be adequate to cover such claims. In addition, we cannot guarantee that our insurers will be solvent when required to make payments on claims. Furthermore, we cannot guarantee 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, cash flows and financial condition. We are subject to government oversight and regulation. We are subject to general oversight by several governmental agencies. This oversight requires us to make certain public disclosures and, from time-to-time, to effect recalls and remediation of certain products. Recently we, in conjunction with the Consumer Product Safety Commission, initiated a recall of our Hiker product. To date, we have received fourteen reports from consumers that under certain circumstances an electrical component in the control system of our Hiker products which included approximately 7,500 units. These units could overheat causing a risk of fire. We effected a recall of the units and remediation of the defective machines at our retail outlets and those already purchased by consumers. While we have not received any reports of injuries we cannot assure you that we will not receive such reports in the future and that injuries, if incurred, will not have a material adverse effect on our results of operation, cash flow and financial condition. In addition, while we do not anticipate the costs to effect the recall and remediation will be material, there can be no assurance that these costs will not have a material adverse effect on our results of operations, cash flow and financial condition. We may be in competition with our retail customers. We currently conduct business directly with consumers through seven Websites over the Internet. We expect to continue to 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 and the continued operation of our retail specialty stores as a competitive effort against them, causing them to reduce or cease the purchase of our products. Additionally, our retail customers may develop direct relationships with suppliers and begin to market private label fitness equipment products under their own brand names in competition with our products. 20 We operate retail stores. We currently operate approximately 70 retail store locations under our NordicTrack name. Retail businesses may be adversely affected by unfavorable local, regional or national economic developments which result in reduced consumer spending. In addition, our retail store strategy of selling goods directly to consumers may be viewed negatively by our traditional retail customers as a competitive effort against them. Lastly, retail stores have many fixed costs including real property leases, personnel costs and other fixed costs associated with operating a retail location. We cannot assure you that an economic downturn would not have a material adverse effect on our retail stores and, therefore on us in general. Our business strategy includes acquisitions to supplement internal growth. Our business strategy is based in part on our ability to supplement internal growth by pursuing opportunistic acquisitions of complementary businesses. We do not know whether in the future we will be able to complete acquisitions on acceptable terms, identify suitable businesses to acquire or successfully integrate acquired businesses. Our competition and, due to our position in certain markets, regulatory considerations may result in fewer acquisition opportunities. If we cannot complete acquisitions, our financial condition or results of operations may be adversely affected. 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 we are in material compliance with such laws and regulations and that the cost of 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 presently or formerly owned or operated by us, may give rise to additional compliance costs or operational interruptions that could have a material adverse effect on our results of operations or financial condition. If our iFIT Internet service is not accepted by the market, we may not be able to sustain or expand our interactive technology and service business. We began selling interactive products and services through our iFIT operations in 2001, and the market for iFIT is new and evolving. The development of a mass market for our iFIT Internet service may be impacted by many factors which are out of our control, including: the cost competitiveness of our iFIT Internet service; consumer reluctance to try a new Internet service; regulatory requirements; consumer perception of our iFIT Internet service; and the emergence of newer and more competitive Internet services. We cannot assure you that the interactive products and services available through iFIT will prove to be commercially viable or that we will not experience operational problems with such products or services. 21 THE EXCHANGE OFFER We are offering to issue new 11.25% senior subordinated notes due 2012 in exchange for a like principal amount of our initial 11.25% senior subordinated notes due 2012 issued on April 9, 2002. We may extend, delay or terminate the exchange offer. Holders of initial notes will need to complete the exchange offer documentation related to the exchange. Purpose And Effect Of The Exchange We entered into a registration rights agreement with the initial purchasers of the initial notes in which we agreed to use all commercially reasonable efforts to file a registration statement relating to an offer to exchange the initial notes for new notes within 90 days after issuing the initial notes and to use all commercially reasonable efforts to have it declared effective within 180 days after issuing the initial notes. We are offering the new notes under this prospectus to satisfy those obligations under the exchange and registration rights agreement. 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 initial notes, but not a holder who is an affiliate of our company within the meaning of Rule 405 of the Securities Act, who exchanges initial 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 initial 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 initial 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 initial 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 initial 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 180 days after the expiration date of the exchange offer. See "Plan of Distribution". Each holder of the initial notes who wishes to exchange 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 initial 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, 22 . any person participating in the exchange offer with the intention or purpose of distributing exchange notes received in exchange for initial 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, 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 initial notes, and . if the holder is a broker-dealer that will receive exchange notes for the holder's own account in exchange for initial 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 initial 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 180 days after the obligation to file a shelf registration arises, and . use their respective best efforts to keep effective the shelf registration statement until the earlier of 180 days after the effective date or the time when all of the applicable initial notes are no longer outstanding. We will, if and when we file the shelf registration statement, provide to each holder of the initial 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 initial notes. A holder that sells initial 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 certain indemnification obligations. In addition, each holder of initial 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 initial notes included in the shelf registration statement and benefit from the provisions regarding any liquidated damages described under "Description of Exchange Notes--Registration Rights; Liquidated Damages". 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 initial notes. We will keep the exchange offer open for at least 25 days, or longer if required by applicable law, after the date notice of the exchange offer is mailed to the holders of the initial notes. The exchange offer is not conditioned upon any minimum aggregate principal amount of initial notes being tendered for exchange. 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 initial notes validly tendered and not withdrawn 23 before 5:00 p.m., 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 initial notes accepted in the exchange offer. Holders may tender some or all of their initial notes under the exchange offer. Initial 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 initial 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 certain terms providing for an increase in the interest rate on the initial notes under specific circumstances which are described in the registration rights agreement. The exchange notes will evidence the same debt as the initial notes and will be entitled to the benefits of the indenture governing the initial notes. In connection with the exchange offer, holders of initial notes do not have any appraisal or dissenters' rights under law or the indenture governing the initial notes. We intend to conduct the exchange offer in accordance with the applicable requirements of the 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 initial 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 initial notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events specified in this prospectus or if initial notes are submitted for a greater principal amount than the holder desires to exchange, the certificates for the unaccepted initial notes will be returned without expense to the tendering holder. If initial 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 initial 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 certain circumstances, in connection with the exchange offer. See "--Fees and Expenses." Holders who tender initial 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 initial notes in the exchange offer. Expiration Date; Extensions; Amendments The expiration date of the exchange offer is 5:00 P.M., New York City time, on , 2002, 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 delay accepting any initial notes, to extend the exchange offer or to terminate the exchange offer if, in its reasonable judgment, any of the conditions described below under "--Conditions" shall not have been satisfied, by giving oral or written notice of the delay, extension or termination to the exchange agent, or . 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 initial notes not accepted for exchange for any reason will be returned without cost to the holder that tendered them as promptly as practicable after the expiration or termination of the exchange offer. 24 Conditions To The Exchange Offer Despite any other term of the exchange offer, if in our reasonable judgment the exchange offer, or the making of any exchange by a holder of initial notes, would violate applicable law or any applicable interpretation of the staff of the Commission: . we will not be required to accept for exchange, or exchange any new notes for, any initial notes; and . we may terminate the exchange offer as provided in this prospectus before accepting any initial notes for exchange. In addition, we will not be obligated to accept for exchange the initial notes of any holder that has not made the following: . the representations described under "--Resale of The Exchange Notes,", and . other representations as may be reasonably necessary under applicable Commission rules, regulations or interpretations to make available to us an appropriate form for registration of the new notes under the Securities Act. We expressly reserve the right to amend or terminate the exchange offer, and to reject for exchange any initial notes not previously accepted for exchange, upon the occurrence of any of the conditions to the exchange offer specified above. We will give oral or written notice of any extension, amendment, non acceptance or termination to the holders of the initial notes as promptly as practicable. These conditions are for our sole benefit, and we may assert them or waive them, in whole or in part, at any time or at various times in our sole discretion. If we fail at any time to exercise any of theses rights, this failure will not mean that we have waived our rights. Each right will be deemed an ongoing right that we may assert at any time or at various times. In addition, we will not accept for exchange any initial notes tendered and will not issue new notes in exchange for any initial notes, if at that time any stop order has been threatened or is in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture relating to the notes under the Trust Indenture Act of 1939. 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 initial notes, a completed letter of transmittal and all other required documents at the address listed below under "--Exchange Agent" before 5:00 P.M., New York City time, on the expiration date for the tender to be effective. You may deliver your initial 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 initial notes on behalf of beneficial owners of initial notes through The Depository Trust Company to tender their initial notes as if they were holders. To effect a tender of initial 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 25 (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 initial 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 initial 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 initial 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 completing and executing the letter of transmittal and delivering such beneficial owner's initial notes, either make appropriate arrangements to register ownership of the initial 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 17ad5 under the Exchange Act of 1934) unless the initial 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 initial 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 initial notes. If a letter of transmittal or any initial 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 initial 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 initial notes by causing the book-entry transfer facility to transfer the old notes into the exchange 26 agent's account with respect to the initial notes in accordance with that facility's procedures. Although delivery of the initial 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 may be delivered to 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 initial 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 ICON may enforce such agreement against the participant. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered initial notes and withdrawal of tendered initial notes will be determined by us in our sole discretion, which determination will be final and binding. We reserve the absolute right to reject any and all initial notes not properly tendered or any initial 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 initial 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 initial 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 initial notes. Tenders of initial notes will not be deemed to have been made until such defects or irregularities mentioned above have been cured or waived. Any initial 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 initial notes and: . whose old notes are not immediately available, . who cannot deliver the holder's initial 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 initial 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 initial 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 27 . 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 initial notes in proper form for transfer or a confirmation of book-entry transfer of such initial 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 initial notes may be withdrawn at any time prior to 5:00 P.M., New York City time, on the expiration date of the exchange offer. To withdraw a tender of initial 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 the expiration date. Any notice of withdrawal must: . specify the name of the person having deposited the initial notes to be withdrawn, . identify the old notes to be withdrawn including the certificate number(s) and principal amount of such initial notes or, in the case of initial 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 initial 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 initial notes register the transfer of the initial notes into the name of the person withdrawing the tender, and . specify the name in which any such initial notes are to be registered, if different from that of the person who deposited the notes. If certificates for initial 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 initial 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 initial notes so withdrawn are validly retendered. Any initial 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. 28 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.: By Hand: The Bank of New York 101 Barclay Street Ground Level Corporate Trust Services Window New York, New York 10286 Attn.: By Facsimile Transmission: (212) 815-6339 Telephone Confirmation to : ------------- 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 initial 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 initial notes will be amortized over the term of the notes. Consequences Of Failure To Exchange Holders of initial notes who are eligible to participate in the exchange offer but who do not tender their initial notes will not have any further registration rights, and their initial notes will continue to be subject to restrictions on transfer. Accordingly, such initial 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, 29 . 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. Other Participation in the exchange offer is voluntary and holders of initial 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. 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 the initial notes in like principal amount. The old notes surrendered in exchange for the exchange notes will be retired and cancelled and cannot be reissued. Accordingly, issuance of the exchange notes will not result in any change in our total indebtedness. 30 CAPITALIZATION The following table sets forth our consolidated capitalization as of March 2, 2002, on an actual basis and as adjusted to reflect the following: . the issuance in April, 2002 of the initial notes . our initial borrowings under the new credit facility . the repayment of our old credit facility . the redemption of our 12% senior subordinated notes due 2005 . the payment of transaction fees and expenses related to the issuance of the initial notes and our new credit facility. The information in the following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements, and the related notes to those statements included in this prospectus.
March 2, 2002 -------------------- Actual As Adjusted ------- ----------- (In millions) Long-term debt (including current portion): Existing revolving credit facility.............. $ 51.3 $ -- New revolving credit facility................... -- 92.3 Term loans...................................... 164.9 -- New term loan................................... -- 25.0 12% Subordinated notes.......................... 44.3(1) -- Senior subordinated notes offered hereby........ -- 152.8 ------- ------- Total long-term debt........................ 260.5 270.1 ------- ------- Stockholder's equity: Common stock and additional paid-in capital..... 204.2 204.2 Receivable from officers for purchase of equity. (2.2) (2.2) Accumulated other comprehensive loss............ (3.0) (3.0) Accumulated deficit............................. (174.3) (178.9) ------- ------- Total stockholder's equity.................. 24.7 20.1(2) ------- ------- Total capitalization........................ $ 285.2 $ 290.2 ======= =======
- -------- (1) Excludes $3.4 million of unamortized net gain on redemption of our 13% senior subordinated notes due 2002 in connection with our recapitalization in September 1999. (2) Decrease in stockholder's equity of $4.6 million is to adjust for write-off of deferred financing fees related to the existing credit facility of $5.0 million, net of taxes, partially offset by gain on extinguishment of the 12% subordinated notes of $0.4 million, net of taxes. 31 UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data as of March 2, 2002 and for the year ended May 31, 2001 and the nine months ended March 2, 2002 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 transactions (dollar amounts in thousands): (1) the issuance of the 11.25% Senior Subordinated Notes, (2) the initial borrowings under the new 2002 credit facility, (3) the repayment of the existing credit facility and the existing 12% Subordinated Notes due 2005, (4) the payment of fees and expenses related to the transactions. These unaudited pro forma financial statements should be read in conjunction with the historical financial statements and notes thereto included elsewhere in this registration statement. The pro forma financial data do not purport to represent what our financial position or results of operations would have actually been had the transactions 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 Balance Sheet (in millions)
Historical Pro Forma March 2, 2002 Adjustments March 2, 2002 ------------- ----------- ------------- Assets Cash.............................................. $ 11.4 $ 270.1 A $ 11.4 (216.2)B (46.1)C (6.6)E (1.2)D Current assets.................................... 325.6 -- 325.6 Property and equipment, net....................... 45.6 -- 45.6 Intangible assets, net............................ 31.5 -- 31.5 Deferred income taxes............................. 12.4 3.1 F 15.3 (0.2)C Other assets...................................... 22.2 6.6 E 19.7 (1.0)C (8.1)F ------- ------- Total assets................................... $ 448.7 $ 449.1 ======= ======= Liabilities and Stockholder's Equity Other current liabilities......................... $ 160.1 $ (1.2)D $ 158.9 Long-term debt.................................... 263.9 92.3 A 270.1 25.0 A 152.8 A (51.3)B (164.9)B (47.7)C ------- ------- Total liabilities.............................. 424.0 429.0 ------- ------- Common stock and additional paid-in capital....... 204.2 -- 204.2 Receivable from Parent............................ (2.2) -- (2.2) Accumulated other comprehensive loss.............. (3.0) -- (3.0) Accumulated deficit............................... (174.3) 0.4 C (178.9) (5.0)F ------- ------- Total stockholder's equity (deficit)........... 24.7 20.1 ------- ------- Total liabilities and stockholder's equity..... $ 448.7 $ 449.1 ======= =======
32 Notes to the Unaudited Pro Forma Condensed Balance Sheet (in millions) A. Proceeds from issuance of initial 11.25% notes and new credit facility: 11.25% Notes $152.8 (net of discount of $2.2), revolver $92.3 and term loan $25.0. B. Repayment of existing credit facility: revolver $51.3 and term loans $164.9. C. Repayment of 12% Subordinated Notes: Cash payment including 4% premium........................... $ 46.1 Write-off deferred financing fees........................... 1.0 Gain on extinguishment (related taxes of $0.2).............. 0.6 ------ Carrying value of existing 12% Notes........................ $ 47.7 ======
D. Payment of accrued interest at March 2, 2002. E. Estimated fees and expenses incurred in connection with the transactions, including fees related to the new credit facility, investment banking, and legal and accounting fees. F. Write-off of deferred financing fees related to the existing credit facility, net of tax benefit. 33 Unaudited Pro Forma Condensed Statement of Operations (in millions)
Historical Pro Forma Year Ended Year Ended May 31, 2001 Adjustments May 31, 2001 ------------ ----------- ------------ Net sales.................................... $820.5 $ -- $820.5 Cost of goods sold........................... 580.5 -- 580.5 Operating expenses........................... 184.1 -- 184.1 ------ ----- ------ Income from operations.................... 55.9 -- 55.9 Interest expense and amortization of deferred financing fees.................... (38.0) 13.0 B (25.0) Other expense................................ (1.1) -- (1.1) ------ ----- ------ Income before income taxes................... 16.8 13.0 29.8 Provision for income taxes................... 3.5 5.1 C 8.6 ------ ----- ------ Net income................................ $ 13.3 $ 7.9 $ 21.2 ====== ===== ======
Unaudited Pro Forma Condensed Statement of Operations (in millions)
Historical Pro Forma Nine Months Nine Months Ended Ended March 2, 2002 Adjustments March 2, 2002 ------------- ----------- ------------- Net sales................................. $715.1 $ -- $715.1 Cost of goods sold........................ 506.4 -- 506.4 Operating expenses........................ 152.5 -- 152.5 ------ ---- ------ Income from operations................. 56.2 -- 56.2 Interest expense and amortization of deferred financing fees................. (22.4) 3.6 A (18.8) ------ ---- ------ Income before income taxes................ 33.8 3.6 37.4 Provision for income taxes................ 4.7 1.4 C 6.1 ------ ---- ------ Net income............................. $ 29.1 $2.2 $ 31.3 ====== ==== ======
34 Notes to the Unaudited Pro Forma Condensed Statements of Operations (in millions) A. Net adjustment for the elimination of historical interest expense and amortization of deferred financing fees of $22.4 and recognition of interest expense and amortization of deferred financing fees of $18.8 on the new debt. B. Net adjustment for the elimination of historical interest expense and amortization of deferred financing fees of $38.0 and recognition of interest expense and amortization of deferred financing fees of $25.0 on the new debt. C. Reflects the estimated income tax provision resulting from the pro forma adjustments. 35 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected financial data set forth below with respect to our statements of operations for the three years ended May 31, 2001 and the balance sheet data for May 31, 2000 and May 31, 2001 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. Our statement of operations data for the years ended May 31, 1997 and 1998, and our balance sheet data as of May 31, 1997, 1998 and 1999, have been derived from the financial statements audited by PricewaterhouseCoopers LLP but not included in this prospectus. The financial data for the nine month periods ended March 3, 2001 and March 2, 2002 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements reflect, in the opinion of management, all adjustments necessary for the fair presentation of the financial condition and results of operations for such periods. Operating results for the nine month periods ended March 3, 2001 and March 2, 2002 are not necessarily indicative of the results that may be expected for an entire year. The data set forth should be read together with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements, and the related notes thereto appearing elsewhere in this offering circular.
For the Nine Month For the Years Ended May 31, Periods Ended -------------------------------------------- -------------------------- 1997 1998 1999 2000 2001 March 3, 2001 March 2, 2002 ------ ------ ------ ------ ------ ------------- ------------- (in millions) Operating Data: Net sales....................................... $836.2 $749.3 $710.2 $733.0 $820.5 $660.1 $715.1 Cost of sales................................... 583.8 535.7 514.0 531.6 580.5 467.7 506.4 Amortization of step-up of Healthrider and ICON of Canada inventory(1)......................... 14.0 0.3 -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ Gross profit.................................... 238.4 213.3 196.2 201.4 240.0 192.4 208.7 Operating expenses: Selling........................................ 132.4 120.7 107.6 96.0 109.8 81.8 93.7 Research and development....................... 7.6 7.8 7.7 8.3 10.9 8.2 7.9 General and administrative..................... 56.7 60.9 53.4 61.7 63.4 46.7 50.9 Weider Settlement and HealthRider integration................................... 21.5(2) -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ Total operating expenses...................... 218.2 189.4 168.7 166.0 184.1 136.7 152.5 ------ ------ ------ ------ ------ ------ ------ Income from operations.......................... 20.2 23.9 27.5 35.4 55.9 55.7 56.2 Interest expense................................ 33.6 35.0 33.1 33.9 34.8 27.1 19.7 Amortization of deferred financing fees......... 3.0 4.8 7.0 2.7 3.2 2.3 2.7 Net income (loss)............................... (11.9) (9.5) (24.7) (6.6) 13.3 14.3 29.1 Other Financial Data: Depreciation and amortization................... $ 13.4 $ 16.7 $ 17.4 $ 16.7 $ 17.4 $ 12.3 $ 13.7 Capital expenditures(3)......................... 16.0 11.8 11.6 12.9 16.1 11.1 8.9 Net cash provided by (used in) operating activities..................................... (37.7) 47.6 38.0 0.5 12.4 (35.0) 26.6 Net cash provided by (used in) investing activities..................................... (52.9) 6.4 (20.1) (19.9) (22.8) (16.5) (14.2) Net cash provided by (used in) financing activities..................................... 77.8 (55.7) (17.1) 21.4 8.7 51.8 (3.2) Ratio of earnings to fixed charges(4)(5)........ -- (6) -- (6) -- (6) 1.0x 1.4x 1.8x 2.3x Supplemental Data: EBITDA(7)....................................... $ 34.1 $ 41.1 $ 44.9 $ 52.5 $ 72.1 $ 68.0 $ 69.9 Adjusted EBITDA(7).............................. 69.6 41.4 55.4 63.4 72.1 68.0 69.9 Balance Sheet Data (at the end of the period): Cash............................................ $ 5.6 $ 3.9 $ 4.3 $ 5.9 $ 3.3 $ 5.4 $ 11.4 Working capital(8).............................. 219.8 155.0 110.9 137.4 165.6 204.0 165.5 Total assets.................................... 456.9 363.1 331.9 368.1 405.5 471.4 448.7 Total indebtedness(9)........................... 327.0 274.5 260.6 247.6 260.4 299.1 260.5
- -------- (1) We incurred one-time charges of $14.0 million and $0.3 million related to the inventory step-up in value associated with the HealthRider and ICON of Canada acquisitions in fiscal 1997 and fiscal 1998, respectively. 36 (2) In fiscal year 1997, we incurred Weider settlement expenses of $16.6 million related to the settlement of various issues related to Weider affiliates as well as associated legal expenses and professional fees. We also incurred HealthRider integration costs of $4.9 million. (3) Excludes purchases of intangibles, trademarks and acquisitions of $36.9 million for fiscal year 1997, $0 for fiscal year 1998, $8.5 for fiscal year 1999, $4.4 million for fiscal year 2000, $6.7 million for fiscal year 2001, $5.4 million for the nine month period ended March 3, 2001 and $5.3 million for the nine month period ended March 2, 2002. (4) The ratio of earnings to fixed charges is derived by dividing earnings by fixed charges. For this purpose, earnings represent income (loss) before income taxes plus fixed charges. "Fixed Charges" consist of interest expense whether expensed or capitalized, the portion of the operating rental expense which management believes is representative of the interest component of rental expense and the amortization of deferred financing fees. (5) After giving effect to the issuance of the initial notes, our initial borrowings under our new credit facility, the repayment of our old credit facility, the redemption of our 12% senior subordinated notes due 2005 and the payment of fees and expenses in connection with the foregoing, our ratio of earnings to fixed charges was 2.0x for the year ended May 31, 2001 and 2.4x for the nine month period ended March 2, 2002, respectively. (6) For the fiscal years 1997, 1998 and 1999, our earnings were inadequate to cover our fixed charges by $15.9 million, $15.4 million and $12.6 million, respectively. (7) EBITDA means earnings before net interest expense, income taxes, depreciation, and amortization and extraordinary loss on extinguishment of debt. Adjusted EBITDA represents adjustments to EBITDA for non-recurring charges as identified by us. EBITDA and Adjusted EBITDA are presented because we believe they are indicators of our ability to incur and service debt and are used by our lenders in determining compliance with financial covenants. However, EBITDA and Adjusted EBITDA should not be considered as alternatives to cash flow from operating activities as measures of liquidity or as alternatives to net income as measures of operating results in accordance with generally accepted accounting principles. Our definition of EBITDA and Adjusted EBITDA may differ from definitions of EBITDA and Adjusted EBITDA used by other companies.
For the Nine Months For the Year Ended May 31, Ended -------------------------------------- ------------------- March 3, March 2, 1997 1998 1999 2000 2001 2001 2002 ----- ----- ----- ----- ----- -------- -------- (In millions) EBITDA........................................................... $34.1 $41.1 $44.9 $52.5 $72.1 $68.0 $69.9 Step-up of Healthrider and ICON of Canada inventories(a)......... 14.0 0.3 -- -- -- -- -- Weider settlement and HealthRider integration.................... 21.5(b) -- -- -- -- -- -- Non-recurring costs in selling expense........................... -- -- 10.5(c) -- -- -- -- Equity grant to senior management................................ -- -- -- 3.1(d) -- -- -- Non-recurring recapitalization cost.............................. -- -- -- 1.8(e) -- -- -- Excess air freight charges....................................... -- -- -- 6.0(f) -- -- -- ----- ----- ----- ----- ----- ----- ----- Adjusted EBITDA.................................................. $69.6 $41.4 $55.4 $63.4 $72.1 $68.0 $69.9 ===== ===== ===== ===== ===== ===== =====
----- (a) We recorded one-time charges of $14.0 million and $0.3 million related to the inventory step-up in value associated with the HealthRider and ICON of Canada acquisitions in fiscal 1997 and fiscal 1998, respectively. (b) We recorded one-time charges of $16.6 million related to a litigation settlement with Weider Health and Fitness and $4.9 million related to integration costs associated with the HealthRider acquisition. (c) We recorded $10.5 million of non-recurring costs (in selling expenses) related to the write-off of accounts receivable due to the bankruptcy of Service Merchandise. (d) We recorded $3.1 million of non-recurring non-cash costs (in general and administrative expense) related to an equity grant made to certain members of senior management due to our recapitalization in September 1999. 37 (e) We recorded $1.5 million of non-recurring costs (in general and administrative expense) related to management retention bonuses, paid to certain executive officers, and $0.3 million of one-time non-recurring costs associated with the redemption of our 13% senior subordinated notes due 2002, both in connection with our recapitalization in September 1999. (f) We incurred $6.0 million of in-bound air freight charges (in cost of sales) in excess of normal freight costs. Due to our significant indebtedness, certain of our vendors shortened our payment terms prior to our recapitalization in September 1999. Due to liquidity constraints we had to delay the purchase of certain component parts and finished goods, and we therefore incurred additional in-bound air freight expenses related to these items that we needed to receive rapidly in order to meet our customers' delivery schedules. (8) Working capital is defined as current assets, excluding cash, less current liabilities, excluding the current portion of long-term debt. (9) Excludes unamortized net gain on the redemption of our 13% senior subordinated notes due 2002 in connection with our recapitalization in September 1999, in the amount of $5.6 million at May 31, 2000 and $4.3 million at May 31, 2001, $4.7 million at March 3, 2001 and $3.4 million at March 2, 2002. Also excludes debt of our parent companies prior to our recapitalization in September 1999 in the amount of $167.8 million at May 31, 1997, $192.2 million at May 31, 1998 and $220.8 million at May 31, 1999. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following should be read in conjunction with the financial statements and the related notes thereto appearing elsewhere in this prospectus. Our fiscal year ends on May 31 of the corresponding calendar year. For example, fiscal 2001 ended on May 31, 2001. Overview We manufacture and market a broad line of products in the fitness equipment industry. These fall into two major product categories, namely: cardiovascular and other equipment, and strength training equipment. We are one of the largest manufacturers and marketers of home fitness equipment in the United States. In addition, we manufacture and distribute an innovative line of products for the institutional fitness equipment market in both our cardiovascular equipment category and our strength training equipment category. We sell our products under a wide variety of brand names and we use our portfolio of brands to tailor our product offerings to specific distribution channels. We believe that we are the only manufacturer with a significant market share in every major distribution channel. We sell our products to department stores, mass retailers and warehouse clubs, sporting goods and specialty fitness retailers, and directly to consumers. The following paragraphs provide a brief description of certain items that appear in our Consolidated Statements of Operations. Net sales. Net sales primarily represents our gross sales adjusted for returns and allowances. We limit our customers' ability to return merchandise to us to products sold to their customers in which defects were discovered within the warranty coverage period (usually 90 days from the time of retail sale). We do not permit our customers to return unsold merchandise. Cost of sales. Cost of sales primarily includes the cost of components that we purchase, direct manufacturing labor and overhead, inbound shipping and freight and depreciation expense related to our property, plant, equipment and tooling. Selling expense. Selling expense primarily includes our direct advertising expense, advertising allowances provided to certain customers and the costs related to our sales and marketing staff for our home fitness and institutional fitness business. Research and development expense. Research and development expense relates primarily to the activities of our product development group and external sources related to the decision of new products and product enhancements. General and administrative expense. General and administrative expense primarily includes expenses related to our senior management team, all accounting and finance functions, management information systems, legal and human resources expenses and unallocated overhead expenses. 1999 recapitalization. In order to provide additional liquidity for our operations, we consummated a recapitalization in September 1999 that included a $40.0 million cash contribution of capital from our parent HF Holdings, Inc. in connection with an investment of new equity from certain of our existing shareholders and new investors. Holders of certain of our and our parent's then existing debt securities exchanged their securities for a combination of cash, new debt securities offered by us and equity offered by HF Holdings, Inc. and we also refinanced our then existing senior debt. As a result of our recapitalization in September 1999 and our improved operating performance, we 39 reduced our indebtedness from a seasonal peak of $547.3 million at January 30, 1998 to $260.5 million (excluding unamortized net gain of $3.4 million on the redemption of our 13% notes due 2002 in connection with our recapitalization in September 1999) at March 2, 2002, and significantly reduced our interest expense. Results of Operations The following table sets forth certain of our financial data, expressed as a percentage of net sales, for fiscal years ended May 31, 1999, 2000 and 2001 and the nine month periods ended March 3, 2001 and March 2, 2002:
For the Nine Month For the Years Ended May 31, Periods Ended --------------------------- ---------------- March 3, March 2, 1999 2000 2001 2001 2002 ----- ----- ----- -------- -------- (unaudited) Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............................................... 72.4% 72.5% 70.7% 70.9% 70.8% ----- ----- ----- ----- ----- Gross profit................................................ 27.6% 27.5% 29.3% 29.1% 29.2% Operating expenses: Selling.................................................. 15.2% 13.1% 13.4% 12.4% 13.1% Research and development................................. 1.1% 1.1% 1.3% 1.2% 1.1% General and administrative............................... 7.5% 8.4% 7.7% 7.1% 7.1% ----- ----- ----- ----- ----- Total operating expenses............................. 23.8% 22.6% 22.4% 20.7% 21.3% ----- ----- ----- ----- ----- Income from operations...................................... 3.9% 4.8% 6.8% 8.4% 7.9% Interest expense............................................ 4.7% 4.6% 4.2% 4.1% 2.8% Amortization of deferred financing fees and other expense... 1.0% 0.3% 0.5% 0.3% 0.4% Income (loss) before income taxes and extraordinary item.... (1.8)% (0.1)% 2.0% 4.0% 4.7% Provision for income taxes.................................. 1.7% 0.5% 0.4% 1.8% 0.7% Extraordinary loss, net..................................... -- 0.3% -- -- -- ----- ----- ----- ----- ----- Net income (loss)........................................... (3.5)% (0.9)% 1.6% 2.2% 4.1% ===== ===== ===== ===== ===== EBITDA...................................................... 6.3% 7.2% 8.8% 10.3% 9.8% ===== ===== ===== ===== ===== Adjusted EBITDA............................................. 7.8% 8.6% 8.8% 10.3% 9.8% ===== ===== ===== ===== =====
Nine Months Ended March 3, 2001 Compared to Nine Months Ended March 2, 2002 Net sales for the first nine months of fiscal 2002 increased $55.0 million, or 8.3%, to $715.1 million from $660.1 million in the comparable period in 2001. Sales increased primarily due to increased customer demand and the introduction of our new line of institutional fitness equipment which represented $8.8 million, or 16.0%, of the sales increase. Sales of our cardiovascular and other equipment for the first nine months of fiscal 2002 increased $39.5 million, or 6.9%, to $607.3 million. Sales of our strength training equipment for the first nine months of fiscal 2002 increased $15.6 million, or 16.9%, to $107.8 million. Gross profit for the first nine months of fiscal 2002 was $208.7 million, or 29.2% of net sales, compared to $192.4 million, or 29.1% of net sales, for the first nine months of fiscal 2001. Selling expenses increased $11.9 million, or 14.5%, to $93.7 million for the first nine months of fiscal 2002. This increase was the result of higher selling costs associated with the increase in sales combined with the impact of the introduction of our new line of institutional fitness equipment as well as bad debt expense of $1.7 million related to the Kmart bankruptcy. "See Management's Discussion and Analysis of Financial Condition and 40 Results of Operation--Liquidity and Capital Resources." Expressed as a percentage of net sales, selling expenses were 13.1% in the first nine months of fiscal 2002 compared to 12.4% in the same period in fiscal 2001. Research and development expenses decreased $0.3 million, or 3.7%, to $7.9 million for the first nine months of fiscal 2002. Expressed as a percentage of net sales, research and development expenses were 1.1% in the first nine months of fiscal 2002 and 1.2% in the first nine months of fiscal 2001. General and administrative expenses increased $4.2 million, or 9.0%, to $50.9 million for the first nine months of fiscal 2002. This increase was the result of higher costs associated with our increase in sales combined with the impact of our introduction of our new line of institutional fitness equipment. Expressed as a percentage of net sales, general and administrative expenses were 7.1% in the first nine months of fiscal 2002 and the first nine months of fiscal 2001. As a result of the foregoing factors, operating income increased $0.5 million, or 0.9%, to $56.2 million for the first nine months of fiscal 2002. Expressed as a percentage of net sales, operating income was 7.9% in the first nine months of fiscal 2002 compared with 8.4% in the prior period. As a result of the foregoing factors, EBITDA increased $1.9 million, or 2.8%, to $69.9 million for the first nine months of fiscal 2002. Expressed as a percentage of net sales, EBITDA was 9.8% in the first nine months of fiscal 2002 compared with 10.3% in the same period in fiscal 2001. Interest expense including amortization of deferred financing fees decreased $7.0 million, or 23.8%, to $22.4 million for the first nine months of fiscal 2002. This decrease reflects our lower borrowing levels during the period combined with lower interest rates on our borrowings during the period. Income tax provision decreased $7.3 million, or 60.8%, to $4.7 million for the first nine months of fiscal 2002. Our effective tax rate was 14.1% for the first nine months of fiscal 2002 compared to 45.6% in the prior period. The lower effective tax rate was the result of adjustments pursuant to an Internal Revenue Service audit. These adjustments created a deferred tax benefit of approximately $11.5 million. No valuation allowance was recorded against this asset because we believed that we would generate sufficient future taxable income through operations to realize the net deferred asset. However, there can be no assurance that we will generate any specific level of taxable earnings or that we 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, an additional valuation allowance against this deferred tax asset would result in a charge to earnings. As a result of the foregoing factors, our net income was $29.1 million for the first nine months of fiscal 2002 compared to net income the first nine months of fiscal 2001 of $14.3 million. Year Ended May 31, 2001 Compared to the Year Ended May 31, 2000 Net sales for fiscal 2001 increased $87.5 million, or 11.9%, to $820.5 million from $733.0 million in fiscal 2000. Sales increased primarily due to increased customer demand across our product categories and the introduction of our new line of institutional fitness equipment in December of 2000, which represented $3.3 million, or 3.8%, of the sales increase. Sales of our cardiovascular and other fitness equipment in fiscal 2001 increased $76.1 million, or 12.0%, to $708.3 million. Sales of our strength training equipment in fiscal 2001 increased $11.4 million, or 11.3%, to $112.2 million. Gross profit for fiscal 2001 was $240.0 million, or 29.3% of net sales, compared to $201.4 million, or 27.5% of net sales, for fiscal 2000. The increase of 1.8% in profit margin was attributable to lower manufacturing costs due to higher operating efficiency, including lower air freight, labor, overhead and material costs. 41 Selling expenses increased $13.8 million, or 14.4%, to $109.8 million fiscal 2001. This increase was the result of higher selling costs associated with the increase in sales combined with higher advertising expenses. Expressed as a percentage of net sales, selling expenses were 13.4% in fiscal 2001 compared to 13.1% in fiscal 2000. Research and development increased $2.6 million, or 31.3%, to $10.9 million in fiscal 2001. Expressed as a percentage of net sales, research and development expenses were 1.3% in fiscal 2001 and 1.1% in fiscal 2000. This increase reflects our continued efforts to develop both current and future products. General and administrative expenses increased $1.7 million, or 2.8%, to $63.4 million in fiscal 2001. This increase was the result of costs associated with increased customer demand for our products. General and administrative expenses in fiscal year 2000 included $4.9 million of costs related to our September 1999 recapitalization. Expressed as a percentage of net sales, general and administrative expenses were 7.7% in fiscal 2001 and 8.4% in fiscal 2000. As a result of the foregoing factors, operating income increased $20.5 million, or 57.9%, to $55.9 million in fiscal 2001. Expressed as a percentage of net sales, operating income was 6.8% in fiscal 2001 compared with 4.8% in fiscal 2000. As a result of the foregoing factors, EBITDA increased $19.6 million, or 37.3%, to $72.1 million in fiscal 2001. Expressed as a percentage of net sales, EBITDA was 8.8% in fiscal 2001 compared with 7.2% in fiscal 2000. Interest expense including amortization of deferred fees increased $1.4 million, or 3.8%,to $38.0 million in fiscal 2001. This increase reflects our higher borrowing levels during the period combined with higher interest rates on our borrowing during the period. Amortization on deferred financing fees was also higher as a result of the September 1999 recapitalization. Income taxes decreased $0.4 million, or 10.3%, to $3.5 million in fiscal 2001. The lower expense for fiscal 2001 reflects our use of approximately $9.5 million of net operating losses carried forward from our September 1999 recapitalization for the period from September 29, 1999 through May 31, 2000. The provision in fiscal 2000 reflected our write-off of a portion of our deferred tax assets that were not realized due to our September 1999 recapitalization. At the end of fiscal 2001, we had a net deferred tax asset of $6.9 million. No valuation allowance was recorded against this asset because we believed that we would generate sufficient future taxable income through operations to realize the net deferred asset. However, there can be no assurance that we will generate any specific level of taxable earnings or that we will be able to realize any of the deferred tax assets in future periods. If we were unable to generate sufficient taxable income in the future, an additional valuation allowance against this deferred tax asset would result in a charge to earnings. As a result of the foregoing factors, our net income was $13.3 million for fiscal 2001 compared to a net loss of $6.6 million in fiscal 2000. Year Ended May 31, 2000 Compared to the Year Ended May 31, 1999 Net sales for fiscal 2000 increased $22.8 million, or 3.2%, to $733.0 million from $710.2 million in fiscal 1999. Sales increased primarily due to increased customer demand for our cardiovascular products. Sales of our cardiovascular and other fitness equipment in fiscal 2000 increased $37.7 million, or 5.3%, to $632.2 million. Sales of our strength training equipment in fiscal 2000 decreased $9.0 million, or 8.2%, to $100.8 million. 42 Gross profit for fiscal 2000 was $201.4 million, or 27.5% of net sales, compared to $196.2 million, or 27.6% of net sales, for fiscal 1999. Cost of sales in fiscal 2000 included $6.0 million of excess air freight costs. Selling expenses decreased $11.6 million, or 10.8%, to $96.0 million fiscal 2000. This decrease was the result of lower bad debt expenses. Bad debt expense in fiscal 1999 was unusually high because of write-offs related to the bankruptcy of Service Merchandise. Expressed as a percentage of net sales, selling expenses were 13.1% in fiscal 2000 compared to 15.2% in fiscal 1999. Research and development increased $0.6 million, or 7.8%, to $8.3 million in fiscal 2000. Expressed as a percentage of net sales, research and development expenses were 1.1% in fiscal 2000 and 1.1% in fiscal 1999. General and administrative expenses increased $8.3 million, or 15.5%, to $61.7 million in fiscal 2000. This increase was the result of costs associated with our September 1999 recapitalization. Expressed as a percentage of net sales, general and administrative expenses were 8.4% in fiscal 2000 and 7.7% in fiscal 1999. As a result of the foregoing factors, operating income increased $7.9 million, or 28.7%, to $35.4 million in fiscal 2000. Expressed as a percentage of net sales, operating income was 4.8% in fiscal 2000 compared with 3.9% in fiscal 1999. As a result of the foregoing factors, EBITDA increased $7.6 million, or 16.9%, to $52.5 million in fiscal 2000. Expressed as a percentage of net sales, EBITDA was 7.2% in fiscal 2000 compared with 6.3% in fiscal 1999. Interest expense including amortization of deferred financing fees decreased $3.5 million, or 8.7%, to $36.6 million in fiscal 2000. This decrease reflects our lower borrowing levels during the period. Amortization on deferred financing fees was also lower in fiscal 2000 when compared to fiscal 1999. Income taxes decreased $8.2 million, or 67.8%, to $3.9 million in fiscal 2000. The higher expense for fiscal 1999 reflected our write off of a portion of our deferred tax assets that were not realized due to our recapitalization in September 1999. At the end of fiscal 2000, we had a net deferred tax asset of $6.0 million. No valuation allowance was recorded against this asset because we believed that it would generate sufficient future taxable income through operations to realize the net deferred asset. As a result of the foregoing factors, our net loss was $6.6 million for fiscal 2000 compared to a net loss of $24.7 million in fiscal 1999. 43 Seasonality The following are the net sales, net income and EBITDA by quarter for fiscal years 2001, 2000 and 1999 and the first, second and third quarters of fiscal year 2002:
First Second Third Fourth Quarter(1) Quarter(2) Quarter(3) Quarter(4) ---------- ---------- ---------- ---------- (dollars in millions) Net Sales 1999.................. $117.2 $214.3 $226.7 $152.0 2000.................. 99.5 234.8 236.5 162.2 2001.................. 129.5 276.0 254.6 160.5 2002.................. 138.1 272.1 304.9 -- Net Income 1999.................. (8.0) 6.1 4.1 (26.9) 2000.................. (11.7) 1.6 7.3 (3.5) 2001.................. (8.2) 11.7 10.8 (1.3) 2002.................. (7.5) 11.1 25.5 -- EBITDA 1999.................. $ 1.0 $ 24.0 $ 20.3 $ (0.4) 2000.................. (2.2) 22.4 24.9 7.4 2001.................. 1.6 34.2 32.2 4.1 2002.................. (0.1) 31.3 38.7 --
- -------- (1) Our first quarter ended August 29, August 28, September 2, and September 1 for fiscal years 1999, 2000, 2001 and 2002, respectively. (2) Our second quarter ended November 28, November 27, December 2 and December 1 for fiscal years 1999, 2000, 2001 and 2002, respectively. (3) Our third quarter ended February 27, February 26, March 3 and March 2 for fiscal years 1999, 2000, 2001 and 2002, respectively. (4) Our fourth quarter ended May 31 for the fiscal years 1999, 2000 and 2001, respectively. 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 our retail 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 effected. The timing of large orders from customers and the mix of products sold may also contribute to periodic fluctuations. Liquidity and Capital Resources Net cash provided by operating activities was $26.6 million in the first nine months of fiscal 2002, as compared to $35.0 million of cash used in operations in the first nine months of fiscal 2001. In the first nine months of fiscal 2002, major sources of funds were net income of $29.1 million, non-cash provisions of $13.7 million for depreciation and amortization, and increases in accrued expenses and payables of $5.4 million. These increases were offset by increases in accounts receivable of $38.6 million. These increases are due to our increasing sales during the course of the first several months of the fiscal year leading up to our peak selling season, which occurs between the months of October and December. We sell the majority of our products to customers in the second and third fiscal quarters (i.e., from September through February). In the first nine months of fiscal 2001, major sources of funds were net income of $14.3 million, non-cash provisions of $12.3 million for depreciation and amortization, and increases in accrued expenses and payables of $32.3 million. These increases 44 were offset by increases in accounts receivable of $76.3 million and inventory of $23.5 million. Such increases were due to the aforementioned factors relating to sales increases. Net cash used in investing activities was $14.2 million in the first nine months of fiscal 2002, compared to $16.5 million in the first nine months of fiscal 2001. Investing activities in the first nine months of fiscal 2002 consisted primarily of capital expenditures of $8.9 million related to upgrades in plant and tooling and purchases of additional manufacturing equipment and purchases of intangibles of $4.3 million relating to software upgrades. Cash used in investing activities in the first nine months of fiscal 2001, was primarily for capital expenditures of $11.1 million, acquisitions of $4.0 million and purchases of intangibles of $1.4 million. Net cash used in financing activities was $3.2 million in the first nine months of fiscal 2002, compared to $51.8 million of cash provided by financing activities in the first nine months of fiscal 2001. Cash used in financing activities, including a seasonal decrease in our revolver balance, consisted principally of repayments on our existing credit facility. Long-term debt decreased $56.1 million in the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001 due in part to the fact that one of our customers accepted shorter payment terms than in prior years, which resulted in a more rapid repayment of revolver balances than occurred in the similar period in fiscal 2001. Net cash provided by operating activities was $12.4 million in fiscal 2001, as compared to $0.5 million in fiscal 2000 and $38.0 million in fiscal 1999. In fiscal 2001, major sources of funds were net income of $13.3 million, non-cash provisions of $17.4 million for depreciation and amortization, and increases in accrued expenses and payables of $10.0 million. These increases were partially offset by increases in inventories of $14.8 million and accounts receivable of $14.1 million. These increases are due, in part, to the incremental materials purchases associated with the build up of inventories in anticipation of the upcoming busy season. Our production is near or at full capacity from August to March and we also build inventory from April to July to be able to meet future customer demand. In addition, because we sell the majority of our products to customers in the second and third fiscal quarters (i.e., from September through February), fourth quarter results can create fluctuations or timing differences in quarterly and or year-end results. Operating cash flows were $0.5 million in fiscal 2000. Major sources of funds were non-cash provisions of $16.7 million for depreciation and amortization and increases in accrued expenses and payables of $13.3 million. These increases were offset by a net loss of $6.6 million as well as increases in inventories of $23.9 million and accounts receivable of $11.6 million, related to our increase in net sales. Net cash used in investing was $22.8 million in fiscal 2001, as compared to $19.9 million in fiscal 2000 and $20.1 million in fiscal 1999. Investing activities in fiscal 2001 consisted primarily of capital expenditures of $16.1 million related to upgrades in plant and tooling and purchases of additional manufacturing equipment and a strategic acquisition of $4.0 million. Cash used in investing activities in fiscal 2000 was primarily for capital expenditures of $12.9 million, a loan to senior management of $2.2 million and $4.4 million related to the purchase of intangibles and trademarks. Net cash provided by (used in) financing activities was $8.7 million in fiscal 2001, as compared to $21.4 million in fiscal 2000 and ($17.1) million in fiscal 1999. Cash provided by financing activities consisted principally of borrowings under our existing credit facility. Borrowings increased $19.5 million in fiscal 2001 and were used to fund working capital needs. We were provided $21.4 million during fiscal 2000 primarily as a result of our recapitalization in September 1999. We made capital expenditures of approximately $16.1 million during fiscal 2001 and expect to make capital expenditures of approximately $13.0 million in fiscal 2002. In the first nine months of fiscal 2002, we have made capital expenditures of approximately $8.9 million. Such expenditures are primarily for expansion of physical plant, purchases of additional or replacement manufacturing equipment and revisions and upgrades in plant tooling. 45 On January 22, 2002, Kmart, a customer for over a decade, filed for bankruptcy protection. At the time of the filing we had $12.1 million of unsecured accounts receivable outstanding with Kmart. As of March 2, 2002 we have reserved $1.7 million against these receivables. We are in the process of attempting to collect the remaining accounts receivable outstanding but may be required to reserve additional amounts if it becomes clear that we will be unsuccessful in our attempts to collect these amounts. In fiscal 2001, we had net sales to Kmart of $38.9 million representing approximately 4.7% of our total net sales for that fiscal year. In the nine month period ended March 2, 2002 we had net sales to Kmart of approximately $32.1 million representing approximately 4.4% of our total net sales for that period. Kmart has secured debtor in possession financing and will continue to operate in bankruptcy. We resumed shipments to Kmart as of February 5, 2002 with payment terms of 30 days, reduced from 60 days. Our primary short-term liquidity needs consist of financing seasonal merchandise inventory buildups and paying cash interest expense under our existing credit facilities and on the 12% subordinated notes due 2005. Our principal source of financing for our seasonal merchandise inventory buildup and increased accounts receivable is revolving credit borrowings under the existing credit facilities. At March 2, 2002, we had $68.7 million of availability under these 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 from April through August. In connection with our recapitalization in September 1999, we entered into our existing credit facility totaling $300.0 million of revolving and term loans with a syndicate of banks and financial services companies. Proceeds of our existing credit facility were used to refinance our then existing senior credit facilities and 13% senior subordinated notes due 2002, to fund transaction fees and expenses, and to provide for general working capital. As of March 2, 2002 the balance outstanding under the existing credit facility consisted of (in millions): Revolver.................................................... $ 51.3 Term Loan A................................................. 19.1 Term Loan B................................................. 77.2 Term Loan C................................................. 61.1 IP Loan..................................................... 7.5 ------ $216.2 ======
We have a significant amount of indebtedness. As of March 2, 2002, our consolidated indebtedness was approximately $260.5 million (excluding $3.4 million of unamortized net gain on the redemption of our 13% senior subordinated notes due 2002 in connection with our recapitalization in September 1999), of which approximately $216.2 million was senior indebtedness. After giving effect to the issuance of the initial notes, our initial borrowings under our new credit facility, the repayment of our old credit facility and redemption of our 12% subordinated notes and the payment of fees and expenses, on March 2, 2002, we would have total indebtedness of approximately $270.1 million (of which $152.8 million would have consisted of the notes and $117.3 million would have consisted of secured borrowings under our new credit facility) and stockholder's deficit of approximately $20.1 million. In addition, we and our subsidiaries will be permitted to incur substantial indebtedness in the future. See "Risk Factors--To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control." 46 The terms of our purchase of the Free Motion Fitness business provide for a contingent earnout not to exceed $8.0 million based upon the future sales and earnings targets of Free Motion Fitness through August 31, 2004. Our ability to make scheduled payments of principal of, or to pay the interest on, or to refinance our indebtedness, including the notes, or to fund planned capital expenditures 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, management believes that cash flow from operations and available cash, together with available borrowings under our new credit facility, will be adequate to meet our future liquidity needs for at least the next few years. We may, however, need to refinance all or a portion of the principal amount of the notes on or prior to maturity. We cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available under our new credit facility in an amount sufficient to enable us to service our indebtedness, including the notes, or to fund our other liquidity needs. In addition, we cannot assure you that we will be able refinance any of our indebtedness, including our new credit facility and the notes, on commercially reasonable terms or at all. See "Risk Factors--To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control." At May 31, 2001, future minimum principal payments of contractual obligations are as follows:
Less than Contractual Obligations Total One Year 1-3 Years 4-5 Years ----------------------- ------ --------- --------- --------- Long-term debt.......................... $264.7 $11.3 $27.3 $226.1
Related Party Transactions and Special Purpose Entities We have not, during the past three years, and are not now engaged in any material transactions with affiliates or related parties other than transactions with our Parent, subsidiaries, compensatory transactions (including employee benefits, stock option and restricted stock grants, compensation deferral and executive employee loans and stock purchases) with officers. We have not been during the past three years and are not now affiliated with or related to any special purpose entity. Off-balance-sheet Financings and Commitments We do not have any material off-balance-sheet financing arrangements or other commitments (including non-exchange traded contracts) other than: . currency exchange rate contracts which are described in "Market Risk;" . commitments under non-cancelable operating leases, primarily for warehouse and production facilities and computer and production equipment, that expire over the next five years and require the Company to pay all executory costs such as maintenance and insurance. Future minimum payments under non-cancellable operating leases consist of the following (in millions): 47
Year ending May 31, ------------------- 2002.............................................. $13.0 2003.............................................. 10.5 2004.............................................. 8.8 2005.............................................. 6.4 2006.............................................. 1.9 Thereafter........................................ 2.3 ----- $42.9 =====
As part of our cash management activities, we seek to manage accounts receivable credit risk, collections, and accounts payable and payments thereof to maximize our free cash at any given time. Careful management of credit risk has allowed us to avoid significant accounts receivable losses in light of the poor financial condition of many of our potential and existing customers. In light of current and prospective global and regional economic conditions, we cannot assure you that we will not be materially adversely affected by accounts receivable losses in the future. Market Risk Fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations expose us to market risk. We are vulnerable to significant fluctuations in interest rates on our variable rate debt and on any future repricing or refinancing of our fixed rate debt and on future debt. We use long-term and medium-term debt as a source of capital. At March 2, 2002, we had approximately $44.3 million in outstanding fixed rate debt (excluding $3.4 million of unamortized net gain on the redemption of our 13% senior subordinated notes due 2002 in connection with our recapitalization in September 1999), consisting of 12% subordinated notes maturing in September 2005. When debt instruments of this type mature, we typically refinance such debt at the then-existing market interest rates, which may be more or less than the interest rates on the maturing debt. Our old credit facility had variable interest rates and any fluctuation in interest rates could increase or decrease our interest expense. At March 2, 2002, we had approximately $216.2 million in outstanding variable rate debt. The weighted average rate of interest on the variable interest rate debt was approximately 11.4% for the year ended May 31, 2001. If the interest rate for our variable rate debt increased or decreased by 1% during fiscal year 2001, our interest rate expense on outstanding variable rate debt would increase or decrease, as the case may be, by approximately $2.3 million. Due to the uncertainty of fluctuations in interest rates and the specific actions that might be taken by us to mitigate the impact of such fluctuations and their possible effects, the foregoing sensitivity analysis assumes no changes in our financial structure. We import some finished products and components from Canada and Asia. All purchases from Asia have been fixed in United States dollars and, therefore, we are not 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 our operating results. In connection with the importation of products and components from Canada, we from time to time engage 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 us 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. 48 As of March 2, 2002 and March 3, 2001, we had no open forward exchange contracts to sell Canadian dollars. During fiscal years 2001 and 2000 we recognized no significant gains or losses upon settlement of foreign currency transactions denominated in Canadian dollars. Recent Accounting Pronouncements In fiscal 2002, we adopted Statements of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities." as amended. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 was issued by the Financial Accounting Standards Board ("FASB") in June of 1998 and requires that an entity recognizes all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Because we had no open forward exchange contracts at May 31, 2001, the adoption of SFAS No. 133 did not have a significant effect on our earnings and financial position. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which provides a comprehensive standard of accounting for business combinations. SFAS 141 is effective for all business combinations after June 30, 2001. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which requires a change in accounting for goodwill and certain other intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 is effective for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121 and requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. In April 2002, the FASB issued SFAS No. 145, "Recission of FAS Nos. 4, 44 and 64, Amendment of FAS 13 and Technical Corrections as of April 2002", which rescinds FAS Nos. 4, 44 and 64 and amends other existing authoritative pronouncements to make various technical corrections, clarify meaning, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Based on current circumstances, we believe the application of the new accounting rules described above will not have a material impact on our financial statements. Critical Accounting Policies The SEC recently issued disclosure guidance for critical accounting policies. The SEC defines critical accounting policies as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described in Note 3 to the Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following accounting policies could be deemed to be critical. 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. 49 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. Advertising Costs--The Company expenses the costs of advertising as incurred, except for the cost of 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. 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. 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 42%, 39% and 37% of total sales for the fiscal years ended May 31, 2001, 2000 and 1999, respectively. Accounts receivable from Sears accounted for approximately 42% and 36% of gross accounts receivable at May 31, 2001 and 2000, respectively. The Company is not the exclusive supplier of home fitness equipment to any of its 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 its major customers would have a material adverse effect on the Company's business. Income Taxes--The Company accounts for income taxes utilizing the asset and liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities at currently enacted tax rates. If appropriate, deferred tax assets are reduced by a valuation allowance which reflects expectations of the extent to which such assets will be realized. Contingencies. We account for contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." SFAS No. 5 requires that we record an estimated loss from a loss contingency when information available prior to issuance of the Consolidated Financial Statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the Consolidated Financial Statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different from the estimated loss, our results of operations may be overstated or understated. Assessment of the Euro On January 1, 1999, eleven of the member countries of the European Union established fixed conversion rates between their existing currencies (called "LEGACY CURRENCIES") and one common currency called the euro. The euro trades on currency exchanges and may be used in business transactions. Beginning in January 2002, the legacy currencies are being withdrawn from circulation. Our subsidiaries affected by the conversion have established plans to address issues raised by the conversion. We believe that, under current conditions, the conversion of legacy currencies into the euro will not have a materially adverse effect on us. 50 INDUSTRY OVERVIEW The home fitness equipment industry in the United States includes treadmills, other popular cardiovascular fitness equipment such as ellipticals and exercise bikes and strength training fitness equipment such as multi-purpose home gyms and weights and weight benches. These products are distributed in various channels of distribution in a wide range of price points, including: department stores such as Sears and JCPenney; mass retailers and warehouse clubs such as Wal-Mart, Sam's Club, Kmart and Costco; sporting goods retailers such as The Sports Authority, Gart Sports, Galyan's and Dick's Sporting Goods; specialty fitness equipment retailers, and direct-to-consumers through our own NordicTrack stores, catalogues, infomercials and the Internet. According to the NSGA 2001 annual report, total retail sales industry-wide of home fitness equipment, one of the largest hard goods categories of sporting goods, are estimated to total $3.8 billion in calendar year 2001. According to NSGA, in calendar year 2000 retail sales of home fitness equipment exceeded retail sales of the following categories combined: camping, snowboarding, downhill skiing, baseball, softball, basketball, hockey and football. According to the NSGA, sales of home fitness equipment have grown at a CAGR of 12.7% from $311.2 million 1980 to an estimated $3.8 billion in 2001, making it among the fastest growing categories in the sporting goods hard goods industry. The following chart illustrates the growth in retail sales of home fitness equipment for the years 1980 through 2001E. United States Personal Fitness Equipment Industry Retail Sales 1980--2001E (dollars in billions) [CHART]
United States Personal Fitness Equipment Industry Sales 1980-2001E 1980 0.3 1981 0.4 1982 0.6 1983 0.8 1984 0.9 1985 1.1 1986 1.1 1987 1.1 1988 1.5 1989 1.7 1990 1.8 1991 2.1 1992 2.1 1993 2.5 1994 2.4 1995 2.9 1996 3.2 1997 3.0 1998 3.2 1999 3.4 2000 3.6 2001E 3.8
We believe that the home exercise market has grown at a healthy pace in response to several main factors: favorable demographics, increased awareness of the compelling medical benefits of exercise and dedication of more disposable income to activities at home, including fitness. Favorable Industry Demographics There has been a significant increase in the United States population, ages 45 to 64, and this age group accounts for the majority of purchases in most categories of fitness equipment and approximately 68% of treadmill purchases in the United States. Moreover, according to the United States Census Bureau, this segment of the population (which accounts for the majority of households with a yearly income greater than $50,000) is expected to increase by 26% from 2001 to 2010 (a CAGR of 2.6%). Depending on the type of equipment, 51 between 50% and 70% of the users of home exercise equipment have household incomes of $50,000 or more. We believe that the aging of the American population further supports the projected future growth in industry sales of home fitness equipment as the preferred method for maintaining fitness. Increased Awareness of the Compelling Medical Benefits of Exercise According to SGMA, the number of Americans participating in fitness activities has increased from 42.3 million in 1987 to 51.6 million in 2000, in part because Americans have become increasingly aware of the compelling medical evidence of the benefits of exercise. Medical research has demonstrated the unique role exercise plays in managing chronic diseases such as heart disease and diabetes and in preventing osteoporosis. As recently as December 2001, United States Surgeon General David Satcher proclaimed the need for a national plan to educate Americans to balance their caloric intake with regular physical activity. Increase in the Use of Fitness Equipment During Aerobic and Anaerobic Exercise Consumers are increasingly exercising with home fitness equipment. While cardiovascular exercise without the use of machines (primarily running and walking) decreased in the period from 1990-2000, exercise with cardiovascular equipment has increased 41% in the period from 1990-2000 and exercise with strength training equipment has increased 69% in the period from 1990-2000. Shift in Consumer Activity to Home-Orientated Activities We believe the increased use of cardiovascular and strength training equipment can be attributed to consumers' desires for time efficient, low impact workouts and a shift in consumer activity to more activities at home, including fitness. Primary Product Categories We believe the home fitness equipment industry is comprised of two main product categories: cardiovascular equipment and strength training equipment. The chart below reflects industry-wide sales and percentages in each product category. We believe our product mix is generally consistent with that of the industry. United States Home Fitness Equipment Retail Sales In 2000--By Product Category (dollars in millions) Industry [CHART] Cardiovascular $2786.3 Strength Training $856.9 52 Cardiovascular Products Treadmills, the largest subcategory in this product line, have become a major home equipment category, popularized to a large extent by manufacturers who have made treadmills affordable to many households. Treadmills have proven to be one of the most effective and easy-to-use pieces of home exercise equipment across a broad array of consumers. A study published in the May 1996 Journal of the American Medical Association asserted that treadmills are the most efficient piece of exercise equipment for burning calories, as compared to cross country skiers, stationary bikes, rowing machines and stair steppers. According to NSGA and as illustrated by the chart below, retail sales of treadmills have grown from $118.4 million in 1987 to $2.1 billion in 2000, representing a CAGR of approximately 24.7%. According to SGMA, more people named the treadmill as their favorite piece of cardiovascular exercise equipment than any other piece of fitness equipment. The following chart illustrates the growth in retail sales of treadmills from 1987 to 2000. United States Retail Sales of Treadmills 1987-2000 (dollars in billions) [CHART]
Treadmills Historical Market Size in Retail Dollars 1987 0.1 1988 0.3 1989 0.4 1990 0.5 1991 0.6 1992 0.5 1993 0.8 1994 0.9 1995 1.0 1996 1.2 1997 1.5 1998 1.8 1999 1.9 2000 2.1
Other cardiovascular fitness products include popular products such as ellipticals and exercise bikes. In calendar year 2000, retail sales of other cardiovascular products in the United States totaled $696.0 million, or approximately 19% of the home fitness market. Elliptical trainers, a relatively new product in this category, have grown at a CAGR of 11.3% since 1997. While retail sales of other cardiovascular equipment as a group have increased at a CAGR of 10.1% from $102.5 million in 1980 to $696.0 million in 2000, retail sales have recently decreased from their high of $1.4 billion in 1996. We believe that such a reduction in sales is primarily due to the decline of infomercial advertising and the presence of a number of cardiovascular products in this category that have relatively shorter life cycles, such as stair steppers, gliders and abdominal exercisers, and the growing popularity of treadmills. Strength Training Products Strength training products are designed to develop muscle tone and strength. The most widely sold products in this category include home gyms, free weights and weight benches and cages. In calendar year 2000, strength training products sales in the United States were $856.9 million, or approximately 24% of the home fitness market. This category has grown from approximately $208.7 million in sales in 1980, a CAGR of 7.3%. 53 BUSINESS General Industry The fitness equipment industry in the United States includes cardiovascular and other fitness equipment, and strength training equipment. Cardiovascular and other fitness equipment includes treadmills, ellipticals, exercise bike, other cardiovascular fitness equipment, such as trampolines, relaxation products such as spas, motorized massage chairs and massage pillows. Strength training equipment includes multi-purpose home gyms, free weights and weight benches and cages. Products in each product category are distributed in various channels of distribution in a wide range of price points. According to the NSGA 2001 annual report, total retail sales industry-wide of home fitness equipment, one of the largest hard goods categories of sporting goods, are estimated to total $3.8 billion in calendar year 2001. According to NSGA, in calendar year 2000 retail sales of home fitness equipment exceeded retail sales of the following categories combined: camping, snowboarding, downhill skiing, baseball, softball, basketball, hockey and football. Our Company We manufacture and distribute a broad line of products in the fitness equipment market. These fall into two product categories, namely: cardiovascular and other fitness equipment, and strength training equipment. We are one of the largest manufacturers and marketers of fitness equipment for home use in the United States. In addition, we manufacture and distribute an innovative line of products for the institutional fitness equipment market in both our cardiovascular and other equipment category, and our strength training equipment category. Our brand names include: ProForm, NordicTrack, HealthRider, Weslo, Image, JumpKing, Free Motion Fitness and, under license, Reebok, Weider and Gold's Gym. For the nine month period ended March 2, 2002, we generated net sales of $715.1 million, net income of $29.1 million and EBITDA of $69.9 million. Our Brands and Distribution Channels We market a complete line of products under multiple brands through multiple distribution channels to reach a wide range of consumers at various price points. We have some of the strongest brands in the industry, including NordicTrack which ranks among the top seven most widely recognized sporting goods brands according to American Sports Data. Our ProForm brand was ranked number one in terms of fitness market share by SMRG in 2000. We market our products through each distribution channel in which home fitness equipment products are sold, including: department stores, mass retailers and warehouse clubs, sporting goods and specialty fitness retailers, and direct-to-consumer sales through catalogs, infomercials, the Internet and our company-owned NordicTrack stores. Our History Our predecessor company, Weslo, was founded in 1977 by Scott Watterson, our Chairman and Chief Executive Officer, and Gary Stevenson, our President and Chief Operating Officer. In 1987, we acquired ProForm, and in 1988 we were acquired by Weider Health and Fitness ("Weider"). In 1994, affiliates of Bain Capital, LLC formed ICON Health and Fitness, Inc. and obtained control of us in a recapitalization transaction. As part of that transaction, we incurred substantial indebtedness and issued common and preferred stock to Weider. In 1996, we acquired HealthRider and CanCo, a Weider affiliated Canadian manufacturing firm, and we repurchased the common and preferred stock issued to Weider in that recapitalization. We funded these transactions with additional indebtedness. In addition, in 1998 we acquired the assets of NordicTrack, Inc. In 1999, we consummated a recapitalization that included a $40.0 million cash contribution of capital, the exchange of our then-existing debt securities for cash and new debt and equity securities and the refinancing of our then existing senior secured credit facility. 54 Our Competitive Strengths We attribute our market leadership, opportunities for continued growth and increased profitability to the following competitive strengths: . Leading Market Position. We are well positioned to grow as the overall industry grows. We maintain a broad product line in each of our two major product categories. Our broad range of products enables us to appeal to consumers with varying fitness needs and incomes, which reduces our dependence on any single product and enables us to respond quickly to changes in consumer preferences. In addition, we are well-positioned to serve retailers that want to increase their sales of home fitness products, while reducing their number of vendors; . Unique Multi-Brand, Multi-Channel Distribution Capability. Our ability to serve multiple distribution channels with multiple products and well-known brand names differentiates us from our competitors, insulates us from the impact of a downturn in any single channel and allows us to make products with varying designs and innovative features that address the pricing strategies of our customers. In addition, we are able to leverage our product development capabilities to maximize product lifecycles by repositioning products into new channels and under different brand names as they mature; . Strong Customer Relationships. We have strong, long-term relationships with many leading retailers. We have been a supplier to Sears since 1984. We have served Wal-Mart and The Sports Authority since 1985 and 1988, respectively. We have received numerous awards and recognition from our customers. These include, among others, Sears' Vendor of the Year in 2000 and their annual Partner in Progress award eleven times since 1985; Wal-Mart's Vendor of the Quarter award once in each of fiscal 1999 and fiscal 2000; and the SPARC Award ("Supplier Performance Awards by Retail Category"), awarded by Discount Store News magazine and based on votes by mass a committee of retailers, five times including the last four years consecutively; . Strong Commitment to Research and Development and Product Innovation. We are dedicated to product innovation. We hold, or have pending, an aggregate 250 United States and foreign patents and 711 United States and foreign trademarks. Our vertically integrated in-house research and development capabilities enable us to develop a product from concept to fully functional prototype and to launch products rapidly; . Flexible Manufacturing Capability. We have four manufacturing in facilities in Utah, one in Texas and three in Canada. All of our manufacturing, warehouse and logistical retail facilities in Utah are ISO 9001 certified. We also have two suppliers in China dedicated exclusively to us from whom we source some of our product requirements. Our facilities are flexible and permit us to shift our product mix quickly and efficiently to meet customer needs. . Experienced Management Team with Significant Equity Ownership. Our top 12 senior executives have an average of approximately 15 years of experience with us, which we believe, makes them among the most experienced management teams in the industry. Our senior management owns approximately 18.6% of our fully diluted shares outstanding. Our Business Strategy We plan to increase our net sales and EBITDA by continuing to pursue a business strategy that has the following principal components: . Participate in Industry Growth. We intend to continue to participate in the dynamic home fitness equipment industry by continuing to develop innovative products in our existing product lines as well as new product lines, such as ellipticals. In addition, we intend to continue our multi-brand, multi-channel distribution strategy. 55 . Increase Direct-to-Consumer Sales. We intend to continue to participate in direct-to-consumer sales, which we believe also enhances our retail sell-through and strengthens our brands. Our direct product and service offerings sold through television and print advertising and the Internet include selections from our core categories of treadmills, aerobic and anaerobic equipment, and our iFIT products and services. Our patented iFIT remote control interactive technology allows us to offer users the opportunity to work with a personal trainer online and prepare customized workout programs for a fee. . Increase Our Presence in the Institutional Fitness Equipment Market. According to SGMA, sales of fitness equipment to health clubs, spas, hotels and other institutions have grown at a CAGR of 20.9% from $77.0 million in 1988 to $750.0 million in 2000. This increase largely reflects the growth in fitness club memberships in the United States, from 17.0 million in 1987 to 32.8 million in 2000, according to the International Health, Racquet and Sportsclub Association. In order to gain entry into this growing market, we acquired the Free Motion Fitness business in December 2000. This new division offers a full line of innovative institutional fitness equipment including patented strength training equipment under the Free Motion brand, and treadmills and aerobic equipment under the NordicTrack brand name. . Increase Our International Sales. We believe that we are positioned to capitalize on our brands in order to increase our sales in several international markets. In Europe, we intend to leverage our significant sales and distribution infrastructure in France, Germany, Italy and the United Kingdom. . Selectively Pursue Acquisitions. The home and institutional fitness equipment markets are highly fragmented, and we believe that there may be attractive acquisition opportunities for us. We will selectively seek opportunities to leverage our strong manufacturing, product development, distribution and marketing capabilities to increase the cashflow from acquired businesses. Products Cardiovascular and Other Fitness Equipment Our products in the cardiovascular and other fitness equipment category cover a broad range of technological sophistication and a variety of price points. Primary products within this category includes the following: Treadmills We design, innovate, manufacture, market and distribute motorized and manual treadmills, designed to promote cardiovascular fitness. Our principal competitors in this category are Schwinn, Life Fitness, Pacemaster, Cybex, Precor and Keys, whose products are primarily targeted at the higher price point range of the market, and Sportcraft recently began supplying Wal-Mart a motorized treadmill targeted at the lower price point range of the market. We are the leading producer of motorized treadmills. Our treadmills include proprietary technologies in the electronics console and drive train systems. In the March 2002 issue of Consumer Reports, six of our treadmills ranked among the top eleven treadmills worldwide, based on criteria such as quality, durability, features and ease of use. Certain features offered by our motorized treadmills that enhance the home user's experience include bio- feedback electronics such as heartrate control, pulse and body fat, certain programmable speeds and inclines, electronic feedback on speed, elapsed time, distance traveled, calories/fat calories burned, and cross-training upper body exercise functions. The SpaceSaver feature for treadmills (introduced in 1996), for which we hold 16 United States patents, enables treadmills with this feature to fold vertically for easy storage. As of the Fall of 2001, we have equipped all our brands of treadmills with a price point of $599 and above with iFIT technology, for which we hold one United States patent and have seven patents pending. iFIT technology automatically controls a treadmill's speed and incline. iFIT technology combines automatic equipment control, heart-rate paced music, and the pre-recorded coaching of a personal trainer. Consumers can enjoy iFIT technology using 56 streaming workouts from the iFIT Website, music workouts on compact discs, or multi-media iFIT videos. In addition, we also offer live personal training services via the Internet for consumers who choose to subscribe to our service. Other popular features on our treadmill line of products include: cushioning mechanisms such as adjustable leaf springs and soft belts for a quiet, shock-absorbent workout and the CrossWalk line of treadmills, which provides users with upper body exercise for a total body workout. Ellipticals. The relatively new category of elliptical crosstrainers was launched in the institutional fitness market in the early 1990's. Ellipticals are now the fastest growing category of products in the home fitness industry, growing at a CAGR of 11.3% from 1997 to 2000. Ellipticals offer 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. We pioneered an innovative mechanism that links upper-body motion with the lower-body motion for a synchronized rhythmic total-body workout. Our ellipticals typically provide an electronic display that provides heartrate control, programmed workouts and feedback on speed, time, distance and calories burned. Our iFIT technology, which automatically adjusts resistance on elliptical trainers, is included on many elliptical trainers priced at $399 and above. Retail prices of our ellipticals range from $179 to $999 and are available in the NordicTrack, ProForm, HealthRider, Image, Reebok and Weslo brands. Our Reebok, ProForm and NordickTrack brand ellipticals were rated the number one, two and three ellipticals, respectively, in the March 2002 Consumer Reports ranking of home exercise equipment. Our principal competitors in this category are Fitness Quest and Thane. Exercise Bikes. We offer exercise bikes featuring a variety of resistance mechanisms including electromagnetic, self-generating, flywheel and air, electronic monitors which display elapsed time, speed, distance and calories burned, and dual function design, which allows the user to exercise the upper body, lower body or both simultaneously. Certain units include heartrate control, motivational electronics and programmable resistance which allow users to design their own workouts. Our iFIT technology which automatically adjusts resistance, is included on several recumbent and upright bikes priced at $299 and above. Recreational Sports Products. Through our JumpKing subsidiary, we manufacture and market 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 for approximately $25 while retail prices for our full-sized trampolines range from $179 to $399. 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 retailers and warehouse clubs, sporting goods retailers, and direct-to-consumers through home shopping cable networks, catalogs and our own direct response marketing efforts. Strength Training Equipment We offer a complete line of anaerobic strength training equipment designed to develop muscle tone and strength under the NordicTrack, Image, ProForm, Weslo, Weider, Gold's Gym, and Reebok brand names. Our principal competitors in this category include Nautilus Group, Inc., Fitness Quest, Soloflex, Life Fitness and Cybex. Our products in this category include the following: Home Gyms. Our multi-purpose home gyms offer a range of resistance mechanisms, from selectorized weight stacks to plate-loaded gyms to our powerstroke leverage system. New products within this category include our patented Free Motion equipment, which enables users to enjoy a full range of motion with "functional movement" versus the rigid "fixed path movement" of traditional equipment. Functional movement training is a significant trend in strength training for home fitness as well as for professional athletes. Other products within this category include our multi-purpose home gyms, which integrate aerobic functions for 57 crosstraining. Selected units are designed to allow multiple users to use the equipment simultaneously, thereby allowing circuit training. Our principal competitors in this category include Direct Focus, Fitness Quest Paramount and Life Fitness. Weight Benches, Cages and Free Weights. We offer a range of weight benches and squat cages under our NordicTrack, Image, Proform and Weider brand names. Retail prices for these products range from $49 to $299. We also offer a broad assortment of cast-iron weight plates, vinyl and neoprene dipped weights and dumbbells, in standard and Olympic size formats. Exercise Accessories. We offer a line of back support belts, workout gloves and exercise accessories, including ankle and hand weights and grip devices. These products are sold under the Reebok, HealthRider, Weider, ProForm and NordicTrack brands. Brands We design, innovate, and market our products under some of the best known brands in the fitness industry, including NordicTrack, HealthRider, Free MotionFitness, ProForm, Image, Weslo, and under license, Reebok, Weider and Gold's Gym. See "Trademarks." Our NordicTrack brand name is recognized by 86.6% of Americans, according to a quantitative survey conducted by American Sports Data, a market research firm. NordicTrack ranked number 7 out of 185 sporting goods brands in this study conducted in 1997, which included Nike and Reebok. The NordicTrack brand has broad awareness, as evidenced by the nearly even awareness levels across various age, income, ethnic and education groups in the American Sports Data study. In addition, our ProForm brand is the number one fitness brand in the United States according to SMRG. Institutional Fitness Equipment In order to gain entry into the growing market of institutional fitness equipment, in December 2000 we acquired the Free Motion Fitness business, a designer, manufacturer and marketer of innovative and patented institutional strength training equipment called "Free Motion." As part of our strategy to gain share in this market, we have also recently begun to offer treadmills and other cardio fitness equipment, such as Incline Trainers, under the NordicTrack brand into the institutional market. We use our institutional fitness equipment sales force to market and distribute our institutional fitness equipment predominantly to health clubs, corporate wellness centers and elite athlete training centers. Our principal competitors in the institutional fitness market are Life Fitness, Precor, StarTrac and Cybex. Sales, Marketing and Distribution Sales and Marketing. We market our products under multiple brands through multiple distribution channels, including department stores, mass retailers and warehouse clubs, sporting goods and specialty fitness retailers and direct-to-consumers through our own Internet sites, catalogs and retail stores. Distribution Capabilities. We believe our distribution capabilities and post-sales support place us in a unique position to service major retailers. This has been done through the successful implementation of our integrated distribution plan that allows us to respond to customer orders with a computerized bar-coded inventory management system that is used to insure that the necessary components are available for manufacturing. This system is also capable of tracking finished goods through all levels of the distribution chain. Through the effective use of electronic data interchange, we are able to run manufacturing jobs to fill specific customer orders, arrange for shipping from many of our manufacturing facilities and make timely deliveries to any of our customer locations. 58 International Operations Foreign revenue (sales originating in countries other than the United States) in fiscal years 2001, 2000 and 1999 was $72.2 million, $61.5 million and $61.6 million, respectively. Revenue from no single country was material to the consolidated revenues of the Company. Sales outside the United States are concentrated in Europe, Asia/Pacific Rim, Canada and Central/South America. In order to meet the growing demand for home and institutional fitness equipment, we maintain offices, showrooms and warehouses in Leeds, England; Perugia, Italy; and Carrieres, France, employing nearly 85 people. Retail Operations As of March 2, 2002, we operated 70 retail stores throughout the United States serving metro New York City, Chicago, Seattle, San Francisco, Los Angeles, Atlanta and other cities. Our NordicTrack product line in these stores and other locations includes treadmills, ellipticals, incline trainers, stationary bikes, multi-purpose home gyms, Pilates machines, jogging strollers and fitness apparel. Product Design and Innovation 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. As of March 2, 2002, we had approximately 382 employees in our research and development group. We hold 181 United States patents, we have 97 United States and 509 foreign trademarks, we have 35 United States and 34 foreign patents pending and 23 United States and 82 foreign trademarks pending. We had research and development expenses of $10.9 million in fiscal 2001. 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. Customers Our largest customer since 1985 has been Sears. In fiscal 2001, Sears accounted for approximately 42.4% of our total net sales, a 3.3% increase over fiscal 2000. Other important customers include Wal-Mart, Sam's Club, The Sports Authority, Gart's Sports, Galyan's and Dick's Sporting Goods. Although Sears still accounts for a substantial portion of our sales, the percentage of net sales to Sears has decreased over the past decade from a high of approximately 68% in fiscal 1989. Nevertheless, the dollar amount of our net sales to Sears has increased during this time period. Several customers have distinguished us with several vendor awards for our commitment in providing quality and value to the American consumer, including, among others, Sears' Vendor of the Year in 2000 and their Partner in Progress award eleven times since 1985, Wal-Mart's Vendor of the Quarter once in each of fiscal 1999 and fiscal 2000 and the annual SPARC Award five times including the last four years consecutively. This annual award is the only industry-wide vendor recognition program in mass market retailing, and is awarded by Discount Store News, a magazine which employs a panel made up of key merchandising executives from the mass market retailing industry. This award honors those who excel in self-sell packaging, new product innovation, on-time delivery, advertising support and quality control. We sell our products to customers representing over 7,600 consumer locations, excluding those consumers we sell to directly through our retail and 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 59 amount of purchases by, or a write-off of any significant receivable due from any of our major customers could have a material adverse effect on our business. See "Risk Factors--We rely on a limited number of major customers, the loss of any of which could have a material adverse effect on our business." Competition The fitness equipment market is 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. We compete with several domestic manufacturers and distributors such as Fitness Quest, Life Fitness (a division of Brunswick), Cybex/Trotter, Precor (a division of Illinois Tool Works), and Direct Focus. In Europe, we principally compete with Tunturi, Helmut Kettler and other domestic competitors. The following table shows our five largest competitors in the United States: Top Five United States Fitness Competitors
Company Name Primary Distribution Channel Principal Products - ------------ ---------------------------- ------------------ Cybex / Trotter............... Specialty fitness dealers, Cardiovascular, institutional clubs and spas Strength Training Nautilus Group, Inc........... TV infomercials, institutional Cardiovascular, clubs and spas Strength Training Fitness Quest................. TV infomercials, mass Cardiovascular, distribution channels Strength Training Life Fitness.................. Institutional clubs and spas, Cardiovascular, specialty fitness dealers Strenth Training Precor........................ Institutional clubs and spas, specialty fitness dealers and Cardiovascular, sporting goods retailers Strength Training
Manufacturing and Purchasing In fiscal 2001, we manufactured or assembled over 80% of our products and component parts at our facilities in Utah, Texas and Canada. The balance of our products and component parts were manufactured and assembled by third parties, principally in mainland China. We have long-standing supply relationships with a number of offshore 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 1.1 million square feet for manufacturing, including a 300,000 square foot facility in Logan, Utah, where the majority of our treadmills are manufactured or assembled. We constructed our Logan, Utah plant in 1990 and equipped the facility with modern manufacturing and assembly features, including fully integrated metal fabrication, powdercoat painting, robotic welding and injection molding equipment. In 1990, we purchased a trampoline manufacturing operation in Dallas, Texas, which produces the JumpKing trampoline brand. In 1991, we began operating our plant in Smithfield, Utah. In 1994, we began operating our Clearfield, Utah manufacturing facility. In 1995, we opened our Smithfield North Plant. In 1996, we expanded our manufacturing capacity by 233,671 square feet through the acquisition of our Canadian manufacturing facility in St. Jerome, Canada. 60 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 all of our non-retail facilities in Utah. 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. The primary raw materials and component parts that we use to manufacture our products are electronics, steel tubing, belt material, motors, rollers, walking decks and plastics. In fiscal 2001, no single raw material or component part accounted for more than 10% of our materials cost. The Bush administration recently announced proposed increased tariffs on raw steel imported from certain countries into the United States. Steel is a primary raw material used in the manufacture of components used into our finished products. Increased steel tariffs may increase our cost of goods. The ultimate impact that this tariff proposal will have on our results of operations remains uncertain. From fiscal 1996 to fiscal 2001 we invested over $68.4 million in tooling, molding, production and computer equipment to develop state-of-the-art production, research and development, distribution and reporting systems. We have a fully implemented Enterprise Resource Planning ("ERP") system that integrates all manufacturing, planning, inventory, purchasing, order entry and financial functions. We have not been required by our auditors to shut down for physical inventories for six years due to the strength of our materials management controls and systems. Our fully-automated management information and reporting systems also allow for efficient operating performance, strong ties to retailers and accurate performance analysis. Our inventory management and manufacturing productivity are enhanced by our just-in-time system for purchasing materials and components. We have also invested in Electronic Data Interchange ("EDI") capabilities, including Wal-Mart's Retail Link system, which provides us and a substantial number of our primary customers a seamless flow from initial retailer orders to parts purchasing to product manufacturing to shipping. We have also implemented EDI capabilities with substantially all of our primary customers. Employees As of March 2, 2002, we employed approximately 3,910 people, 185 of whom were and are represented by a Canadian labor union. We are party to a collective bargaining agreement with this union which expires on August 7, 2004. We believe that we have good relationships with our employees. Factory employees are compensated through a targeted incentive system. Managerial employees receive bonuses tied to the achievement of performance targets. As of March 2, 2002, approximately 382 employees were engaged in research and development, 425 in sales and marketing, 2,369 in manufacturing and 397 in other areas, primarily administrative. We are also subject to two employment agreements with senior executives. See "Certain Relationships and Related Party Transactions--Employment Agreements." Environmental Matters Our operations are subject to federal, state and local health and safety and environmental 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 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. In addition, many but not all of our properties have been the subject of either Phase I or 61 Phase II Environmental Site Assessments. While we are not aware of any existing conditions that are likely to result in material costs or liabilities to us, there can be no assurance that all potential instances of soil or ground water contamination have been identified even where Environment Site Assessments have been conducted. Accordingly, there can be no assurance that previously unknown environmental conditions will not be discovered at any of our properties, whether presently or formerly owned or leased, or that the cost of remediating such condition will not be material. Insurance and Product Recalls 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 25, 2001 to October 1, 2002 of up to $5.0 million per occurrence and $5.0 million in the aggregate. The policy has a deductible on each claim of up to $500,000. 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 guarantee that our product liability insurance is or will be adequate to cover such claims. From time to time we are subject to product recalls of defective products. Recently we, in conjunction with the Consumer Product Safety Commission, initiated a recall of our Hiker Product. To date, we have received fourteen reports from consumers that under certain circumstances an electrical component in the control system of our Hiker product which included approximately 7,500 total units. These units could overheat causing a risk of fire. We effected a recall of the units and remediation of the defective machines at our retail outlets and those already purchased by consumers. While we cannot be certain of the ultimate costs of effecting this remediation we do not believe the costs will be material. Facilities Our headquarters are located in Logan, Utah, and we own the related land and buildings. Additionally, we own land and buildings in Canada. The total square footage of our owned buildings is approximately 485,000 square feet. We lease additional facilities for manufacturing, warehouses and offices in the United States and various foreign countries including the United Kingdom, Italy, France and Germany. We sublease certain of these facilities where space is not fully utilized or has been involved in restructuring activities. We believe that these facilities are well maintained, in good operating condition and are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate any expansion of our operations. In addition, as of March 2, 2002 we operated under lease 70 NordicTrack retail stores in various cities in the United States. Legal Proceedings We are party to a variety of non-product liability commercial lawsuits involving contract claims. We believe that adverse resolution of these lawsuits would not have a material adverse effect upon our results of operations or financial position. We are party to a variety of product liability lawsuits as a result of injuries sustained by customers while using a variety of our products. These claims include injuries sustained by individuals using trampolines and 62 treadmills. We vigorously defend any and all product liability claims brought against us and do not believe that any currently pending claim or series of claims will have a material adverse effect on our results of operations or financial position. We are involved in litigation with Service Merchandise in connection with its filing for bankruptcy protection. The bankruptcy trustee has filed suit seeking to recapture approximately $1.5 million in payments made to us as a voidable preference. We are also involved in several intellectual property and patent infringement claims, arising in the ordinary course of our business. We believe that the ultimate outcome of these matters will not have a material adverse effect upon our results of operations or financial position. The United States Customs Service has assessed United States duties of approximately $1.3 million regarding the disputed treatment of certain imports. On September 1, 2000 we made a partial payment in the amount of $213,188. On September 25, 2000, we initiated proceedings with the United States Customs Service to obtain a ruling on the correct treatment of these imports. If this proceeding results in a favorable ruling for us, we hope to obtain a refund of the partial payment paid on September 1, 2000. We can make no assurance that we will obtain a favorable result with respect to these amounts. 63 MANAGEMENT Directors And Executive Officers The directors and executive officers of our company, and their ages, are as follows:
Years Name Age with ICON Position - ---- --- --------- -------- Scott R. Watterson................. 46 24 Chairman of the Board and Chief Executive Officer Gary E. Stevenson.................. 46 24 President, Chief Operating Officer and Director S. Fred Beck....................... 44 13 Chief Financial and Accounting Officer, Vice President and Treasurer David J. Watterson................. 42 22 Senior Vice President, Marketing and Research and Development Jon M. White....................... 54 15 Vice President, Manufacturing William T. Dalebout................ 53 14 Vice President, Design M. Joseph Brough................... 38 13 Vice President, Operations and Information Technology Matthew N. Allen................... 38 18 Vice President of Product Development Douglas L. Clausen................. 55 11 Vice President, Purchasing Brad A. Bearnson................... 48 7 General Counsel, Secretary Robert C. Gay...................... 49 -- Vice Chairman of the Board Ronald P. Mika..................... 42 -- Director Gregory Benson..................... 47 -- Director David J. Matlin.................... 40 -- Director Christopher R. Pechock............. 37 -- Director Stanley C. Tuttleman............... 82 -- Director W. McComb Dunwoody................. 57 -- Director
Scott R. Watterson. Mr. Watterson has served as Chairman of our Board of Directors and Chief Executive Officer since 1988. Prior to 1988, Mr. Watterson co-founded Weslo, Inc., a predecessor entity of the Company, in 1977. In addition, Mr. Watterson is a director of 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 our President, Chief Operating Officer and as one of our directors since 1988. Prior to 1988, Mr. Stevenson co-founded Weslo, Inc., the predecessor entity of the Company, in 1977. S. Fred Beck. Mr. Beck has served as our Chief Financial Officer and Accounting Officer, Vice President and Treasurer since 1989. 64 David J. Watterson. Mr. Watterson has served as Senior Vice President of Marketing and Research and Development since November 1992. Mr. Watterson is Scott R. Watterson's brother. Jon M. White. Mr. White has served as our Vice President of Manufacturing since 1988. Prior to 1988 Mr. White served as Plant Manager of Weathershield Manufacturing Inc. William T. Dalebout. Mr. Dalebout has served as our Vice President of Design since 1987. M. Joseph Brough. Mr. Brough joined us in 1989 and has served as our Vice President of Operations and Information Technology since 1995. Matthew N. Allen. Mr. Allen joined us in 1984 and serves as Vice President of Product Development. Douglas L. Clausen. Mr. Clausen joined us in 1991 and has served as our Vice President of Purchasing since this time. Brad A. Bearnson. Mr. Bearnson joined us in 1995 and presently serves as General Counsel and Secretary. Robert C. Gay. Mr. Gay became Vice Chairman of our Board of Directors 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 Nutraceutical, GS Technologies Corporation, Anthony Crane, Alliance Laundry and Buhrmann. Ronald P. Mika. Mr. Mika became one of our directors 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 Professional Service Industries. Gregory Benson. Mr. Benson became one of our directors in September 1999. Mr. Benson has been an executive vice president of Bain Capital since 1996. Prior to joining Bain Capital, Mr. Benson was an executive vice president of American Pad and Paper Company. David J. Matlin. Mr. Matlin became one of our directors in September 1999. Mr. Matlin is a managing director of Credit Suisse First Boston Corporation. Mr. Matlin joined Credit Suisse First Boston Corporation in May 1994. Prior to that, Mr. Matlin was 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, Vasocor, Inc., and Forstmann Textiles. Christopher R. Pechock. Mr. Pechock became one of our directors in September 1999. Mr. Pechock is a director of Credit Suisse First Boston Corporation and has been at Credit Suisse First Boston Corporation since 1998. Prior to joining Credit Suisse First Boston Corporation, Mr. Pechock was a portfolio manager at Turnberry Capital Management from 1997 until 1998 and at Eos Partners from 1996 until 1997. From 1993 until 1996, Mr. Pechock was a Vice President at PaineWebber, Incorporated. Stanley C. Tuttleman. Mr. Tuttleman became one of our directors in September 1999. Mr. Tuttleman is the Chief Executive Officer and President of Tuttson Capital Corp. and the Chief Executive Officer of Telepartners International. 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 one of our directors in September 1999. Mr. Dunwoody founded The Inverness Group Incorporated in 1975. He has served as Managing Director of Inverness Management LLC since 1998. Mr. Dunwoody was a member of the Corporate Finance Departments of the First Boston Corporation and Donaldson, Lufkin & Jenrette Securities Corporation. He is Chairman of the Executive Committee of the Board of Directors of National-Oilwell, Inc. 65 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation for fiscal 2001, 2000 and 1999 for Mr. Scott Watterson and our other four most highly compensated executive officers (collectively, the "Named Executive Officers"): Summary Compensation Table
Annual Compensation Other Long-term All ---------------------- Annual Compensation Other Fiscal Salary Bonus Compensation Options Compensation Name and Principal Position Year ($) ($) ($) (#)(4) ($)(5) - --------------------------- ------ ------- ------- ------------ ------------ ------------ Scott R. Watterson.................................. 2001 551,250 448,905 116,808(2)(7) -- 42,000(6) Chairman of the Board and Chief Executive Officer 2000 525,000 746,447 2,053,794(1)(2)(3) -- 1,894 1999 472,500 219,000 25,276(2) -- 1,800 Gary E. Stevenson................................... 2001 498,750 398,149 62,900(2)(7) -- 42,000(6) President and Chief Operating Officer 2000 475,000 656,874 1,650,136(1)(2)(3) -- 1,444 1999 420,000 219,000 18,464(2) -- 1,800 S. Fred Beck........................................ 2001 235,000 145,059 -- -- 8,500 Chief Financial and Accounting Officer 2000 223,000 201,459(8) -- 99,990 544 Vice President and Treasurer 1999 210,000 88,000 -- -- 1,853 David J. Watterson.................................. 2001 284,400 155,559 -- -- 8,500 Vice President, Marketing and Research 2000 270,000 209,459(9) -- 119,957 1,717 and Development 1999 252,000 88,000 -- -- 925 Richard Hebert...................................... 2001 296,974 155,000 10,496(2) -- -- General Manager, ICON Du Canada, Inc. 2000 297,945 109,459 10,893(2) -- -- 1999 297,799 161,473 8,736(2) -- --
- -------- (1) On September 27, 1999, HF Holdings issued to Mr. Watterson and Mr. Stevenson, without cost, an aggregate of 666,700 shares of the common stock of HF Holdings as part of the Company's Recapitalization. Mr. Watterson received 375,000 of those shares, while Mr. Stevenson received 291,700 shares. (2) Includes the annual cost of providing the named person with the use of an automobile during the year. (3) On September 27, 1999, the Company and HF Holdings entered into management agreements with each of Mr. Watterson and Mr. Stevenson, which provide for a closing fee of $417,000 in the aggregate and shared equally. Messrs. Watterson and Stevenson also receive an annual management fee of $67,000 in the aggregate and shared equally. (4) Options to purchase shares of HF Holdings' common stock (5) Includes amounts contributed by the Company for the benefit of the Named Executive Officers under the Company's 401 (K) Plan. (6) Includes a management fee of $33,500 paid by the Company. (7) Includes amounts for personal use of the Company jet. (8) Includes a one-time retention bonus of $92,000 as an incentive to stay through the 1999 restructuring. (9) Includes a one-time retention bonus of $100,000 as an incentive to stay through the 1999 restructuring. 66 The following table sets forth information as of May 31, 2001, concerning options of HF Holdings, Inc. exercised by each of the named executive officers in 2001 and year-end option values: Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Value of Unexercised Number of Unexercised In-the-Money Shares Acquired Value Options at May 31, 2001 (#) Options at May 31, 2001 ($)(1) on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/ Unexercisable --------------- ------------ --------------------------- ------------------------------ Common Common Common Common Name Stock Stock Stock Stock - ---- --------------- ------------ --------------------------- ------------------------------ Scott Watterson.......... -- -- -- -- Gary Stevenson........... -- -- -- -- S. Fred Beck............. -- -- 49,995/49,995 -- David J. Watterson....... -- -- 59,979/59,979 -- Richard Hebert........... -- -- -- --
- -------- (1) As of May 31, 2001 there was no market for the common stock of HF Holdings, Inc., no value has been attributed to the equity underlying these options. There has been no arm's length sales of HF Holding's common stock since the closing of the recapitalization in September of 1999. 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 the Company of nonstatutory options. A total of 333,300 shares of common stock of HF Holdings were reserved and issued under the 1999 Stock Option Plan, which is administered by the Board of Directors or a committee thereof. Committee Interlocks and Insider Participation We Company did not maintain a compensation committee during 2001. Messrs. Scott Watterson's and Stevenson's fiscal 2001 compensation was determined prior to the September restructuring pursuant to employment contracts that had been in place since 1989 and, after the September restructuring, 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. Compensation of Directors Our directors do not receive any compensation for serving on the Board of Directors except for Messrs. Tuttleman and Dunwoody who are paid $25,000 annually for their services as directors. 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 its directors. See "Certain Relationships and Related Party Transactions--Management Fees" for a more detailed description of these arrangements. Employment Agreements On September 27, 1999, we entered into three-year employment agreements with each of Mr. Watterson and Mr. Stevenson. Subsequently these agreements have been extended to May 31, 2003. 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. 67 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 the Company's credit facility) of the Company and its subsidiaries (the Company's "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 the Company's 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. 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. 68 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT HF Holdings, Inc. owns all of our outstanding common stock. 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 2, 2002 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)
Percent of Number of Outstanding Names Shares Shares ----- --------- ----------- Scott R. Watterson+ (2)........................... 376,000 4.86% c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Gary E. Stevenson+ (3)............................ 292,700 3.78% c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 The Bain Funds (4)................................ 5,161,035 66.69% c/o Bain Capital, Inc. 111 Huntington Avenue Boston, Massachusetts 02199 Robert C. Gay+ (5)................................ 5,161,035 66.69% c/o Bain Capital, Inc. 111 Huntington Avenue Boston, Massachusetts 02199 Ronald P. Mika+ (5)............................... 5,161,035 66.69% c/o Bain Capital, Inc. 111 Huntington Avenue Boston, Massachusetts 02199 Gregory Benson+ (5)............................... 5,161,035 66.69% c/o Bain Capital, Inc. Devonshire House Mayfair Place London WIJ 8AJ Credit Suisse First Boston Corporation (6)........ 1,312,934 16.96% c/o Credit Suisse First Boston Corporation Eleven Madison Avenue New York, New York 10010-3629 Christopher R. Pechock+ (7)....................... 1,312,934 16.96% c/o Credit Suisse First Boston Corporation Eleven Madison Avenue New York, New York 10010-3629
69
Percent of Number of Outstanding Names Shares Shares - ----- --------- ----------- David Matlin+ (7)........................................... 1,312,934 16.96% c/o Credit Suisse First Boston Corporation Eleven Madison Avenue New York, New York 10010-3629 HF Investment Holdings, LLC................................. 5,160,035 66.69% c/o ICON Health & Fitness, Inc. 1500 South 100 West Logan, Utah 8432 W. McComb Dunwoody+......................................... 344,002 3.44% c/o Inverness/Phoenix Capital LLC 630 Fifth Avenue, Suite 2435 New York, New York 10111 Stanley C. Tuttleman+....................................... 172,002 1.72% Tuttson's Inc. 349 Montgomery Avenue P.O. Box 22405 Bala Cynwyd, Pennsylvania 19004 David J. Watterson (8)...................................... 18,173 -- c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 S. Fred Beck (8)............................................ 15,149 -- c/o ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 All directors and executive officers as a group (11 persons) 7,692,264 98.55% + Director of HF Holdings................................... 7,314,620
- -------- (1) 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, under the Exchange Act of 1934, as amended. The table includes the HF Holdings Warrants (which have an exercise price, subject to adjustment, of $.01 per share) which are presently exercisable. 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. (2) Includes 1,000 shares of common stock owned by HF Investment 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. (3) Includes 1,000 shares of common stock owned by HF Investment 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. (4) Includes 5,160,035 shares of common stock 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 of common stock owned by HF Investment 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 HF Investment Holdings. The Bain Funds disclaim beneficial ownership of any shares in which they do not have a pecuniary interest. 70 (5) Includes the shares beneficially owned by each of the Bain Funds, of which each of Mr. Gay, Mr. Mika and 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 HF Investment 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 and Mr. Benson disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. (6) Includes 669,179 shares of common stock subject to purchase upon exercise of warrants that are presently exercisable. (7) Includes 1,312,934 shares beneficially owned by Credit Suisse First Boston Corporation, 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 Corporation. Each of Mr. Pechock and Mr. Matlin disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. (8) Represents shares of common stock issuable upon exercise of the vested portion of options awarded pursuant to the 1999 HF Holdings Junior Management Stock Option Plan. 71 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Our 1999 Recapitalization General. As part of our recapitalization in September 1999, affiliates of Bain and its designees, Scott Watterson, Gary Stevenson, and Credit Suisse First Boston Corporation ("CSFB") and its affiliates made an equity investment in HF Holdings which then made a $40.0 million cash contribution of capital to us. Investment By Bain Affiliates And Senior Management. The Bain Affiliates (and their designees), CSFB and certain members of our senior management purchased membership interests in HF Investment Holdings, LLC ("HF Investment Holdings") for an aggregate of $30.0 million of cash. The Bain Affiliates purchased $14,950,000 worth of membership interests in the form of Class B Units, each member of our senior management purchased an aggregate of $5,000,000 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. 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 1999 recapitalization). Investment By CSFB. In addition to its investment in HF Investment Holdings, CSFB, in September, 1999 purchased for an aggregate purchase price of $10.0 million in cash: (i) $7.5 million principal amount of convertible notes (which are reflected as common stock on the balance sheet of HF Holdings) that were convertible into shares of common stock of HF Holdings and (ii) 643,755 shares of common stock of HF Holdings. 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). CSFB received, as a participant in a private exchange offering, including the retirement of the above described convertible notes, an aggregate of approximately $4.0 million in cash, $4.5 million principal amount of 12% subordinated notes due 2005 and warrants to purchase 669,179 shares of common stock of HF Holdings. It is anticipated that a portion of the proceeds from the sale of the notes will be used to redeem the 12% senior subordinated notes due 2005 held by CFSB. 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, Credit Suisse First Boston Corporation and certain members of our senior management. Under the Stockholders Agreement, certain holders of HF Holdings' common stock, who received such common stock in the exchange offer, are subject to transfer restrictions with respect to their common stock. In addition, these holders received customary tag along and drag along rights with respect to sales of common stock of HF Holdings (including sales by any Bain Holder) and pre-emptive rights with respect to any issuances of common stock by HF Holdings to HF Investment Holdings. The tag along, drag along and registration rights of 72 our management are subject to the condition that our senior management own at least 25% of the common stock held by all management holders and the junior management own at least 15% of the common stock of HF Holdings held by all management holders, provided such person is still employed by us or has been employed within the 12 preceding months and the purchaser of the common stock is a financial buyer. Certain holders of warrants to purchase common stock of HF Holdings issued in the exchange offer received registration rights with respect to the common stock issuable upon exercise of such warrants. Pursuant to the Stockholders Agreement, HF Investment Holdings granted to CSFB an option to purchase a certain percentage (based on the date of exercise of such option) of the common stock of HF Holdings held by HF Investment Holdings. HF Investment Holdings also granted to certain of our junior management an option to purchase 216,700 shares of the common stock of HF Holdings held by HF Investment Holdings. Each of these options is exercisable only upon the occurrence of a Liquidity Event (as defined in the Stockholders Agreement). In addition, HF Investment Holdings is entitled to appoint seven directors and CSFB is entitled to appoint two directors to our Board of Directors. Upon a liquidation of HF Investment Holdings, the Bain Affiliates will be entitled to appoint five directors and Scott Watterson and Gary Stevenson shall have the right to be directors, provided they remain employed by us. Management Agreements. On September 27, 1999, our company and HF Holdings also entered into a new management agreement with a Bain affiliate which provides an annual management fee not to exceed $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 a gross purchase price of 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). Additionally, HF Holdings entered into a management arrangement with CSFB which provides for an annual management fee of $366,500 in exchange for consulting services. In addition, if we enter into transactions which constitute a Liquidity Event (as defined in the Stockholders Agreement), CSFB will receive a fee in an amount which will approximate 50% of the fee payable under the management agreement with the Bain Affiliate 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, so long as the Bain Affiliate is receiving a management fee under its 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, CSFB and their affiliates, Mr. Watterson and Mr. Stevenson, respectively. Aircraft Lease On February 8, 2002, we entered into an agreement with FG Aviation, Inc. ("FG"), a company which is jointly owned by certain of our officers, whereby we have committed to lease a Gulf Stream II jet from FG. Minimum rentals under the lease, which expires February 2009, are $120,000 per month. In addition, we are responsible for payment of the aircraft crew and any unscheduled maintenance of the aircraft. 73 DESCRIPTION OF SENIOR INDEBTEDNESS Senior Credit Facility We are party to a credit agreement (the "Credit Agreement") with General Electric Capital Corporation ("GE"), as administrative and collateral agent sole and exclusive lead arranger and the lenders, pursuant to which the lenders, subject to certain conditions, have made available to us a credit facility of up to $235.0 million. Structure The credit facility consists of (i) revolving loans of up to $210.0 million including a letter of credit subfacility of up to $10.0 million (the "Revolving Credit Facility"), and (ii) a term loan of $25.0 million (the "Term Loan Facility"). Availability and Use of Proceeds The Revolving Credit Facility is subject to a borrowing base defined as up to 85% of our and our subsidiary guarantors' eligible accounts receivable and up to the lesser of (a) 60% of our and our subsidiary guarantors' eligible inventory (with a seasonal increase to 70% during the months from July through November) valued at the lower of cost or market value, less reserves or (b) 85% of the appraised net orderly liquidation value of inventory. The undrawn portion of the Revolving Credit Facility is available to us for general corporate purposes, including to effect permitted acquisitions. The full amount of the Term Loan Facility was borrowed pursuant to a single drawing on April 9, 2002, and any amounts repaid or prepaid under the Term Loan Facility may not be reborrowed. Interest; Fees Borrowings under the Revolving Credit Facility will, at our option, bear interest at either (i) a floating rate equal to the index rate (to be defined as the higher of the prime rate as reported by the Wall Street Journal or the Overnight Federal Funds rate plus 50 basis points) plus 1.250%, or (ii) a fixed rate for periods of one, two, three or six months equal to the reserve adjusted LIBOR plus 2.625%. Borrowings under the Term Loan Facility will, at our option, bear interest at either (i) a floating rate equal to the above-described index rates plus 1.750%, or (ii) a fixed rate for periods of one, two, three or six months equal to the reserve adjusted LIBOR plus 3.125%. Interest will be payable monthly in arrears for all index rate loans and at the expiration of each LIBOR period for all LIBOR loans, provided that with respect to LIBOR periods greater than three months interest will be payable at three-month intervals and on the expiration of such LIBOR period. We will be subject to certain LIBOR breakage fees in connection with any LIBOR based advances. We are required to pay administration fees, commitment fees and certain expenses and to provide certain indemnities, all of which we believe are customary for financings of this type. For so long as any event of default is continuing, any applicable interest rate shall be increased by 2.0% per annum. An unused facility fee calculated at a rate equal to 0.50% on the average unused daily balance of the Revolving Credit Facility will be payable monthly in arrears. This unused facility fee is subject to upward adjustment annually to 0.75% if the average annual utilization of the facility is less than 50%. Fees in respect of letters of credit issued under the Revolving Credit Facility will be equal to 2.0% per annum on the face amount of the letters of credit, payable monthly in arrears. We are also required to pay any costs and expenses incurred by GE in arranging for the issuance or guaranty of letters of credit and any charges assessed by the issuing bank. Maturity and Amortization Loans made under the Revolving Credit Facility will mature on the fifth anniversary of the closing date. The loan made under the Term Loan Facility will mature over five years, and amounts due thereunder will amortize 74 on a quarterly basis in twenty equal installments. In the event that the Revolving Credit Facility is terminated for any reason the Term Loan Facility shall become immediately due and payable. Mandatory Repayments We are required to prepay borrowings under our new credit facility with net cash proceeds from any of the following: (i) asset sales not in the ordinary course of business, subject to certain exceptions (ii) sales of equity or debt securities, (iii) insurance casualty events or condemnation events respecting any of our property, subject to exceptions for replacement or repair, and (iv) 50% of our consolidated excess cash flow. The foregoing prepayments shall be applied against principal due, in the inverse order of maturity, on the Term Loan Facility until such loan is paid in full and thereafter against the Revolving Credit Facility. Voluntary Prepayments We are permitted to make voluntary prepayments of the Term Loan Facility and to permanently reduce the commitment under the Revolving Credit Facility, in each case in whole or in part, at our option and without premium or penalty, subject to certain requirements including reimbursement of the Lenders' redeployment costs in the case of prepayment of Adjusted LIBOR borrowings other than at the end of an interest period. Security and Guarantees Our parent, HF Holdings, has guaranteed the repayment of the new credit facility and has secured its guarantee by the pledge of all of the outstanding common stock of our company. The new credit facility is also secured by substantially all of our assets, including the assets of our existing and future domestic and Canadian subsidiaries. Substantially all of the capital stock of each of our domestic subsidiaries has been pledged as part of the security for the new credit facility. Additionally, substantially all of the capital stock of our Canadian subsidiaries and 65% of the capital stock of certain foreign subsidiaries has been pledged as part of the security for the new credit facility. Each of our domestic and Canadian subsidiaries has directly or indirectly guaranteed the repayment of the credit facility (with the guarantee of our Quebec subsidiary to consist of its guarantee of the obligations of our New Brunswick subsidiary, which in turn will undertake, pursuant to its guarantee, to guarantee repayment of the new credit facility). Covenants The credit agreement contains affirmative and negative covenants customary for such financings. The covenants, among other things: . Require us to provide the lenders with monthly unaudited financial statements and annual audited financial statements; . Require us to maintain cash management systems consistent with our current practices; . Require us to obtain and maintain commercially reasonable insurance protection for all assets and risks; . Limit commercial transactions, management agreements, service agreements and loan transactions between us and our officers, directors, employees and affiliates; . Limit certain sale-leaseback transactions; . Limit our ability to pay cash dividends and other payments or distributions to our stockholders and holders of our subordinated debt and limit payments of management fees to affiliates in certain circumstances; 75 . Require any acquisitions funded through a sub-facility of $25.0 million established under the Revolving Credit Facility to meet certain criteria, including (a) compliance with all financial and other covenants on a pro forma basis after giving effect to any proposed transaction; (b) $20.0 million in minimum remaining availability after giving effect to the proposed acquisition; and (c) the lenders' right to approve contingent liabilities associated with any acquisition including without exception environmental reviews; . Prohibit the sale of our stock or material portion of our assets; and . Prohibit a direct or indirect change in control. The Credit Agreement also contains standard financial covenants customary in connection with facilities of this type. Events of Default The credit agreement contains events of default customary for such financings, including, but not limited to: nonpayment of principal, interest, fees or other amounts when due; violation of covenants; failure of any representation or warranty to be true in all material respects when made or deemed made; cross defaults; ERISA; change of control; bankruptcy events; material judgments; and actual or company-asserted invalidity of the loan documents, liens or security interests or other material agreements. Such events of default allow for certain grace periods and materiality concepts. 76 DESCRIPTION OF EXCHANGE NOTES You can find the definitions of certain terms used in this description under the subheading "Certain Definitions." In this description, "ICON" refers only to ICON Health & Fitness, Inc. and not to any of its subsidiaries. ICON issued the initial notes to the initial purchases on April 9, 2002 under an indenture among itself, the Guarantors and The Bank of New York, as trustee, in a private transaction not subject to the registration requirements of the Securities Act. The initial purchasers sold all of the outstanding initial notes to "qualified institutional buyers" as defined in Rule 144A, under the Securities Act and to persons outside the United States under Regulation S form and terms of the exchange notes are the same as the form and terms of the initial notes they will replace except that: . ICON will register the exchange notes under the securities act . the exchange notes will not bear legends restricting transfer . holders of the exchange notes will not be entitled to some rights under the registration rights agreement, See "Notice to Investors." The terms of the notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939. The following description is a summary of the material provisions of the indenture and the registration rights agreement. It does not restate those agreements in their entirety. We urge you to read the indenture and the registration rights agreement because they, and not this description, define your rights as holders of the notes. Copies of the indenture and the registration rights agreement are available as set forth below under "--Additional Information." Certain defined terms used in this description but not defined below under "--Certain Definitions" have the meanings assigned to them in the indenture. The registered Holder of a note will be treated as the owner of it for all purposes. Only registered Holders will have rights under the indenture. Brief Description of the Notes and the Guarantees The Notes The notes: . are general unsecured obligations of ICON; . are subordinated in right of payment to all existing and future Senior Debt of ICON; . are pari passu in right of payment with any future senior subordinated Indebtedness of ICON; and . are unconditionally guaranteed by the Guarantors. The Guarantees The notes are guaranteed by all of ICON's Domestic Subsidiaries. Each guarantee of the notes: . is a general unsecured obligation of the Guarantor; . is subordinated in right of payment to all existing and future Senior Debt of that Guarantor; and . is pari passu in right of payment with any future senior subordinated Indebtedness of that Guarantor. 77 As indicated above and as discussed in detail below under the caption "--Subordination," payments on the notes and under these guarantees will be subordinated to the payment of Senior Debt. The indenture will permit us and the Guarantors to incur additional Senior Debt. Not all of our subsidiaries will guarantee the notes. In the event of a bankruptcy, liquidation or reorganization of any of these non-guarantor subsidiaries, the non-guarantor subsidiaries will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to us. See footnote 19 to our Consolidated Financial Statements included at the back of this offering circular for detail about the division of our consolidated revenues and assets between our guarantor and non-guarantor subsidiaries. As of the date of the indenture, all of our Domestic Subsidiaries will be "Restricted Subsidiaries." However, under the circumstances described below under the subheading "--Certain Covenants--Designation of Restricted and Unrestricted Subsidiaries," we will be permitted to designate certain of our subsidiaries as "Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will not be subject to many of the restrictive covenants in the indenture. Our Unrestricted Subsidiaries and our Foreign Subsidiaries will not guarantee the notes. Our Canadian Subsidiaries will guarantee the notes. Principal, Maturity and Interest The notes are initially being offered in the principal amount of $155.0 million. We may, without the consent of the holders, increase such principal amount in the future on the same terms and conditions and with the same CUSIP number(s) as the notes being offered hereby. Any offering of additional notes is subject to the covenant described below under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." The notes and any additional notes subsequently issued under the indenture will be treated as a single class for all purposes under the indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. ICON will issue notes in denominations of $1,000 and integral multiples of $1,000. The notes will mature on April 1, 2012. Interest on the notes will accrue at the rate of 11.25% per annum and will be payable semi-annually in arrears on January 1 and July 1, commencing on July 1, 2002. ICON will make each interest payment to the Holders of record on the immediately preceding December 15 and June 15. Interest on the notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. 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 If a Holder has given wire transfer instructions to ICON, ICON will pay all principal, interest and premium and Additional Interest, if any, on that Holder's notes in accordance with those instructions. All other payments on notes will be made at the office or agency of the paying agent and registrar within the City and State of New York unless ICON elects to make interest payments by check mailed to the Holders at their address set forth in the register of Holders. Paying Agent and Registrar for the Notes The trustee will initially act as paying agent and registrar. ICON may change the paying agent or registrar without prior notice to the Holders of the notes, and ICON or any of its Subsidiaries may act as paying agent or registrar. Transfer and Exchange A Holder may transfer or exchange notes in accordance with the indenture. The registrar and the trustee may require a Holder to furnish appropriate endorsements and transfer documents in connection with a transfer of 78 notes. Holders will be required to pay all taxes due on transfer. ICON is not required to transfer or exchange any note selected for redemption. Also, ICON is not required to transfer or exchange any note for a period of 15 days before a selection of notes to be redeemed. Subsidiary Guarantees The notes will be guaranteed, directly or indirectly, by each of ICON's current and future Domestic Subsidiaries (with the Subsidiary Guarantee of our Quebec subsidiary to consist of its guarantee of the obligations of our New Brunswick subsidiary, which in turn will undertake, pursuant to its Subsidiary Guarantee, to guarantee repayment of the notes). These Subsidiary Guarantees will be joint and several obligations of the Guarantors. Each Subsidiary Guarantee will be subordinated to the prior payment in full of all Senior Debt of that Guarantor on the same basis and to the same extent as the notes are subordinated to the Senior Debt of ICON. The obligations of each Guarantor under its Subsidiary Guarantee will be limited as necessary to prevent that Subsidiary Guarantee from constituting a fraudulent conveyance under applicable law. See, however, "Risk Factors--Federal and state statutes allow courts, under specific circumstances, to void guarantees and require noteholders to return payments received from guarantors." A Guarantor may not sell or otherwise dispose of all or substantially all of its assets to, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another Person, other than ICON or another Guarantor, unless: (1) immediately after giving effect to that transaction, no Default or Event of Default exists; and (2) either: (a) the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger assumes all the obligations of that Guarantor under the indenture, its Subsidiary Guarantee and the registration rights agreement pursuant to a supplemental indenture reasonably satisfactory to the trustee; or (b) the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the indenture. The Subsidiary Guarantee of a Guarantor will be released: (1) in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation) to a Person that is not (either before or after giving effect to such transaction) a Subsidiary of ICON, if such sale or other disposition, merger or consolidation complies with the relevant provisions of the indenture; (2) in connection with any sale of all of the Capital Stock of a Guarantor to a Person that is not (either before or after giving effect to such transaction) a Subsidiary of ICON, if the sale complies with the "Asset Sale" provisions of the indenture; or (3) if the Guarantor is designated by ICON as an Unrestricted Subsidiary in accordance with the applicable provisions of the indenture. See "--Repurchase at the Option of Holders--Asset Sales." Subordination The payment of principal, interest and premium and Additional Interest, if any, on the notes will be subordinated to the prior payment in full in cash of all Senior Debt of ICON, including Senior Debt incurred after the date of the indenture. 79 The holders of Senior Debt will be entitled to receive payment in full in cash of all Obligations due in respect of Senior Debt (including interest after the commencement of any bankruptcy proceeding at the rate specified in the applicable Senior Debt) before the Holders of notes will be entitled to receive any payment with respect to the notes (except that Holders of notes may receive and retain Permitted Junior Securities and payments made from the trust described under "--Legal Defeasance and Covenant Defeasance"), in the event of any distribution to creditors of ICON or any Guarantor: (1) in a liquidation or dissolution of ICON or any Guarantor; (2) in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to ICON or any Guarantor or their respective property; (3) in an assignment for the benefit of creditors of ICON or any Guarantor; or (4) in any marshaling of ICON's or any Guarantor's assets and liabilities. ICON also may not make any payment or distribution on account of or in respect of the notes (except in Permitted Junior Securities or from the trust described under "--Legal Defeasance and Covenant Defeasance") if: (1) a payment default on Designated Senior Debt occurs and is continuing beyond any applicable grace period; or (2) any other default occurs and is continuing on any series of Designated Senior Debt that permits holders of that series of Designated Senior Debt to accelerate its maturity and the trustee receives a notice of such default (a "Payment Blockage Notice") from ICON or the holders (or their representative) of any Designated Senior Debt. Payments on the notes may and will be resumed: (1) in the case of a payment default, upon the date on which such default is cured or waived; and (2) in the case of a nonpayment default, upon the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated. No new Payment Blockage Notice may be delivered unless and until: (1) 360 days have elapsed since the delivery of the immediately prior Payment Blockage Notice; and (2) all scheduled payments of principal, interest and premium and Additional Interest, if any, on the notes that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the trustee will be, or be made, the basis for a subsequent Payment Blockage Notice unless such default has been cured or waived for a period of not less than 90 days. If the trustee or any Holder of the notes receives a payment in respect of the notes (except in Permitted Junior Securities or from the trust described under "--Legal Defeasance and Covenant Defeasance") when: (1) the payment is prohibited by these subordination provisions; and (2) the trustee or the Holder has actual knowledge that the payment is prohibited; the trustee or the Holder, as the case may be, will hold the payment in trust for the benefit of the holders of Senior Debt. Upon the proper written request of the holders of Senior Debt, the trustee or the Holder, as the case may be, will deliver the amounts in trust to the holders of Senior Debt or their proper representative. ICON must promptly notify holders of Designated Senior Debt (or their representative) if payment of the notes is accelerated because of an Event of Default. 80 As a result of the subordination provisions described above, in the event of a bankruptcy, liquidation or reorganization of ICON, Holders of notes may recover less ratably than creditors of ICON who are holders of Senior Debt. See "Risk Factors--The notes and the guarantees will be junior to our and the guarantors' senior debt respectively." Optional Redemption At any time prior to April 1, 2005, ICON may on any one or more occasions redeem up to 35% of the aggregate principal amount of notes issued under the indenture at a redemption price of 111.25% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the redemption date, with the net cash proceeds of one or more Equity Offerings; provided that: (1) at least 65% of the aggregate principal amount of notes issued under the indenture remains outstanding immediately after the occurrence of such redemption (excluding notes held by ICON and its Subsidiaries); and (2) the redemption occurs within 90 days of the date of the closing of such Equity Offering. Except pursuant to the preceding paragraph, the notes may not be redeemed at the option of ICON prior to April 1, 2007. Thereafter, the notes may be redeemed at the option of ICON in whole or, in part, upon not less than 30 nor more than 60 days' notice by mail to holders of the notes. The redemption prices (expressed as percentages of principal amount) are as follows for notes redeemed during the periods set forth below:
Redemption Period Price - ------ ---------- April 1, 2007 through March 31, 2008............................. 105.625% April 1, 2008 through March 31, 2009............................. 103.750% April 1, 2009 through March 31, 2010............................. 101.875% April 1, 2010 and thereafter..................................... 100.000%
in each case together with accrued interest up to but not including the redemption date; provided that if the redemption date falls after an interest payment record date and on or before an interest payment date, then the interest payment shall be payable to holders of record on the relevant record date. 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 If a Change of Control occurs, each Holder of notes will have the right to require ICON to repurchase all or any part (equal to $1,000 or an integral multiple of $1,000) of that Holder's notes pursuant to a Change of Control Offer on the terms set forth in the indenture. In the Change of Control Offer, ICON will offer a Change of Control Payment in cash equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest and Additional Interest, if any, on the notes repurchased, to the date of purchase. Within 30 days following any Change of Control, ICON will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the Change of Control Payment Date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the indenture and described in such notice. 81 ICON will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control provisions of the indenture, ICON will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Change of Control provisions of the indenture by virtue of such conflict. On the Change of Control Payment Date, ICON will, to the extent lawful and subject to the provisions set forth under the caption "--Subordination": (1) accept for payment all notes or portions of notes properly tendered pursuant to the Change of Control Offer; (2) deposit with the paying agent an amount equal to the Change of Control Payment in respect of all notes or portions of notes properly tendered; and (3) deliver or cause to be delivered to the trustee the notes properly accepted together with an officers' certificate stating the aggregate principal amount of notes or portions of notes being purchased by ICON. The paying agent will promptly mail to each Holder of notes properly tendered the Change of Control Payment for such notes, and the trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new note equal in principal amount to any unpurchased portion of the notes surrendered, if any; provided that each new note will be in a principal amount of $1,000 or an integral multiple of $1,000. The indenture provides that prior to complying with any of the provisions of this "Change of Control" covenant, but in any event within 60 days following a Change of Control, ICON will either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of notes required by this covenant. ICON will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The provisions described above that require ICON to make a Change of Control Offer following a Change of Control will be applicable whether or not any other provisions of the indenture are applicable. Except as described above with respect to a Change of Control, the indenture does not contain provisions that permit the Holders of the notes to require that ICON repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction. 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 in the indenture applicable to a Change of Control Offer made by ICON and purchases all notes properly tendered and not withdrawn under the Change of Control Offer. The definition of Change of Control includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the properties or assets of ICON and its 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 and it may be unclear as to whether a Change of Control has occurred. Accordingly, the ability of a Holder of notes to require ICON to repurchase its notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of ICON and its Subsidiaries taken as a whole to another Person or group may be uncertain. Asset Sales ICON will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless: (1) ICON (or the Restricted Subsidiary, as the case may be) receives consideration at the time of the Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of; 82 (2) the fair market value is determined by ICON's Board of Directors and evidenced by a resolution of the Board of Directors set forth in an officers' certificate delivered to the trustee; and (3) at least 75% of the consideration received in the Asset Sale by ICON or such Restricted Subsidiary is in the form of cash. For purposes of this provision, each of the following will be deemed to be cash: (a) any liabilities, as shown on ICON's or such Restricted Subsidiary's most recent balance sheet, of ICON or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the notes or any Subsidiary Guarantee) that are assumed by the transferee of any such assets pursuant to a customary agreement that releases ICON or such Restricted Subsidiary from further liability; (b) any securities, notes or other obligations received by ICON or any such Restricted Subsidiary from such transferee that are converted within 30 days by ICON or such Restricted Subsidiary into cash, to the extent of the cash received in that conversion; and (c) any payment of Senior Debt secured by the assets sold in the Asset Sale. Within 365 days after the receipt of any Net Proceeds from an Asset Sale, ICON may apply those Net Proceeds at its option: (1) to repay Senior Debt and, if the Senior Debt repaid is revolving credit Indebtedness, to correspondingly reduce commitments with respect thereto; (2) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another Permitted Business; (3) to make capital expenditures; (4) to acquire other long-term assets that are used or useful in a Permitted Business; or (5) for any combination of clauses (1) through (4) above. Pending the final application of any Net Proceeds, ICON may temporarily reduce revolving credit borrowings or otherwise invest the Net Proceeds in any manner that is not prohibited by the indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding paragraph will constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million, ICON will make an Asset Sale Offer to all Holders of notes and all holders of other Indebtedness that is pari passu with the notes containing provisions similar to those set forth in the indenture with respect to offers to purchase or redeem with the proceeds of sales of assets to purchase the maximum principal amount of notes and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of principal amount plus accrued and unpaid interest and Additional Interest, if any, to the date of purchase, and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, ICON may use those Excess Proceeds for any purpose not otherwise prohibited by the indenture. If the aggregate principal amount of notes and other pari passu Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee will select the notes and such other pari passu Indebtedness to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds will be reset at zero. ICON will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with each repurchase of notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the Asset Sale provisions of the indenture, ICON will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Asset Sale provisions of the indenture by virtue of such conflict. 83 The agreements governing ICON's Senior Debt will prohibit ICON from purchasing any notes, and also will provide that certain change of control or asset sale events with respect to ICON will constitute a default under these agreements. Any future credit agreements or other agreements relating to Senior Debt to which ICON becomes a party may contain similar restrictions and provisions. In the event a Change of Control or Asset Sale 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 would constitute an Event of Default under the indenture which would, in turn, constitute a default under such Senior Debt. In such circumstances, the subordination provisions in the indenture would likely restrict payments to the Holders of notes. Selection and Notice If less than all of the notes are to be redeemed at any time, the trustee will select notes for redemption as follows: (1) if the notes are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the notes are listed; or (2) if the notes are not listed on any national securities exchange, on a pro rata basis, by lot or by such method as the trustee deems fair and appropriate. No notes of $1,000 or less can be redeemed in part. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of notes to be redeemed at its registered address, except that redemption notices may be mailed more than 60 days prior to a redemption date if the notice is issued in connection with a defeasance of the notes or a satisfaction and discharge of the indenture. Notices of redemption may not be conditional. If any note is to be redeemed in part only, the notice of redemption that relates to that note will state the portion of the principal amount of that note that is to be redeemed. A new note in principal amount equal to the unredeemed portion of the original note will be issued in the name of the Holder of notes upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption. Certain Covenants Restricted Payments 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' Equity Interests (including, without limitation, 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 ICON's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of ICON or to ICON or a Restricted Subsidiary of ICON); (2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving ICON) any Equity Interests of ICON or any direct or indirect parent of ICON; (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the notes or the Subsidiary Guarantees, except a payment of interest or principal at the Stated Maturity thereof; or 84 (4) make any Restricted Investment (all such payments and other actions set forth in these clauses (1) through (4) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (1) no Default or Event of Default has occurred and is continuing or would occur as a consequence of such Restricted Payment; and (2) ICON would, 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 pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock;" and (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by ICON and its Restricted Subsidiaries after the date of the indenture (excluding Restricted Payments permitted by clauses (2), (3), (4), (6), (7) and (8) of the next succeeding paragraph), is less than the sum, without duplication, of: (a) 50% of the Consolidated Net Income of ICON for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the indenture to the end of ICON's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by ICON since the date of the indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of ICON (other than Disqualified Stock) or from the issue or sale of convertible or exchangeable Disqualified Stock or convertible or exchangeable debt securities of ICON that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Subsidiary of ICON), plus (c) to the extent that any Restricted Investment that was made after the date of the indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (i) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (ii) the initial amount of such Restricted Investment, plus (d) to the extent that any of our Unrestricted Subsidiaries is redesignated as a Restricted Subsidiary after the date of the indenture, the fair market value of ICON's Investment in such Subsidiary as of the date of such redesignation. The preceding provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration of the dividend, if at the date of declaration the dividend payment would have complied with the provisions of the indenture; (2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of ICON or any Guarantor or of any Equity Interests of ICON in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of ICON) of, Equity Interests of ICON (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition will be excluded from clause (3)(b) of the preceding paragraph; (3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of ICON or any Guarantor with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (4) the payment of any dividend by a Restricted Subsidiary of ICON to the holders of its Equity Interests on a pro rata basis; 85 (5) so long as no Default has occurred and is continuing or would be caused thereby, the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of ICON or any Restricted Subsidiary of ICON held by any of ICON's (or any of its Subsidiaries') current or former employees, officers or directors pursuant to any management equity subscription agreement, stock option agreement, employment agreement, severance agreement, employee benefits plan or similar agreement or plan; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests may not exceed $5.0 million; (6) repurchases of Equity Interests deemed to occur upon exercise of stock options if those Equity Interests represent a portion of the exercise price of those options; (7) distributions to a parent corporation for administrative expenses in an amount not to exceed $500,000 in any fiscal year; (8) cash dividends to a parent corporation in amounts required for that parent corporation to pay any federal, state or local income taxes to the extent that such income taxes are directly attributable to the income of ICON and its Subsidiaries; and (9) so long as no Default has occurred and is continuing or would be caused thereby, other Restricted Payments in an amount not to exceed $5.0 million. 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 Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant will be determined by the Board of Directors whose resolution with respect thereto will be delivered to the trustee. 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 $5.0 million. Not later than the date of making any Restricted Payment, 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 "Restricted Payments" covenant were computed, together with a copy of any fairness opinion or appraisal required by the indenture. Incurrence of Indebtedness and Issuance of Preferred Stock ICON will not, and will not permit any of its 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 Debt), and ICON will not, and will not permit any of the Guarantors to, issue any Disqualified Stock and will not permit any of its Subsidiaries that do not guarantee the notes to issue any shares of preferred stock; provided, however, that ICON and any Guarantor may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock, if the Fixed Charge Coverage Ratio for ICON's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least (a) 2.25 to 1.0, if such incurrence or issuance is on or prior to April 1, 2004 or (b) 2.50 to 1.0, if such incurrence or issuance is after April 1, 2004, in each case, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred or Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period; The first paragraph of this covenant will not prohibit the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (1) the incurrence by ICON and any Guarantor of additional Indebtedness and letters of credit under Credit Facilities in an aggregate principal amount at any one time outstanding under this clause (1) (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of ICON 86 and its Subsidiaries thereunder) not to exceed the greater of (x) $235.0 million (provided that such amount shall be reduced to the extent of any reduction or elimination of any commitment under any Credit Facility resulting from or relating to the formation of any Receivables Subsidiary or the consummation of any Qualified Receivables Transaction and shall thereafter be increased to an amount not greater than $235.0 million to the extent of any increase in the commitment under any Credit Facility resulting from or relating to the termination of any Qualified Receivables Transaction or the elimination of any Receivables Subsidiary) or (y) the amount of the Borrowing Base as of the date of such incurrence; (2) the incurrence by ICON and its Restricted Subsidiaries of the Existing Indebtedness; (3) the incurrence by ICON and the Guarantors of Indebtedness represented by the notes and the related Subsidiary Guarantees to be issued on the date of the indenture and the exchange notes and the related Subsidiary Guarantees to be issued pursuant to the registration rights agreement; (4) the incurrence by ICON or any of its Restricted Subsidiaries of Indebtedness (including, without limitation, Capital Lease Obligations) incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of ICON or such Restricted Subsidiary, in an aggregate principal amount, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (4), not to exceed $10.0 million at any time outstanding; (5) the incurrence by ICON or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the indenture to be incurred under the first paragraph of this covenant or clauses (2), (3), (4), (5), (10) or (13) of this paragraph; (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 Guarantor is the obligor on such Indebtedness, 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 (other than in the case of intercompany Indebtedness of a Guarantor to ICON), in the case of a Guarantor except to the extent such notes are pledged as collateral for Senior Debt; and (b) (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than ICON or a Restricted Subsidiary of ICON and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either ICON or a Restricted Subsidiary of ICON; will 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) the incurrence by ICON or any of its Restricted Subsidiaries of Hedging Obligations in the ordinary course of business or to the extent required under the Credit Facilities; (8) the guarantee by ICON or any of the Guarantors of Indebtedness of ICON or a Restricted Subsidiary of ICON that was permitted to be incurred by another provision of this covenant; (9) the incurrence by ICON's Unrestricted Subsidiaries of Non-Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event will be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of ICON that was not permitted by this clause (9); (10) the incurrence by ICON or any Restricted Subsidiary of Indebtedness arising from agreements of ICON or any Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided, however, that (i) 87 such Indebtedness is not reflected on the balance sheet of ICON or any Restricted Subsidiary (contingent obligations referred to in a footnote or footnotes to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (i)) and (ii) the maximum assumable liability in respect of such Indebtedness shall at no time exceed the gross proceeds, including noncash proceeds (the fair market value of such noncash proceeds being measured at the time received and without giving effect to any subsequent changes in value), actually received by ICON and/or the Restricted Subsidiary in connection with such disposition; (11) the incurrence by any Foreign Subsidiaries of ICON in an aggregate principal amount (or accreted value, as applicable) at any time outstanding including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (11), not to exceed $10.0 million; (12) the incurrence by a Receivables Subsidiary of Indebtedness in a Qualified Receivables Transaction that is without recourse to ICON or to any other Restricted Subsidiary of ICON or their assets (other than such Receivables Subsidiary and its assets and, as to ICON or any of its Restricted Subsidiaries, other than pursuant to representations, warranties, covenants and indemnities customary for such transactions) and is not guaranteed by any such Person; and (13) the incurrence by ICON or any of the Guarantors of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (13), not to exceed $7.0 million. The accrual of interest, the 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 Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, in each such case, that the amount thereof is included in Fixed Charges of ICON as accrued. For purposes of determining compliance with this "Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (13) above, or is entitled to be incurred pursuant to the first paragraph of this covenant, ICON will, in its sole discretion, be permitted to classify such item of Indebtedness on the date of its incurrence, or later reclassify all or a portion of such item of Indebtedness, in any manner that complies with this covenant. Indebtedness under Credit Facilities outstanding on the date on which notes are first issued and authenticated under the indenture will be deemed to have been incurred on such date in reliance on the exception provided by clause (1) of the definition of Permitted Debt. Sale and Leaseback Transactions ICON will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that ICON or any Restricted Subsidiary may enter into a sale and leaseback transaction if: (1) ICON or that Restricted Subsidiary, as applicable, could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction under the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described below under the caption "--Liens;" (2) the gross cash proceeds of that sale and leaseback transaction are at least equal to the fair market value, as determined in good faith by the Board of Directors and set forth in an officers' certificate delivered to the trustee, of the property that is the subject of that sale and leaseback transaction; and (3) the transfer of assets in that sale and leaseback transaction is permitted by, and ICON applies the proceeds of such transaction in compliance with, the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales." 88 Notwithstanding the foregoing, ICON or any of its Restricted Subsidiaries may enter into sale and leaseback transactions that in the aggregate amount do not exceed $2.0 million in any twelve-month period without complying with the above provisions. Anti-Layering ICON will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt of ICON and senior in any respect in right of payment to the notes. No Guarantor will incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to the Senior Debt of such Guarantor and senior in any respect in right of payment to such Guarantor's Subsidiary Guarantee. Liens ICON will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or trade payables on any asset now owned or hereafter acquired, except Permitted Liens. Dividend and Other Payment Restrictions Affecting Subsidiaries ICON will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to: (1) pay dividends or make any other distributions on its Capital Stock to ICON or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to ICON or any of its Restricted Subsidiaries; (2) make loans or advances to ICON or any of its Restricted Subsidiaries; or (3) transfer any of its properties or assets to ICON or any of its Restricted Subsidiaries. However, the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) agreements governing Existing Indebtedness and Credit Facilities as in effect on the date of the indenture and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of those agreements, provided that the amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in those agreements on the date of the indenture; (2) the indenture, the notes and the Subsidiary Guarantees; (3) applicable law; (4) any instrument governing Indebtedness or Capital Stock of a Person acquired by ICON or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness or Capital Stock was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the indenture to be incurred; (5) customary non-assignment provisions in contracts or leases entered into in the ordinary course of business and consistent with past practices; 89 (6) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on that property of the nature described in clause (3) of the preceding paragraph; (7) any agreement for the sale or other disposition of the Capital Stock or assets of a Restricted Subsidiary that restricts distributions by that Restricted Subsidiary pending the closing of such sale or other disposition; (8) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; (9) Liens securing Indebtedness otherwise permitted to be incurred under the provisions of the covenant described above under the caption "--Liens" that limit the right of the debtor to dispose of the assets subject to such Liens; (10) provisions with respect to the disposition or distribution of assets or property in joint venture agreements, assets sale agreements, stock sale agreements and other similar agreements entered into in the ordinary course of business; (11) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; (12) agreements not described in clause (1) in effect on the date of the indenture; (13) covenants in agreements relating to the Indebtedness of Foreign Subsidiaries; (14) Indebtedness or other contractual requirements of a Receivables Subsidiary in connection with a Qualified Receivables Transaction, provided that such restrictions apply only to such Receivables Subsidiary; and (15) any amendments to any of the foregoing that, when taken as a whole, are not more restrictive than those contained in the agreement being amended. Merger, Consolidation or Sale of Assets ICON may not, directly or indirectly: (1) consolidate or merge with or into another Person (whether or not ICON is the surviving corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of ICON and its Restricted Subsidiaries taken as a whole, in one or more related transactions, to another Person; unless: (1) either: (a) ICON is the surviving corporation; or (b) the Person formed by or surviving any such consolidation or merger (if other than ICON) or to which such sale, assignment, transfer, conveyance or other disposition has been made is a corporation organized or existing under the laws of the United States, any state of the United States or the District of Columbia; (2) the Person formed by or surviving any such consolidation or merger (if other than ICON) or the Person to which such sale, assignment, transfer, conveyance or other disposition has been made assumes all the obligations of ICON under the notes, the indenture and the registration rights agreement pursuant to a supplemental indenture or other agreements reasonably satisfactory to the trustee; (3) immediately after such transaction no Default or Event of Default exists; and (4) ICON or the Person formed by or surviving any such consolidation or merger (if other than ICON), or to which such sale, assignment, transfer, conveyance or other disposition has been made will, on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if the same had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock." 90 In addition, ICON may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. This "Merger, Consolidation or Sale of Assets" covenant will not apply to: (1) a sale, assignment, transfer, conveyance or other disposition of assets between or among ICON and any of the Guarantors; (2) a merger or consolidation of a Restricted Subsidiary into ICON; or (3) the merger or consolidation of ICON into an affiliate of ICON consummated for the sole purpose of reincorporating in another jurisdiction under the laws of the United States, any state of the United States or the District of Columbia. Transactions with Affiliates ICON will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate Transaction"), unless: (1) the Affiliate Transaction is on terms that are no less favorable to ICON or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by ICON or such Restricted Subsidiary with an unrelated Person; and (2) ICON delivers to the trustee: (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $2.0 million, a resolution of the Board of Directors set forth in an officers' certificate certifying that such Affiliate Transaction complies with this covenant and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors; and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The following items will not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph: (1) any employment agreement entered into by ICON or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of ICON or such Restricted Subsidiary; (2) payment of fees, compensation, benefits, indemnities or similar payments and issuances of stock options to officers, directors and employees of ICON or any of its Restricted Subsidiaries in the ordinary course of business; (3) transactions between or among ICON and/or its Restricted Subsidiaries or transactions between a Receivables Subsidiary and any Person in which the Receivables Subsidiary has an Investment; (4) transactions with a Person that is an Affiliate of ICON solely because ICON owns an Equity Interest in, or controls, such Person; (5) payment of reasonable directors fees to Persons who are not otherwise Affiliates of ICON; (6) loans or advances by ICON or any of its Restricted Subsidiaries to employees of ICON or any of its Restricted Subsidiaries that are entered into in the ordinary course of business and that are approved by the Board of Directors of ICON; provided that the aggregate principal amount of all such loans or advances do not exceed $1.5 million at any one time outstanding; 91 (7) sales of Equity Interests (other than Disqualified Stock) to Affiliates of ICON; (8) Restricted Payments that are permitted by the provisions of the indenture described above under the caption "--Restricted Payments;" (9) transactions pursuant to the Stockholders Agreement; (10) payments of fees and the reimbursement of expenses by ICON for management services pursuant to the management agreements, each dated September 27, 1999, with Bain Capital, LLC, Credit Suisse First Boston Corporation and Gary Stevenson and Scott Watterson, as such agreements may be amended from time to time; provided that such amendments do not contain modifications that are materially adverse to the holders of the notes; and (11) payments of rent and other expenses by ICON to FG Aviation, Inc. made pursuant to the aircraft lease agreement, dated February 8, 2002, as such agreement may be amended from time to time; provided that such amendments do not contain modifications that are materially adverse to the holders of the notes. Additional Subsidiary Guarantees If ICON or any of its Subsidiaries acquires or creates another Domestic Subsidiary (other than a Receivables Subsidiary) after the date of the indenture, then that newly acquired or created Domestic Subsidiary will become a Guarantor and execute a supplemental indenture and deliver an opinion of counsel satisfactory to the trustee within 10 Business Days of the date on which it was acquired or created; provided, however, that any such Domestic Subsidiary that has been properly designated as an Unrestricted Subsidiary in accordance with the indenture shall not be required to become a Guarantor so long as it continues to constitute an Unrestricted Subsidiary. Designation of Restricted and Unrestricted Subsidiaries The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if that designation would not cause a Default. If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate fair market value of all outstanding Investments owned by ICON and its Restricted Subsidiaries in the Subsidiary properly designated will be deemed to be an Investment made as of the time of the designation and will reduce the amount available for Restricted Payments under the first paragraph of the covenant described above under the caption "--Restricted Payments" or under one or more clauses of the definition of Permitted Investments, as applicable, as determined by ICON. That designation will only be permitted if the Investment would be permitted at that time and if the Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a Default. Any such Unrestricted Subsidiary properly designated to be a Restricted Subsidiary will become a Guarantor and execute a supplemental indenture and deliver an opinion of counsel satisfactory to the trustee within 10 Business Days of the date of such designation. Business Activities ICON will not, and will not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to ICON and its Restricted Subsidiaries taken as a whole. Payments for Consent 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 92 be paid and is paid to all Holders of the notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. Reports Whether or not required by the Commission, so long as any notes are outstanding, ICON will furnish to the Holders of notes, within the time periods specified in the Commission's rules and regulations: (1) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if ICON were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report on the annual financial statements by ICON's certified independent accountants; and (2) all current reports that would be required to be filed with the Commission on Form 8-K if ICON were required to file such reports. If ICON has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph will include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in Management's Discussion and Analysis of Financial Condition and Results of Operations, of the financial condition and results of operations of ICON and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of ICON. In addition, following the consummation of the exchange offer contemplated by the registration rights agreement, whether or not required by the Commission, ICON will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the Commission for public availability within the time periods specified in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, ICON and the Subsidiary Guarantors have agreed that, for so long as any notes remain outstanding, they will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Events of Default and Remedies Each of the following is an Event of Default: (1) default for 30 days in the payment when due of interest on, or Additional Interest with respect to, the notes whether or not prohibited by the subordination provisions of the indenture; (2) default in payment when due of the principal of, or premium, if any, on the notes, whether or not prohibited by the subordination provisions of the indenture; (3) failure by ICON or any of its Subsidiaries to comply with the provisions described under the captions "--Repurchase at the Option of Holders--Change of Control," "--Certain Covenants--Restricted Payments," or "--Certain Covenants--Merger, Consolidation or Sale of Assets;" (4) failure by ICON or any of its Subsidiaries for 30 days after notice to comply with the provisions described under the captions "--Repurchase at the Option of Holders--Asset Sales" and "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" (5) failure by ICON or any of its Subsidiaries for 60 days after notice to comply with any of the other agreements in the indenture; (6) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by ICON or any of its 93 Subsidiaries (or the payment of which is guaranteed by ICON or any of its Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the indenture, if that default: (a) is caused by a failure to pay principal of, or interest or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default"); or (b) results in the acceleration of such Indebtedness prior to its express maturity, and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $15.0 million or more; (7) failure by ICON or any of its Subsidiaries to pay final judgments aggregating in excess of $15.0 million (net of applicable insurance which has not been denied in writing by the insurer), which judgments are not paid, discharged or stayed for a period of 60 days; (8) except as permitted by the 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 Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (9) certain events of bankruptcy or insolvency described in the indenture with respect to ICON, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary. In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to ICON, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding notes will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the trustee or the Holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately by notice in writing to the trustee and ICON; provided that so long as any Indebtedness permitted to be incurred pursuant to Credit Facilities shall be outstanding, such acceleration shall not be effective until the earlier of (1) the acceleration of such Indebtedness under Credit Facilities or (2) five business days after receipt by ICON of written notice of such acceleration. Holders of the notes may not enforce the indenture or the notes except as provided in the indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding notes may direct the trustee in its exercise of any trust or power. The trustee may withhold from Holders of the notes notice of any continuing Default or Event of Default if it determines that withholding notice is in their interest, except a Default or Event of Default relating to the payment of principal or interest or Additional Interest. The Holders of a majority in aggregate principal amount of the notes then outstanding by notice to the trustee may on behalf of the Holders of all of the notes waive any existing Default or Event of Default and its consequences under the indenture except a continuing Default or Event of Default in the payment of interest or Additional Interest on, or the principal of, the notes. In the case of any Event of Default occurring by reason of any willful action or inaction taken or not taken by or on behalf of ICON with the intention of avoiding payment of the premium that ICON would have had to pay if ICON then had elected to redeem the notes pursuant to the optional redemption provisions of the indenture, an equivalent premium will also become and be immediately due and payable to the extent permitted by law upon the acceleration of the notes. If an Event of Default occurs prior to April 1, 2007, by reason of any willful action (or inaction) taken (or not taken) by or on behalf of ICON with the intention of avoiding the prohibition on redemption of the notes prior to April 1, 2007, then the premium specified in the indenture will also become immediately due and payable to the extent permitted by law upon the acceleration of the notes. 94 ICON is required to deliver to the trustee annually a statement regarding compliance with the indenture. Upon becoming aware of any Default or Event of Default, ICON is required to deliver to the trustee a statement specifying such Default or Event of Default. No Personal Liability of Directors, Officers, Employees and Stockholders No director, officer, employee, incorporator or stockholder of ICON or any Guarantor, as such, will have any liability for any obligations of ICON or the Guarantors under the notes, the indenture or the Subsidiary Guarantees 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. The waiver may not be effective to waive liabilities under the federal securities laws. Legal Defeasance and Covenant Defeasance ICON may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding notes and all obligations of the Guarantors discharged with respect to their Subsidiary Guarantees ("Legal Defeasance") except for: (1) the rights of Holders of outstanding notes to receive payments in respect of the principal of, or interest or premium and Additional Interest, if any, on such notes when such payments are due from the trust referred to below; (2) ICON's obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payment and money for security payments held in trust; (3) the rights, powers, trusts, duties and immunities of the trustee, and ICON's and the Guarantor's obligations in connection therewith; and (4) the Legal Defeasance provisions of the indenture. In addition, ICON may, at its option and at any time, elect to have the obligations of ICON and the Guarantors released with respect to certain covenants that are described in the indenture ("Covenant Defeasance") and thereafter any omission to comply with those covenants will not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "--Events of Default and Remedies" will no longer constitute an Event of Default with respect to the notes. In order to exercise either Legal Defeasance or Covenant Defeasance: (1) ICON must irrevocably deposit with the trustee, in trust, for the benefit of the Holders of the notes, cash in U.S. dollars, non-callable Government Securities, or a combination of cash in U.S. dollars and non-callable Government Securities, in amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, or interest and premium and Additional Interest, if any, on the outstanding notes on the stated maturity or on the applicable redemption date, as the case may be, and ICON must specify whether the notes are being defeased to maturity or to a particular redemption date; (2) in the case of Legal Defeasance, ICON has delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that (a) ICON has received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel will confirm that, the Holders of the outstanding notes will not recognize income, gain or 95 loss for federal income tax purposes as a result of such Legal 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 Legal Defeasance had not occurred; (3) in the case of Covenant Defeasance, ICON has delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that the Holders of the outstanding notes 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; (4) no Default or Event of Default has occurred and is continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit); (5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the indenture) to which ICON or any of its Subsidiaries is a party or by which ICON or any of its Subsidiaries is bound; (6) ICON must deliver to the trustee an officers' certificate stating that the deposit was not made by ICON with the intent of defeating, hindering, delaying or defrauding creditors of ICON or others; and (7) ICON must deliver to the trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with. Amendment, Supplement and Waiver Except as provided in the next three succeeding paragraphs, the indenture or the notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes), and any existing default or compliance with any provision of the indenture or the notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes). Without the consent of each Holder affected, an amendment or waiver may not (with respect to any notes held by a non-consenting Holder): (1) reduce the principal amount of notes whose Holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any note or alter the provisions with respect to the redemption of the notes (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"); (3) reduce the rate of or change the time for payment of interest on any note; (4) waive a Default or Event of Default in the payment of principal of, or interest or premium, or Additional Interest, if any, on the notes (except a rescission of acceleration of the notes by the Holders of at least a majority in aggregate principal amount of the notes and a waiver of the payment default that resulted from such acceleration); (5) make any note payable in money other than that stated in the notes; (6) make any change in the provisions of the indenture relating to waivers of past Defaults or the rights of Holders of notes to receive payments of principal of, or interest or premium or Additional Interest, if any, on the notes; 96 (7) waive a redemption payment with respect to any note (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders"); (8) release any Guarantor from any of its obligations under its Subsidiary Guarantee or the indenture, except in accordance with the terms of the indenture; or (9) make any change in the preceding amendment and waiver provisions. In addition, any amendment to, or waiver of, the provisions of the indenture relating to subordination that adversely affects the rights of the Holders of the notes will require the consent of the Holders of at least 75% in aggregate principal amount of notes then outstanding. Notwithstanding the preceding, without the consent of any Holder of notes, ICON, the Guarantors and the trustee may amend or supplement the indenture or the notes: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated notes in addition to or in place of certificated notes; (3) to provide for the assumption of ICON's obligations to Holders of notes in the case of a merger or consolidation or sale of all or substantially all of ICON's assets; (4) to make any change that would provide any additional rights or benefits to the Holders of notes or that does not adversely affect the legal rights under the indenture of any such Holder; (5) to comply with requirements of the Commission in order to effect or maintain the qualification of the indenture under the Trust indenture Act; or (6) to add Guarantors with respect to the notes. Satisfaction and Discharge The indenture will be discharged and will cease to be of further effect as to all notes issued thereunder, when: (1) either: (a) all notes that have been authenticated, except lost, stolen or destroyed notes that have been replaced or paid and notes for whose payment money has been deposited in trust and thereafter repaid to ICON, have been delivered to the trustee for cancellation; or (b) all notes that have not been delivered to the trustee for cancellation have become due and payable by reason of the mailing of a notice of redemption or otherwise or will become due and payable within one year either upon Stated Maturity or by virtue of earlier redemption under arrangements reasonably satisfactory to the trustee in accordance with the terms of the indenture and ICON or any Guarantor has irrevocably deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the Holders, cash in U.S. dollars, non-callable Government Securities, or a combination of cash in U.S. dollars and non-callable Government Securities, in amounts as will be sufficient without consideration of any reinvestment of interest, to pay and discharge the entire indebtedness on the notes not previously delivered to the trustee for cancellation for principal, premium and Additional Interest, if any, and accrued interest to the date of maturity or redemption; (2) no Default or Event of Default has occurred and is continuing on the date of the deposit or will occur as a result of the deposit and the deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which ICON or any Guarantor is a party or by which ICON or any Guarantor is bound; 97 (3) ICON or any Guarantor has paid or caused to be paid all other sums payable by it under the indenture; and (4) ICON has delivered irrevocable instructions to the trustee under the indenture to apply the deposited money toward the payment of the notes at maturity or the redemption date, as the case may be. In addition, ICON must deliver an officers' certificate and an opinion of counsel to the trustee stating that all conditions precedent to satisfaction and discharge have been satisfied. Concerning the Trustee If the trustee becomes a creditor of ICON or any Guarantor, the indenture limits its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indenture provides that in case an Event of Default occurs and is continuing, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any Holder of notes, unless such Holder has offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense. Additional Information Anyone who receives this offering circular may obtain a copy of the indenture and registration rights agreement without charge by writing to ICON Health & Fitness, Inc., 1500 South 1000 West, Logan, Utah 84321, Attention: Brad Bearnson, Esq. Book-Entry, Delivery and Form The notes are being offered and sold to qualified institutional buyers in reliance on Rule 144A ("Rule 144A Notes"). Notes also may be offered and sold in offshore transactions in reliance on Regulation S ("Regulation S Notes"). Except as set forth below, notes will be issued in registered, global form in minimum denominations of $1,000 and integral multiples of $1,000 in excess of $1,000. Notes will be issued at the closing of this offering only against payment in immediately available funds. Rule 144A Notes initially will be represented by one or more notes in registered, global form without interest coupons (collectively, the "Rule 144A Global Notes"). Regulation S Notes initially will be represented by one or more temporary notes in registered, global form without interest coupons (collectively, the "Regulation S Temporary Global Notes"). The Rule 144A Global Notes and the Regulation S Temporary Global Notes will be deposited upon issuance with the trustee as custodian for The Depository Trust Company ("DTC"), in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant in DTC as described below. Through and including the 40th day after the later of the commencement of this offering and the closing of this offering (such period through and including such 40th day, the "Restricted Period"), beneficial interests in the Regulation S Temporary Global Notes may be held only through the Euroclear System ("Euroclear") and Clearstream Banking, S.A. ("Clearstream") (as indirect participants in DTC), unless transferred to a person that takes delivery through a Rule 144A Global Note in accordance with the certification requirements described below. Within a reasonable time period after the expiration of the Restricted Period, the Regulation S Temporary Global Notes will be exchanged for one or more 98 permanent notes in registered, global form without interest coupons (collectively, the "Regulation S Permanent Global Notes" and, together with the Regulation S Temporary Global Notes, the "Regulation S Global Notes" (the Regulation S Global Notes and Rule 144A Global Notes, collectively being the "Global Notes")) upon delivery to the trustee of certification of compliance with the transfer restrictions applicable to the notes and pursuant to Regulation S as provided in the indenture. See "--Exchanges Between Regulation S Temporary Global Notes and Regulation S Permanent Global Notes." Beneficial interests in the Rule 144A Global Notes may not be exchanged for beneficial interests in the Regulation S Global Notes at any time except in the limited circumstances described below. See "--Exchanges Between Regulation S Notes and Rule 144A Notes." Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Notes may not be exchanged for notes in certificated form except in the limited circumstances described below. See "--Exchange of Book-Entry Notes for Certificated Notes." Except in the limited circumstances described below, owners of beneficial interests in the Global Notes will not be entitled to receive physical delivery of notes in certificated form. Rule 144A Notes (including beneficial interests in the Rule 144A Global Notes) will be subject to certain restrictions on transfer and will bear a restrictive legend as described under "Notice to Investors." Regulation S Notes will also bear the legend as described under "Notice to Investors." In addition, transfers of beneficial interests in the Global Notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants (including, if applicable, those of Euroclear and Clearstream), which may change from time to time. Depository Procedures The following description of the operations and procedures of DTC, Euroclear and Clearstream are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them. ICON takes no responsibility for these operations and procedures and urges investors to contact the system or their participants directly to discuss these matters. DTC has advised ICON that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the initial purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised ICON that, pursuant to procedures established by it: (1) upon deposit of the Global Notes, DTC will credit the accounts of Participants designated by the initial purchasers with portions of the principal amount of the Global Notes; and (2) ownership of these interests in the Global Notes will be shown on, and the transfer of ownership of these interests will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Global Notes). Investors in the Rule 144A Global Notes who are Participants in DTC's system may hold their interests therein directly through DTC. Investors in the Rule 144A Global Notes who are not Participants may hold their 99 interests therein indirectly through organizations (including Euroclear and Clearstream) which are Participants in such system. Through and including the Restricted Period, investors in the Regulation S Global Notes must hold their interests therein in the Regulation S Temporary Global Notes through Euroclear or Clearstream, if they are participants in such systems, or indirectly through organizations that are participants in such systems. After the expiration of the Restricted Period (but not earlier), investors may also hold interests in the Regulation S Global Notes through Participants in the DTC system other than Euroclear and Clearstream. Euroclear and Clearstream will hold interests in the Regulation S Global Notes on behalf of their participants through customers' securities accounts in their respective names on the books of their respective depositories, which are Euroclear Bank, S.A./ N.V., as operator of Euroclear, and Citibank, N.A., as operator of Clearstream. All interests in a Global Note, including those held through Euroclear or Clearstream, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Clearstream may also be subject to the procedures and requirements of such systems. The laws of some states require that certain Persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such Persons will be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of Indirect Participants, the ability of a Person having beneficial interests in a Global Note to pledge such interests to Persons that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. Except as described below, owners of interests in the Global Notes will not have notes registered in their names, will not receive physical delivery of notes in certificated form and will not be considered the registered owners or "Holders" thereof under the indenture for any purpose. Payments in respect of the principal of, and interest and premium and Additional Interest, if any, on a Global Note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered Holder under the indenture. Under the terms of the indenture, ICON and the trustee will treat the Persons in whose names the notes, including the Global Notes, are registered as the owners of the notes for the purpose of receiving payments and for all other purposes. Consequently, neither ICON, the trustee nor any agent of ICON or the trustee has or will have any responsibility or liability for: (1) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Notes; or (2) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised ICON that its current practice, upon receipt of any payment in respect of securities such as the notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date unless DTC has reason to believe it will not receive payment on such payment date. Each relevant Participant is credited with an amount proportionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on the records of DTC. Payments by the Participants and the Indirect Participants to the beneficial owners of notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the trustee or ICON. Neither ICON nor the trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the notes, and ICON and the trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Subject to the transfer restrictions set forth under "Notice to Investors," transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds, and transfers between participants in Euroclear and Clearstream will be effected in accordance with their respective rules and operating procedures. 100 Subject to compliance with the transfer restrictions applicable to the notes described herein, cross-market transfers between the Participants in DTC, on the one hand, and Euroclear or Clearstream participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Global Note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream participants may not deliver instructions directly to the depositories for Euroclear or Clearstream. DTC has advised ICON that it will take any action permitted to be taken by a Holder of notes only at the direction of one or more Participants to whose account DTC has credited the interests in the Global Notes and only in respect of such portion of the aggregate principal amount of the notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the notes, DTC reserves the right to exchange the Global Notes for legended notes in certificated form, and to distribute such notes to its Participants. Although DTC, Euroclear and Clearstream have agreed to the foregoing procedures to facilitate transfers of interests in the Rule 144A Global Notes and the Regulation S Global Notes among participants in DTC, Euroclear and Clearstream, they are under no obligation to perform or to continue to perform such procedures, and may discontinue such procedures at any time. Neither ICON nor the trustee nor any of their respective agents will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Exchange of Global Notes for Certificated Notes A Global Note is exchangeable for definitive notes in registered certificated form ("Certificated Notes") if: (1) DTC (a) notifies ICON that it is unwilling or unable to continue as depositary for the Global Notes and ICON fails to appoint a successor depositary or (b) has ceased to be a clearing agency registered under the Exchange Act; (2) in the case of a Global Note held for an account of Euroclear or Clearstream, Euroclear or Clearstream, as the case may be, (A) is closed for business for a continuous period of 14 days (other than by reason of statutory or other holidays), or (B) announces an intention permanently to cease business or does in fact do so; (3) ICON, at its option, notifies the trustee in writing that it elects to cause the issuance of the Certificated Notes; or (4) there has occurred and is continuing a Default or Event of Default with respect to the notes. In addition, beneficial interests in a Global Note may be exchanged for Certificated Notes upon prior written notice given to the trustee by or on behalf of DTC in accordance with the indenture. Further, in no event will Regulation S Temporary Global Notes be exchanged for Certificated Notes prior to the expiration of the Restricted Period and receipt by the registrar of any certificates required pursuant to Regulation S. In all cases, Certificated Notes delivered in exchange for any Global Note or beneficial interests in Global Notes will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear the applicable restrictive legend referred to in "Notice to Investors," unless that legend is not required by applicable law. 101 Exchange of Certificated Notes for Global Notes Certificated Notes may not be exchanged for beneficial interests in any Global Note unless the transferor first delivers to the trustee a written certificate (in the form provided in the indenture) to the effect that such transfer will comply with the appropriate transfer restrictions applicable to such notes. See "Notice to Investors." Exchanges Between Regulation S Notes and Rule 144A Notes Beneficial interests in the Regulation S Global Note may be exchanged for beneficial interests in the Rule 144A Global Note only if: (1) such exchange occurs in connection with a transfer of the notes pursuant to Rule 144A; and (2) the transferor first delivers to the trustee a written certificate (in the form provided in the indenture) to the effect that the notes are being transferred to a Person: (a) who the transferor reasonably believes to be a qualified institutional buyer within the meaning of Rule 144A; (b) purchasing for its own account or the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A; and (c) in accordance with all applicable securities laws of the states of the United States and other jurisdictions. Beneficial interests in a Rule 144A Global Note may be transferred to a Person who takes delivery in the form of an interest in the Regulation S Global Note, whether before or after the expiration of the Restricted Period, only if the transferor first delivers to the trustee a written certificate (in the form provided in the indenture) to the effect that such transfer is being made in accordance with Rule 903 or 904 of Regulation S and that, if such transfer occurs prior to the expiration of the Restricted Period, the interest transferred will be held immediately thereafter through Euroclear or Clearstream. Transfers involving exchanges of beneficial interests between the Regulation S Global Notes and the Rule 144A Global Notes will be effected in DTC by means of an instruction originated by the trustee through the DTC Deposit/Withdraw at Custodian system. Accordingly, in connection with any such transfer, appropriate adjustments will be made to reflect a decrease in the principal amount of the Regulation S Global Note and a corresponding increase in the principal amount of the Rule 144A Global Note or vice versa, as applicable. Any beneficial interest in one of the Global Notes that is transferred to a Person who takes delivery in the form of an interest in the other Global Note will, upon transfer, cease to be an interest in such Global Note and will become an interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interest in such other Global Note for so long as it remains such an interest. The policies and practices of DTC may prohibit transfers of beneficial interests in the Regulation S Global Note prior to the expiration of the Restricted Period. Exchanges Between Regulation S Temporary Global Notes and Regulation S Permanent Global Notes After the expiration of the Restricted Period, and upon receipt by the trustee of written certification (in the form provided in the indenture) from Euroclear or Clearstream, as the case may be, and upon receipt by Euroclear and Clearstream, as the case may be, of written certification (in the form provided in the indenture) from holders of beneficial interests in the Regulation S Temporary Global Note that the note or notes with respect to which such certifications are made are not owned by or for persons who are U.S. Persons or for purposes of resale directly or indirectly to a U.S. Person or to a person within the United States or its possessions, the trustee will exchange the portion of the Regulation S Temporary Global Notes covered by such certifications for interests in the Regulation S Permanent Global Notes. 102 Same Day Settlement and Payment ICON will make payments in respect of the notes represented by the Global Notes (including principal, premium, if any, interest and Additional Interest, if any) by wire transfer of immediately available funds to the accounts specified by the Global Note Holder. ICON will make all payments of principal, interest and premium and Additional Interest, if any, with respect to Certificated Notes by wire transfer of immediately available funds to the accounts specified by the Holders of the Certificated Notes or, if no such account is specified, by mailing a check to each such Holder's registered address. The notes represented by the Global Notes are expected to be eligible to trade in the PORTAL market and to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such notes will, therefore, be required by DTC to be settled in immediately available funds. ICON expects that secondary trading in any Certificated Notes will also be settled in immediately available funds. Because of time zone differences, the securities account of a Euroclear or Clearstream participant purchasing an interest in a Global Note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or Clearstream participant, during the securities settlement processing day (which must be a business day for Euroclear and Clearstream) immediately following the settlement date of DTC. DTC has advised ICON that cash received in Euroclear or Clearstream as a result of sales of interests in a Global Note by or through a Euroclear or Clearstream participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Clearstream cash account only as of the business day for Euroclear or Clearstream following DTC's settlement date. Registration Rights; Additional Interest The following description is a summary of the material provisions of the registration rights agreement. It does not restate that agreement in its entirety. We urge you to read the proposed form of registration rights agreement in its entirety because it, and not this description, defines your registration rights as Holders of these notes. See "--Additional Information." ICON, the Guarantors and the initial purchasers will enter into the registration rights agreement on or prior to the closing of this offering. Pursuant to the registration rights agreement, ICON and the Guarantors will agree to file with the Commission the Exchange Offer Registration Statement on the appropriate form under the Securities Act with respect to the Exchange Notes. Upon the effectiveness of the Exchange Offer Registration Statement, ICON and the Guarantors will offer to the Holders of Transfer Restricted Securities pursuant to the Exchange Offer who are able to make certain representations the opportunity to exchange their Transfer Restricted Securities for Exchange Notes. If: (1) ICON and the Guarantors are not (a) required to file the Exchange Offer Registration Statement; or (b) permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy; or (2) any Holder of Transfer Restricted Securities notifies ICON prior to the 20th day following consummation of the Exchange Offer that: (a) it is prohibited by law or Commission policy from participating in the Exchange Offer; or (b) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales; or (c) that it is a broker-dealer and owns notes acquired directly from ICON or an affiliate of ICON, 103 ICON and the Guarantors will file with the Commission a Shelf Registration Statement to cover resales of the notes by the Holders of the notes who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. ICON and the Guarantors will use their best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. For purposes of the preceding, "Transfer Restricted Securities" means each note until: (1) the date on which such note has been exchanged by a Person other than a broker-dealer for an Exchange Note in the Exchange Offer; (2) following the exchange by a broker-dealer in the Exchange Offer of a note for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement; (3) the date on which such note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement; or (4) the date on which such note is distributed to the public pursuant to Rule 144 under the Securities Act. The registration rights agreement will provide that: (1) ICON and the Guarantors will file an Exchange Offer Registration Statement with the Commission on or prior to 90 days after the closing of this offering; (2) ICON and the Guarantors will use their best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to 180 days after the closing of this offering; (3) unless the Exchange Offer would not be permitted by applicable law or Commission policy, ICON and the Guarantors will (a) commence the Exchange Offer; and (b) use their best efforts to issue on or prior to 30 business days, or longer, if required by the federal securities laws, after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, Exchange Notes in exchange for all notes tendered prior thereto in the Exchange Offer; and (4) if obligated to file the Shelf Registration Statement, ICON and the Guarantors will use their best efforts to file the Shelf Registration Statement with the Commission on or prior to 90 days after such filing obligation arises and to cause the Shelf Registration to be declared effective by the Commission on or prior to 180 days after such obligation arises. If: (1) ICON and the Guarantors fail to file any of the registration statements required by the registration rights agreement on or before the date specified for such filing; or (2) any of such registration statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"); or (3) ICON and the Guarantors fail to consummate the Exchange Offer within 30 business days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement; or (4) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities 104 during the periods specified in the registration rights agreement (each such event referred to in clauses (1) through (4) above, a "Registration Default"), then ICON and the Guarantors will pay additional interest ("Additional Interest") to each Holder of notes, with respect to the first 90-day period immediately following the occurrence of the first Registration Default in an amount equal to $.05 per week per $1,000 principal amount of notes held by such Holder. The amount of the Additional Interest will increase by an additional $.05 per week per $1,000 principal amount of notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Additional Interest for all Registration Defaults of $.50 per week per $1,000 principal amount of notes. All accrued Additional Interest will be paid by ICON and the Guarantors on each regular interest payment date to the Global Note Holder by wire transfer of immediately available funds or by federal funds check and to Holders of Certificated Notes by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of Additional Interest will cease. Holders of notes will be required to make certain representations to ICON (as described in the registration rights agreement) in order to participate in the Exchange Offer and will be required to deliver certain information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the registration rights agreement in order to have their notes included in the Shelf Registration Statement and benefit from the provisions regarding Additional Interest set forth above. By acquiring Transfer Restricted Securities, a Holder will be deemed to have agreed to indemnify ICON and the Guarantors against certain losses arising out of information furnished by such Holder in writing for inclusion in any Shelf Registration Statement. Holders of notes will also be required to suspend their use of the prospectus included in the Shelf Registration Statement under certain circumstances upon receipt of written notice to that effect from ICON. Certain Definitions Set forth below are certain defined terms used in the indenture. Reference is made to the indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" 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 directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control," as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person will be deemed to be control. For purposes of this definition, the terms "controlling," "controlled by" and "under common control with" have correlative meanings. No Person (other than ICON or any Restricted Subsidiary of 105 ICON) in whom a Receivables Subsidiary makes an Investment in connection with a Qualified Receivables Transaction will be deemed to be an Affiliate of ICON or any of its Restricted Subsidiaries solely by reason of such Investment. "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 and the granting of Liens permitted under the terms of the indenture; provided that the sale, conveyance or other disposition of all or substantially all of the assets of ICON and its Subsidiaries taken as a whole will be governed by the provisions of the indenture described above under the caption "--Repurchase at the Option of Holders--Change of Control" and/or the provisions described above under the caption "--Certain Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant; and (2) the issuance of Equity Interests in any of ICON's Restricted Subsidiaries or the sale of Equity Interests in any of its Restricted Subsidiaries. Notwithstanding the preceding, the following items will not be deemed to be Asset Sales: (1) any single transaction or series of related transactions that involves assets having a fair market value of less than $2.0 million; (2) a transfer of assets between or among ICON and its Restricted Subsidiaries, (3) an issuance of Equity Interests by a Restricted Subsidiary to ICON or to another Restricted Subsidiary; (4) the sale or lease of equipment, inventory, accounts receivable or other assets in the ordinary course of business; (5) the licensing or sub-licensing of intellectual property in the ordinary course of business consistent with past practice; (6) the sale, lease or other disposition of obsolete equipment; (7) the sale or other disposition of cash or Cash Equivalents; (8) a Restricted Payment or Permitted Investment that is permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments;" (9) sales of accounts receivable and related assets of the type specified in the definition of "Qualified Receivables Transaction" to a Receivables Subsidiary for the fair market value thereof, including cash in an amount at least equal to 75% of the book value thereof as determined in accordance with GAAP, it being understood that, for the purposes of this clause (9), notes received in exchange for the transfer of accounts receivable and related assets will be deemed cash if the Receivables Subsidiary or other payor is required to repay said notes as soon as practicable from available cash collections less amounts required to be established as reserves pursuant to contractual agreements with entities that are not Affiliates of ICON entered into as part of a Qualified Receivables Transaction; and (10) transfers of accounts receivable and related assets of the type specified in the definition of "Qualified Receivables Transaction" (or a fractional undivided interest therein) by a Receivables Subsidiary in a Qualified Receivables Transaction. "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. 106 "Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular "person" (as that term is used in Section 13(d)(3) of the Exchange Act), such "person" will be deemed to have beneficial ownership of all securities that such "person" has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. The terms "Beneficially Owns" and "Beneficially Owned" have a corresponding meaning. "Board of Directors" means: (1) with respect to a corporation, the board of directors of the corporation; (2) with respect to a partnership, the Board of Directors of the general partner of the partnership; and (3) with respect to any other Person, the board or committee of such Person serving a similar function. "Borrowing Base" means, as of any date, an amount equal to: (1) 85% of the face amount of all accounts receivable owned by ICON and the Guarantors as of the end of the most recent fiscal quarter preceding such date that were not more than 90 days past due; plus (2) 60% of the book value of all inventory owned by ICON and the Guarantors during the period of December 1 through June 30 of any fiscal year or 70% of the book value of all inventory owned by ICON and its Restricted Subsidiaries during the period from July 1 through November 30 of any fiscal year, in each case as of the end of the most recent fiscal quarter preceding such date; provided, however, that any accounts receivable owned by a Receivables Subsidiary, or which ICON or any Guarantor has agreed to transfer to a Receivables Subsidiary, shall be excluded for purposes of determining such amount. "Capital Lease Obligation" means, at the time any determination is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP. "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. "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 of the United States government (provided that the full faith and credit of the United States is pledged in support of those securities) having maturities of not more than six 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, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case, with any domestic commercial bank having capital and surplus in excess of $500.0 million and a Thomson Bank Watch Rating of "B" or better; 107 (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above; (5) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Rating Services and in each case maturing within six months after the date of acquisition; and (6) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (5) of this definition. "Change of Control" means the occurrence of any of the following: (1) the direct or indirect 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 properties or assets of ICON and its Restricted Subsidiaries, taken as a whole, to any "person" (as that term is used in Section 13(d)(3) of the Exchange Act) other than a Principal or a Related Party of a Principal; (2) the adoption of a plan relating to the liquidation or dissolution of ICON; (3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the Beneficial Owner, directly or indirectly, of more than 50% of the Voting Stock of ICON, measured by voting power rather than number of shares; provided, that any transaction that results in any "person" (as defined above) Beneficially Owning less than 50% of the Voting Stock of ICON, measured by voting power rather than number of shares, subject to the Stockholders Agreement or the LLC Agreement shall not, in any case, constitute a Change of Control under this clause (3) unless such person Beneficially Owns in the aggregate more than 50% of the Voting Stock of ICON; (4) the first day on which a majority of the members of the Board of Directors of ICON are not Continuing Directors; or (5) the first day on which HF Holdings ceases to own 100% of the outstanding Equity Interests of ICON. "Consolidated Cash Flow" means, with respect to any specified Person for any period, the Consolidated Net Income of such Person for such period plus: (1) an amount equal to any extraordinary loss plus any net loss realized by such Person or any of its Restricted Subsidiaries in connection with an Asset Sale, to the extent such losses were deducted in computing such Consolidated Net Income; plus (2) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus (3) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income; plus (4) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses 108 (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income; minus (5) non-cash items increasing such Consolidated Net Income for such period, other than the accrual of revenue or the reversal of reserves in the ordinary course of business, in each case, on a consolidated basis and determined in accordance with GAAP. "Consolidated Net Income" means, with respect to any specified Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that: (1) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting will be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person or a Restricted Subsidiary of the Person; (2) the Net Income of any Restricted Subsidiary will be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination 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 regulation applicable to that Restricted Subsidiary or its stockholders; (3) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition will be excluded; (4) the cumulative effect of a change in accounting principles will be excluded; and (5) the Net Income (but not loss) of any Unrestricted Subsidiary will be excluded, whether or not distributed to the specified Person or one of its Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of ICON who: (1) was a member of such Board of Directors on the date of the indenture; (2) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election; or (3) was nominated for election by, or is a designee of, a Principal. "Credit Agreement" means that certain Credit Agreement, dated as of April 9, 2002, by and among ICON, the lenders signatory thereto and General Electric Capital Corporation, as administrative agent, providing for up to $210.0 million of revolving loan credit borrowings and a term loan of $25.0 million, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. "Credit Facilities" means, one or more debt facilities (including, without limitation, the Credit Agreement) or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. 109 "Default" means any event that is, or with the passage of time or the giving of notice, or both, would be, an Event of Default. "Designated Senior Debt" means: (1) any Indebtedness outstanding under the Credit Facilities; and (2) after payment in full of all Obligations under the Credit Facilities, any other Senior Debt permitted under the indenture the principal amount of which is $25.0 million or more and that has been designated in writing by ICON as "Designated Senior Debt" for purposes of the indenture. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder of the Capital Stock), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder of the Capital Stock, in whole or in part, on or prior to the date that is 91 days after the date on which the notes mature. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders of the Capital Stock have the right to require ICON to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale will not constitute Disqualified Stock if the terms of such Capital Stock provide that ICON may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Domestic Subsidiary" means any Subsidiary of ICON that was formed under the laws of the United States or any state of the United States or the District of Columbia or that guarantees or otherwise provides direct credit support for any Indebtedness of ICON. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means any public offering of Capital Stock of ICON (other than Disqualified Stock). "Existing Indebtedness" means the Indebtedness of ICON and its Restricted Subsidiaries (other than Indebtedness under the Credit Agreement) in existence on the date of the indenture, until such amounts are repaid. "Fixed Charges" means, with respect to any specified Person for any period, the sum, without duplication, of: (1) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations; plus (2) the consolidated interest of such Person and its Restricted Subsidiaries that was capitalized during such period; plus (3) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries, whether or not such Guarantee or Lien is called upon; plus (4) the product of (a) all dividends, whether paid or accrued and whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividends on Equity 110 Interests payable solely in Equity Interests of ICON (other than Disqualified Stock) or to ICON or a Restricted Subsidiary of ICON, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any specified Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the specified Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary working capital borrowings) or issues, repurchases or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated and on or prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or such issuance, repurchase or redemption of preferred stock, and the use of the proceeds therefrom as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of calculating the Fixed Charge Coverage Ratio: (1) acquisitions that have been made by the specified Person or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date will be given pro forma effect as if they had occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period will be calculated on a pro forma basis in accordance with Regulation S-X under the Securities Act, but without giving effect to clause (3) of the proviso set forth in the definition of Consolidated Net Income; (2) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, will be excluded; and (3) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, will be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the specified Person or any of its Restricted Subsidiaries following the Calculation Date. "Foreign Subsidiary" means any Subsidiary of ICON that is not a Domestic Subsidiary. "GAAP" means generally accepted accounting principles in the United States 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 such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the indenture. "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. "Guarantors" means each of: (1) each Domestic Subsidiary of ICON; and (2) any other subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of the indenture; and their respective successors and assigns. 111 "Hedging Obligations" means, with respect to any specified Person, the obligations of such Person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; (2) any commodities future contract, commodity option or other similar agreement or arrangement designed to protect against fluctuations in the price of commodities used by that entity at the time; (3) agreements entered into for the purpose of fixing or hedging the risks associated with fluctuations in foreign currency exchange rates; and (4) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "HF Holdings" means HF Holdings, Inc., a Delaware corporation. "Indebtedness" means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent: (1) in respect of borrowed money; (2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof); (3) in respect of banker's acceptances; (4) representing Capital Lease Obligations; (5) representing the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or (6) representing any Hedging Obligations, if and to the extent any of the preceding items (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of the specified Person prepared in accordance with GAAP. In addition, the term "Indebtedness" includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person) and, to the extent not otherwise included, the Guarantee by the specified Person of any Indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date will be: (1) the accreted value of the Indebtedness, in the case of any Indebtedness issued with original issue discount; and (2) the principal amount of the Indebtedness, together with any interest on the Indebtedness that is more than 30 days past due, in the case of any other Indebtedness. "Investments" means, with respect to any Person, all direct or indirect investments by such Person in other Persons (including Affiliates) in the forms of loans (including Guarantees or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If ICON or any Restricted Subsidiary of ICON sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of ICON such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of ICON, ICON will be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Certain Covenants--Restricted Payments." The acquisition by ICON or any Restricted Subsidiary of ICON of a Person that holds an Investment in a third Person will be deemed to be an 112 Investment by ICON or such Restricted Subsidiary in such third Person in an amount equal to the fair market value of the Investment held by the acquired Person in such third Person in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and, except in connection with any Qualified Receivables Transaction, any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction. "LLC Agreement" means that certain Limited Liability Company Agreement by and among Credit Suisse First Boston Corporation, affiliates of Bain Capital, LLC and certain other persons listed therein, as in effect on the date of the indenture; provided, however, that such Limited Liability Company Agreement may be amended from time to time if after giving effect to such amendment Credit Suisse First Boston Corporation and its affiliates and Bain Capital, LLC and its affiliates Beneficially Own more than 50% of the common equity of HF Holdings subject to the LLC Agreement. "Net Income" means, with respect to any specified Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however: (1) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with: (a) any Asset Sale; or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries; and (2) any extraordinary gain (but not loss), together with any related provision for taxes on such extraordinary gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by ICON or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result of the Asset Sale, taxes paid or payable as a result of the Asset Sale, in each case, after taking into account any available tax credits or deductions and any tax sharing arrangements, and amounts required to be applied to the repayment of Indebtedness, other than Indebtedness under a Credit Facility, secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustments in respect of the sale price of such asset or assets established in accordance with GAAP. "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, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender; (2) no default with respect to which (including any rights that the holders of the Indebtedness 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 on such other Indebtedness or cause the payment of the Indebtedness to be accelerated or payable prior to its stated maturity; and (3) as to which the lenders have been notified in writing, or the terms of which provide, that they will not have any recourse to the stock or assets of ICON or any of its Restricted Subsidiaries. 113 "Obligations" means any principal, interest, penalties, fees, expenses, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Business" means any business that derives a majority of its revenues from the business engaged in by ICON and its Restricted Subsidiaries on the date of original issuance of the notes and/or activities that are reasonably similar, ancillary or related to, or a reasonable extension, development or expansion of, the businesses in which ICON and its Restricted Subsidiaries are engaged on the date of original issuance of the notes. "Permitted Investments" means: (1) any Investment in ICON or in a Restricted Subsidiary of ICON; (2) any Investment in Cash Equivalents; (3) any Investment by ICON or any Restricted Subsidiary of ICON in a Person, if as a result of such Investment: (a) such Person becomes a Restricted Subsidiary of ICON; or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, ICON or a Restricted Subsidiary of ICON; (4) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales;" (5) any acquisition of assets (including Capital Stock) in exchange for the issuance of Equity Interests (other than Disqualified Stock) of ICON or HF Holdings; (6) any Investments received in compromise of obligations of such persons incurred in the ordinary course of trade creditors or customers that were incurred in the ordinary course of business, including pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of any trade creditor or customer; (7) Investments arising in connection with Hedging Obligations; (8) Investments existing on the date of the indenture; (9) loans or advances by ICON or any of its Restricted Subsidiaries to employees of ICON or any of its Restricted Subsidiaries that are entered into in the ordinary course of business and that are approved by the Board of Directors of ICON; provided that the aggregate principal amount of all such loans or advances do not exceed $1.5 million at any one time outstanding; (10) the acquisition by a Receivables Subsidiary in connection with a Qualified Receivables Transaction of Equity Interests of a trust or other Person established by such Receivables Subsidiary to effect such Qualified Receivables Transaction; and any other Investment by ICON or a Restricted Subsidiary of ICON in a Receivables Subsidiary or any Investment by a Receivables Subsidiary in any other Person in connection with a Qualified Receivables Transaction, provided, that such other Investment is in the form of a note or other instrument that the Receivables Subsidiary or other Person is required to repay as soon as practicable from available cash collections less amounts required to be established as reserves pursuant to contractual agreements with entities that are not Affiliates of ICON entered into as part of a Qualified Receivables Transaction; and (11) other Investments in any Person other than HF Holdings or an Affiliate of HF Holdings that is not also a Subsidiary of ICON having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (11) that are at the time outstanding not to exceed $10.0 million. 114 "Permitted Junior Securities" means: (1) Equity Interests in ICON or any Guarantor; or (2) debt securities that are subordinated to all Senior Debt and any debt securities issued in exchange for Senior Debt to substantially the same extent as, or to a greater extent than, the notes and the Subsidiary Guarantees are subordinated to Senior Debt under the indenture. "Permitted Liens" means: (1) Liens on all assets of ICON or any Subsidiary securing Senior Debt; (2) Liens in favor of ICON or the Guarantors; (3) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with ICON or any Restricted Subsidiary of ICON; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets of ICON or any Restricted Subsidiary other than those of the Person merged into or consolidated with ICON or the Restricted Subsidiary; (4) Liens on property existing at the time of acquisition of the property by ICON or any Subsidiary of ICON, provided that such Liens were in existence prior to the contemplation of such acquisition; (5) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business (including, without limitation, landlord liens on leased properties); (6) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (4) of the second paragraph of the covenant entitled "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" covering only the assets acquired with such Indebtedness; (7) Liens existing on the date of the indenture; (8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as is required in conformity with GAAP has been made therefor; (9) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries; (10) carriers' warehousemen's, mechanics', landlords', materialmen's, repairmen's or other like liens arising in the ordinary course of business in respect of obligations not overdue for a period in excess of 60 days or which are being contested in good faith by appropriate proceedings promptly instituted and diligently prosecuted; provided that any reserve or other appropriate provisions as shall be required to conform with GAAP shall have been made therefore; (11) easements, right-of-way, zoning and similar restrictions and other similar encumbrances or title defects incurred, or leases or subleases granted to others, in the ordinary course of business, which do not in any case materially detract from the value of the property subject thereto or do not interfere with, or adversely affect in any material respect, the ordinary conduct of the business of ICON and its Restricted Subsidiaries taken as a whole; (12) liens in favor of customs and revenue authorities to secure payment of custom duties in connection with the importation of goods in the ordinary course of business and other similar liens arising in the ordinary course of business; (13) leases or subleases granted to third persons not interfering with the ordinary course of business of ICON or any of its Restricted Subsidiaries; 115 (14) liens (other than any Lien imposed by ERISA or any rule or regulation promulgated thereunder) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, and other types of social security; (15) deposits, in an aggregate amount not to exceed $250,000, made in the ordinary course of business to secure liability to insurance carriers; (16) any attachment or judgment Lien not constituting an Event of Default under clause (6) of the first paragraph of the section described above under the caption "--Events of Default and Remedies;" (17) any interest or title of a lessor or sublessor under any operating lease; (18) liens arising solely by virtue of any statutory, contractual or common law provisions relating to banker's liens, right of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a depositary institution; provided that: (a) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by ICON or the issuer, as applicable, in excess of those set forth by regulations promulgated by the Federal Reserve Board of the United States or other applicable governmental or banking regulatory authority; and (b) such deposit account is not intended by ICON or any of its Restricted Subsidiaries to provide collateral to the depositary institution; (19) liens under any title retention agreement entered into in the ordinary course of business; (20) liens arising under Uniform Commercial Code financing statement filings regarding operating leases entered into by ICON and its Restricted Subsidiaries in the ordinary course of business; (21) Liens on assets of ICON or a Receivables Subsidiary incurred in connection with a Qualified Receivables Transaction; (22) Liens on assets of Foreign Subsidiaries; and (23) other Liens incurred in the ordinary course of business of ICON or any Subsidiary of ICON with respect to obligations that do not exceed $10.0 million at any one time outstanding. "Permitted Refinancing Indebtedness" means any Indebtedness of ICON or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of ICON or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that: (1) the principal amount (or accreted value, if applicable) or, in the case of a Credit Facility, the committed amount of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) or, in the case of a Credit Facility, the committed amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus all accrued interest on such Indebtedness and the amount of all expenses and premiums incurred in connection with such extension, refinancing, renewal, replacement, defeasement or refund); (2) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the notes on terms at least as favorable to the Holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and 116 (4) such Indebtedness is incurred either by ICON or by the Restricted Subsidiary (or both) who are the obligors on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company or government or other entity. "Principals" means Bain Capital, LLC and its affiliates and Credit Suisse First Boston Corporation and its affiliates and the collective parties to the Stockholders Agreement or the LLC Agreement. "Qualified Receivables Transaction" means any transaction or series of transactions entered into by ICON or any of its Restricted Subsidiaries pursuant to which ICON or any of its Restricted Subsidiaries sells, conveys or otherwise transfers to (i) a Receivables Subsidiary (in the case of a transfer by ICON or any of its Restricted Subsidiaries) and (ii) any other Person (in the case of a transfer by a Receivables Subsidiary), or grants a security interest in, any accounts receivable (whether now existing or arising 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 all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable. "Receivables Subsidiary" means a Subsidiary of ICON which engages in no activities other than in connection with the financing of accounts receivable and which is designated by the Board of Directors of ICON (as provided below) as a Receivables Subsidiary (a) no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which (i) is guaranteed by ICON or any of its Restricted Subsidiaries (excluding guarantees of Obligations (other than the principal of, and interest on, Indebtedness) pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Receivables Transaction), (ii) is recourse to or obligates ICON or any of its Restricted Subsidiaries in any way other than pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Receivables Transaction or (iii) subjects any property or asset of ICON or any of its Restricted Subsidiaries (other than accounts receivable and related assets as provided in the definition of "Qualified Receivables Transaction"), directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Receivables Transaction, (b) with which neither ICON nor any of its Restricted Subsidiaries has any material contract, agreement, arrangement or understanding other than on terms 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, other than fees payable in the ordinary course of business in connection with servicing accounts receivable and (c) with which neither ICON nor any of its Restricted Subsidiaries has any obligation to maintain or preserve such Subsidiary's financial condition or cause such Subsidiary to achieve certain levels of operating results. Any such designation by the Board of Directors of ICON will be evidenced to the trustee by filing with the trustee a certified copy of the resolution of the Board of Directors of ICON giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing conditions. "Related Party" means: (1) any controlling stockholder, 80% (or more) owned Subsidiary, or immediate family member (in the case of an individual) of any Principal; or (2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of any one or more Principals and/or such other Persons referred to in the immediately preceding clause (1). "Restricted Investment" means an Investment other than a Permitted Investment. 117 "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Senior Debt" means: (1) all Indebtedness of ICON or any Guarantor outstanding under Credit Facilities and all Hedging Obligations with respect thereto; (2) any other Indebtedness of ICON or any Guarantor permitted to be incurred under the terms of the indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the notes or any Subsidiary Guarantee; and (3) all Obligations with respect to the items listed in the preceding clauses (1) and (2). Notwithstanding anything to the contrary in the preceding, Senior Debt will not include: (1) any liability for federal, state, local or other taxes owed or owing by ICON; (2) any intercompany Indebtedness of ICON or any of its Subsidiaries to ICON or any of its Affiliates; (3) any trade payables; or (4) that portion of any Indebtedness that is incurred in violation of the indenture. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal or any final amount of principal on any series of Indebtedness, the date on which the payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and will not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Stockholders Agreement" means that certain Stockholders Agreement by and among certain common equity stockholders of HF Investment Holdings, LLC, including Credit Suisse First Boston Corporation, affiliates of Bain Capital, LLC and certain other persons listed therein, as in effect on the date of the indenture; provided, however, that such Stockholders Agreement may be amended from time to time if after giving effect to such amendment Credit Suisse First Boston Corporation and its affiliates and Bain Capital, LLC and its affiliates Beneficially Own more than 50% of the common equity of HF Holdings subject to the Stockholders Agreement. "Subsidiary" means, with respect to any specified Person: (1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees of the corporation, association or other business entity is at the time owned or controlled, directly or indirectly, by that 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 that Person or one or more Subsidiaries of that Person (or any combination thereof). "Subsidiary Guarantee" means, the Guarantee by each Guarantor of ICON's payment obligations under the indenture and the notes, executed pursuant to the terms of the indenture. 118 "Unrestricted Subsidiary" means any Subsidiary of ICON 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 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 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 Equity Interests or (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of ICON or any of its Restricted Subsidiaries; and (5) has at least one director on its Board of Directors that is not a director or executive officer of ICON or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of ICON or any of its Restricted Subsidiaries. Any designation of a Subsidiary of ICON as an Unrestricted Subsidiary will be evidenced to the trustee by filing with the trustee a certified copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the preceding conditions and was permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary will be deemed to be incurred by a Restricted Subsidiary of ICON as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," ICON will be in default of such covenant. The Board of Directors of ICON may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation will be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of ICON of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation will only be permitted if (1) such Indebtedness is permitted under the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to 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 of the Indebtedness, 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. 119 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a summary of the material U.S. federal income tax consequences expected to apply to the exchange of initial notes for exchange notes and the ownership and disposition of exchange notes under currently applicable law. The discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), the final and temporary U.S. Treasury Regulations promulgated thereunder, published administrative positions of the Internal Revenue Service ("IRS") and reported judicial decisions, all as now existing and currently applicable and all of which are subject to change (possibly with retroactive effect) or to different interpretations. We have not sought and will not seek a ruling from the IRS with respect to the U.S. federal income tax consequences of acquiring, owning and disposing of an exchange note. There can be no assurance that the IRS will not challenge one or more of the tax considerations described herein. This discussion does not cover all aspects of U.S. federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, particular holders, and does not address other aspects of U.S. federal taxation or state, local, foreign and other tax laws. Further, the U.S. federal income tax treatment of a holder of the initial notes and the exchange notes may vary depending on the holder's particular situation. Certain holders (including banks, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, taxpayers subject to the alternative minimum tax, dealers in securities, persons holding a note as part of a "straddle", "hedge", "conversion transaction" or other risk reduction transaction, persons who have a "functional currency" other than the U.S. dollar, U.S. expatriates and non-U.S. holders) may be subject to special rules not discussed below. Also, the description below applies only to those holders of the initial notes and the exchange notes who hold them as "capital assets" (generally, property held for investment purposes) within the meaning of Section 1221 of the Code, and it does not address notes held through a partnership or other pass-through entity. Holders of the initial notes and of the exchange notes should consult their own tax advisors with respect to their particular circumstances and with respect to the effects of state, local and foreign tax laws to which they may be subject. The Exchange An exchange of initial notes for exchange notes should be treated as a "non-event" for U.S. federal income tax purposes because the exchange notes should not be considered to differ materially in kind or extent from the initial notes. As a result, no U.S. federal income tax consequences would result to holders exchanging initial notes for exchange notes. The Exchange Notes Interest Payments on the Exchange Notes. The stated interest on the exchange notes should be considered to be "qualified stated interest" and, therefore, will be includible in a holder's gross income (except to the extent attributable to accrued interest at the time of purchase) as ordinary income for U.S. federal income tax purposes in accordance with the holder's regular method of tax accounting. Tax Basis. A holder's adjusted tax basis (determined by taking into account accrued interest at the time of purchase) in an exchange note received in exchange for an initial note will equal the cost of the initial note to the holder, increased by the amounts of market discount previously included in income by the holder and reduced by any principal payments received by the holder with respect to the exchange note and by amortized bond premium. A holder's adjusted tax basis in an exchange note purchased by the holder will be equal to the price paid for such an exchange note (determined by taking into account accrued interest at the time of purchase), increased by amounts of market discount previously included in income by the holder and reduced by any principal payments received by the holder with respect to the exchange note and by amortized bond premium. See "Market Discount and Bond Premium" below. 120 Sale, Exchange or Retirement. Upon the sale, exchange or retirement of an exchange note, a holder will recognize taxable gain or loss, if any, equal to the difference between the amount realized on the sale, exchange or retirement and the holder's adjusted tax basis in the exchange note. The gain or loss will be a capital gain or loss (except to the extent of any accrued market discount), and will be a long-term capital gain or loss if the exchange note has been held for more than one year at the time of such sale, exchange or retirement. The amount realized does not include any amount received that is attributable to the payment of accrued interest on an exchange note not previously included in income, which amount will be taxable as ordinary income. Market Discount and Bond Premium. Holders should be aware that the market discount provisions of the Code may affect the exchange notes. These rules generally provide that a holder who purchases an exchange note for an amount that is less than its principal amount will be considered to have purchased the exchange note at a "market discount" equal to the amount of such difference. The holder will be required to treat any gain realized upon the disposition of the exchange note as interest income to the extent of the market discount that is treated as having accrued during the period that the holder held the exchange note, unless an election is made to include such market discount in income on a current basis. A holder of an exchange note who acquires the exchange note at a market discount and who does not elect to include market discount in income on a current basis may also be required to defer the deduction of a portion of the interest on any indebtedness incurred or continued to purchase or carry the exchange note until the holder disposes of the exchange note in a taxable transaction. If a holder's tax basis in an exchange note immediately after acquisition exceeds the stated redemption price at maturity of the exchange note, the holder may be eligible to elect to deduct the excess as amortizable bond premium pursuant to Section 171 of the Code. Purchasers of the exchange notes should consult their own tax advisors concerning the application to such purchasers of the market discount and bond premium rules. Backup Withholding The holder of an initial note and the holder of an exchange note may be subject, under certain circumstances, to "backup withholding" at the applicable rate with respect to certain "reportable payments", including interest on the note and the gross proceeds from the disposition of the note. The backup withholding rules apply if the holder is not otherwise exempt and, among other things, (i) fails to furnish a social security number or other taxpayer identification number ("TIN") certified under penalties of perjury within a reasonable time after the request therefor, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it has failed to report properly the receipt of interest or dividends, or (iv) under certain circumstances, fails to provide a certified statement, signed under penalties of perjury, that the TIN furnished is the correct number and that the holder is not subject to backup withholding. Backup withholding will not apply with respect to payments made to certain holders, including corporations and tax-exempt organizations, provided their exemptions from backup withholding are properly established. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against the holder's U.S. federal income tax liability provided the requisite procedures are followed. HOLDERS OF THE INITIAL NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF THE INITIAL NOTES AND THE EXCHANGE NOTES, INCLUDING THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND POSSIBLE FUTURE CHANGES IN SUCH FEDERAL TAX LAWS. 121 PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be issued by a broker-dealer in connection with resales of Exchange Notes received in exchange for Initial Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Issuer has agreed that for a period of 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until 2002, all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. The Issuer will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such brokerdealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date the Issuer will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Issuer has agreed to pay all expenses incident to the Exchange Offer other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Notes (including any brokerdealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters in connection with the notes and the guarantees offered hereby will be passed upon for us by Hutchins, Wheeler & Dittmar, A Professional Corporation, Boston, Massachusetts. EXPERTS The consolidated financial statements as of May 31, 2001 and 2000 and for each of the three years in the period ended May 31, 2001, 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. AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-4, covering the exchange notes offered in this prospectus. This prospectus does not contain all the information that is included in the registration statement. You will find additional information in the registration statement. 122 Statements made in this prospectus as to the contents of any contract, agreement or other document are not necessarily complete. For a more complete understanding and description of each contract, agreement or other document filed as an exhibit to the registration statement, we encourage you to read the documents contained in the exhibits. You may read and copy the registration statement and any other documents we file with the Securities and Exchange Commission at the Securities and Exchange Commission's public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. In addition, reports and other filings will be available to the public on the Securities and Exchange Commission's web site at www.sec.gov. If for any reason we are not subject to the reporting requirements of the Securities Exchange Act of 1934 in the future, we will still be required under the indenture governing the notes to furnish the holders of the notes with annual reports containing financial statements audited by its independent certified public accountants and with quarterly reports containing unaudited financial statements for each of the first three quarters of each fiscal year. 123 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.................................... F-2 Consolidated Balance Sheets.......................................... F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) F-4 Consolidated Statement 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-36
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 income (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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 consolidated 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 of America, 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 our opinion. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah July 18, 2001, except for Note 17 for which the date is August 29, 2001 F-2 ICON HEALTH & FITNESS, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
May 31, March 2, -------------------- ----------- 2000 2001 2002 --------- --------- ----------- (Unaudited) ASSETS Current assets: Cash..................................... $ 5,864 $ 3,324 $ 11,427 Accounts receivable, net................. 128,093 142,946 181,542 Inventories, net......................... 130,365 145,984 121,909 Deferred income taxes.................... 2,109 5,058 6,181 Other current assets..................... 8,013 15,846 15,979 --------- --------- --------- Total current assets................. 274,444 313,158 337,038 --------- --------- --------- Property and equipment, net................. 43,853 46,758 45,666 Intangible assets, net...................... 27,147 30,517 31,468 Deferred income taxes....................... 3,860 1,824 12,398 Other assets, net........................... 18,843 13,247 22,178 --------- --------- --------- Total Assets......................... $ 368,147 $ 405,504 $ 448,748 ========= ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt........ $ 10,976 $ 11,346 $ 10,671 Accounts payable......................... 104,439 120,155 119,903 Accrued expenses......................... 21,721 19,608 26,063 Income taxes payable..................... -- 345 12,975 Interest payable......................... 4,982 4,118 1,165 --------- --------- --------- Total current liabilities............ 142,118 155,572 170,777 --------- --------- --------- Long-term debt.............................. 242,198 253,327 253,305 --------- --------- --------- Commitments and contingencies (Notes 9 and 13) Stockholder's equity (deficit): Common stock and additional paid-in capital................................ 204,155 204,155 204,155 Receivable from Parent................... (2,200) (2,200) (2,200) Accumulated other comprehensive loss..... (1,483) (2,015) (3,007) Accumulated deficit...................... (216,641) (203,335) (174,282) --------- --------- --------- Total stockholder's equity (deficit).......................... (16,169) (3,395) 24,666 --------- --------- --------- Total Liabilities and Stockholder's Equity (Deficit)..... $ 368,147 $ 405,504 $ 448,748 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-3 ICON HEALTH & FITNESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands)
Nine Months Ended Year Ended May 31, ---------------------- ---------------------------- March 3, March 2, 1999 2000 2001 2001 2002 -------- -------- -------- ----------- ----------- (Unaudited) (Unaudited) Net sales.................... $710,249 $733,022 $820,496 $660,061 $715,088 Cost of sales................ 514,018 531,622 580,484 467,725 506,361 -------- -------- -------- -------- -------- Gross profit................. 196,231 201,400 240,012 192,336 208,727 -------- -------- -------- -------- -------- Operating expenses: Selling................... 107,621 95,973 109,781 81,778 93,690 Research and development............. 7,715 8,309 10,851 8,151 7,884 General and administrative.......... 53,414 61,675 63,477 46,741 50,957 -------- -------- -------- -------- -------- Total operating expenses............ 168,750 165,957 184,109 136,670 152,531 -------- -------- -------- -------- -------- Income from operations....... 27,481 35,443 55,903 55,666 56,196 Interest expense.......... (33,056) (33,899) (34,771) (27,092) (19,707) Amortization of deferred financing fees.................... (6,992) (2,743) (3,189) (2,342) (2,652) Other income (expense), net.......... (34) 404 (1,154) -- -- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item......... (12,601) (795) 16,789 26,232 33,837 Provision for income taxes...................... 12,084 3,913 3,483 11,962 4,784 -------- -------- -------- -------- -------- Income (loss) before extraordinary item....................... (24,685) (4,708) 13,306 14,270 29,053 Extraordinary loss on extinguishment of debt, net of income tax benefit of $1,244...... -- (1,948) -- -- -- -------- -------- -------- -------- -------- Net income (loss)............ (24,685) (6,656) 13,306 14,270 29,053 Other comprehensive loss comprised of foreign currency translation adjustment, net of income tax benefit of $325 in 2001 and $285 in 2000.................... (470) (466) (532) (290) (992) -------- -------- -------- -------- -------- Comprehensive income (loss)..................... $(25,155) $ (7,122) $ 12,774 $ 13,980 $ 28,061 ======== ======== ======== ======== ========
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)
Common stock and additional paid-in Accumulated capital Receivable other Total ----------------- from officers comprehensive Accumulated stockholder's Shares Value and Parent loss deficit equity (deficit) ------ -------- ------------- ------------- ----------- ---------------- Balance at June 1, 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 $4,375)..... -- 35,625 -- -- -- 35,625 Common stock of HF Holdings, Inc. issued to management..... -- 3,175 -- -- -- 3,175 Cancellation of receivables from officers.. -- (656) 656 -- -- -- Warrants of HF Holdings, Inc. granted to holders of 13% Notes.......... -- 2,192 -- -- -- 2,192 Other comprehensive loss........... -- -- -- (466) -- (466) Receivable from Parent......... -- -- (2,200) -- -- (2,200) Net loss......... -- -- -- -- (6,656) (6,656) ----- -------- ------- ------- --------- -------- Balance at May 31, 2000.............. 1,000 204,155 (2,200) (1,483) (216,641) (16,169) Other comprehensive loss........... -- -- -- (532) -- (532) Net income....... -- -- -- -- 13,306 13,306 ----- -------- ------- ------- --------- -------- Balance at May 31, 2001.............. 1,000 204,155 (2,200) (2,015) (203,335) (3,395) Other comprehensive loss (unaudited).... -- -- -- (992) -- (992) Net income (unaudited).... -- -- -- -- 29,053 29,053 ----- -------- ------- ------- --------- -------- Balance at March 2, 2002 (unaudited).. 1,000 $204,155 $(2,200) $(3,007) $(174,282) $ 24,666 ===== ======== ======= ======= ========= ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 ICON HEALTH & FITNESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31, Nine Months Ended ------------------------------ ---------------------- March 3, March 2, 1999 2000 2001 2001 2002 --------- --------- -------- ----------- ----------- (Unaudited) (Unaudited) Operating activities: Net income (loss)............................................... $ (24,685) $ (6,656) $ 13,306 $ 14,270 $ 29,053 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision (benefit) for deferred taxes.......................... 9,521 1,859 (588) 1,647 (11,697) Depreciation and amortization................................... 17,422 16,749 17,372 12,292 13,671 Amortization of deferred financing fees......................... 7,272 2,743 3,189 2,342 2,652 Amortization of gain on extinguishment of debt.................. -- (816) (1,300) (975) (975) Common stock of HF Holdings, Inc. issued to management.......... -- 3,175 -- -- -- Write-off of loans to junior management......................... -- 452 -- -- -- Extraordinary loss on extinguishment of debt.................... -- 1,948 -- -- -- Changes in operating assets and liabilities, net of acquisition: Accounts receivable, net........................................ 7,833 (11,625) (14,097) (76,355) (38,596) Inventories, net................................................ 15,040 (23,939) (14,784) (23,510) 24,075 Income taxes receivable/payable................................. 1,353 (1,821) (2,807) 4,519 12,630 Other assets, net............................................... (5,317) 4,679 54 (1,285) (9,757) Accounts payable and accrued expenses........................... 10,503 13,287 10,040 32,328 5,444 Interest payable................................................ (923) 506 2,022 (263) 61 --------- --------- -------- -------- -------- Net cash provided by (used in) operating activities............. 38,019 541 12,407 (34,990) 26,561 --------- --------- -------- -------- -------- Investing activities: Purchase of property and equipment.............................. (11,593) (12,877) (16,095) (11,106) (8,921) Purchase of intangibles and trademarks.......................... (8,474) (4,382) (2,693) (1,415) (4,337) Receivable from Parent.......................................... -- (2,200) -- -- -- Loans to junior management...................................... -- (452) -- -- -- Acquisition, net of cash acquired............................... -- -- (3,997) (3,996) (969) --------- --------- -------- -------- -------- Net cash used in investing activities........................... (20,067) (19,911) (22,785) (16,517) (14,227) --------- --------- -------- -------- -------- Financing activities: Borrowings (payments) on revolving credit facility, net......... 223,121 (113,051) 19,497 60,675 4,855 Payments on other long-term debt................................ (237,369) (580) (376) (464) (5,177) Proceeds from new term notes.................................... -- 180,000 -- -- -- Payments on new term notes...................................... -- (5,321) (9,273) (6,884) (2,414) Payments on old term notes...................................... -- (19,464) -- -- -- Payments to 13% note holders.................................... -- (40,908) -- -- -- Payment of fees-debt portion.................................... (2,846) (14,876) (1,153) (1,545) (503) Cash contribution of capital from Parent........................ -- 40,000 -- -- -- Payment of fees-equity portion.................................. -- (4,375) -- -- -- Receivable from Parent.......................................... (5) -- -- -- -- --------- --------- -------- -------- -------- Net cash provided by (used in) financing activities............. (17,099) 21,425 8,695 51,782 (3,239) --------- --------- -------- -------- -------- Effect of exchange rate changes on cash........................... (470) (466) (857) (752) (992) --------- --------- -------- -------- -------- Net increase (decrease) in cash................................... 383 1,589 (2,540) (477) 8,103 Cash, beginning of period......................................... 3,892 4,275 5,864 5,864 3,324 --------- --------- -------- -------- -------- Cash, end of period............................................... $ 4,275 $ 5,864 $ 3,324 $ 5,387 $ 11,427 ========= ========= ======== ======== ========
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"). At March 2, 2002, May 31, 2001 and 2000, ICON Health was a wholly-owned subsidiary of HF Holdings, Inc. ("HF Holdings") 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"). On July 20, 1999, prior to the Restructuring discussed in Note 2, a new holding company, HF Holdings was formed. HF Holdings was formed through equity investments by current shareholders of IHF Capital, members of Company management and other investors. 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. There was no adjustment to the assets and liabilities of ICON Health as a result of this transaction. 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 March 2, 2002 and the results of its operations and cash flows for the nine-month periods ended March 2, 2001 and March 3, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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. Restructuring 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 refinanced its existing bank credit facility. The Company believes that the new capital structure, the new credit facility (Note 9) and cash provided from operations will be sufficient to fund its operations and debt repayment requirements in the future. As part of the Restructuring, 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: The 13% noteholders received: i. $39,408,000 in cash, ii. $44,282,000 in new 12% Subordinated Notes ("12% Notes") of ICON Health issued in connection with the Exchange Offer, iii. $10,086,000 payment for accrued interest, and F-7 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) iv. warrants to purchase 423,939 shares of HF Holdings common stock for a nominal exercise price which were valued at $2,192,000 and 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, which were assigned no value. 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 Offer totaled $1,500,000. On May 18, 2000, the Company agreed to acquire the $1,500,000 of 13% Notes for $1,815,000, plus accrued interest (Note 9). No gain was realized on the extinguishment of the 13% Notes. Unamortized deferred financing fees of $6,346,000 related to the 13% Notes have been reflected as a component of the adjustment to establish the carrying value of the 12% Notes. 3. Significant Accounting Policies Principles of Consolidation--All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Cash--At May 31, 2001, substantially all of the Company's cash is held by two banks located in Chicago and Massachusetts. 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. 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, Equipment and Tooling--Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Tooling is stated at cost and depreciated using the straight-line method over the estimated useful life, approximately three years. Expenditures for renewals and improvements are capitalized, and maintenance and repairs are charged to expense as incurred. Intangible Assets--Intangible assets are recorded at cost and are amortized on a straight-line basis over the following estimated useful lives: Goodwill................................ 5 years Trademarks.............................. 20 years Other................................... 5 years
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 F-8 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 Facility and the issuance of the 12% Notes (the "Notes") as part of the Restructuring. These costs are capitalized in other long-term assets and are being amortized using the straight-line method for costs associated with the Credit Facility and the effective interest method for costs associated with the Notes. Deferred costs relating to the 13% Notes and existing bank credit agreement were written-off as part of the Restructuring in September of 1999. Advertising Costs--The Company expenses the costs of advertising as incurred, except for the cost of 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, 2000 and 2001, $830,000 and $1,629,000, respectively, of capitalized advertising costs were included in other assets. For the fiscal years ended May 31, 1999, 2000 and 2001, total advertising expense was approximately $11,249,000, $9,198,000 and $13,011,000, 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. Software Development Costs--Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. Prior to the adoption of SOP 98-1, the Company expensed all internal use software related costs as incurred. As of May 31, 2000 and 2001, the amount of capitalized software costs included on the consolidated balance sheet were not significant. 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%, 40% and 42% of total sales for the fiscal years ended May 31, 1999, 2000 and 2001, respectively. Accounts receivable from Sears accounted for approximately 36% and 42% of gross accounts receivable at May 31, 2000 and 2001, respectively. The Company is not the exclusive supplier of home fitness equipment to any of its 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 its major customers would have a material adverse effect on the Company's business. 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". Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities at currently enacted tax rates. If appropriate, deferred tax assets are reduced by a valuation allowance which reflects expectations of the extent to which such assets will be realized. F-9 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of May 31, 2000 and 2001, ICON Health is included as part of the consolidated tax return filed by HF Holdings, Inc. Prior to the Restructuring, ICON Health was included as part of the consolidated tax return filed by IHF Capital. The income tax provision for ICON Health 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, Italian lire and Euro dollars 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, 2000 and 2001. In the fiscal years ended May 31, 1999, 2000 and 2001, the Company's foreign operations represented less than 10% of the Company's net sales and the 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 exposure 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 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 statements of cash flows in the same category as the hedged transactions. As of May 31, 2000 and 2001, the Company had no open forward exchange contracts to sell Canadian dollars. During the fiscal years ended May 31, 1999, 2000 and 2001, the Company recognized no gains or losses upon settlement of foreign currency contracts denominated in Canadian dollars. Barter Transaction--Included in other current and other long-term assets at May 31, 2000 and 2001 are barter credits of $3,920,000 and $2,477,000, respectively, which were recorded in connection with a barter agreement the Company entered into during the fiscal year ended May 31, 1997. The Company intends to use these barter credits primarily to purchase certain products from vendors and advertising through August 31, 2003, the expiration date of the barter credits. The Company, based on current plans, intends to utilize the credits in its ongoing operations before expiration. The total amount of cash required to utilize the credits will range from $1,000,000 to $2,000,000 per year over the next two years. Fair Value of Financial Instruments--The following methods and assumptions were used to estimate the fair value disclosures for financial instruments: 12% Notes--estimated by discounting the future cash flows using rates currently offered for borrowings of similar remaining maturities at May 31, 2001; based on face value at May 31, 2000, due to timing of issuance. 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, 2000 and 2001 were as follows (in thousands):
2000 2001 ------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- 12% Notes.................................... $ 49,914 $ 44,282 $ 48,614 $ 44,282 Other long-term debt......................... 203,260 203,260 216,059 216,059
F-10 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Use of Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period presented. Actual results could differ from those estimates. New Accounting Standard--SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," became effective for the Company on June 1, 2001. Because the Company had no open forward exchange contracts at May 31, 2001, the adoption of SFAS No. 133 had no impact on the earnings or financial position of the Company. Reclassifications--Certain balances of the prior years have been reclassified to conform to the current year's presentation. These reclassifications had no effect on net loss or total assets. 4. Accounts Receivable Accounts receivable, net, consist of the following (table in thousands):
May 31, ------------------ 2000 2001 -------- -------- Trade accounts receivable......................... $135,097 $149,698 Less allowance for doubtful accounts, advertising discounts and credit memos...................... (7,004) (6,752) -------- -------- $128,093 $142,946 ======== ========
5. Inventories Inventories, net, consist of the following (table in thousands):
May 31, ----------------- 2000 2001 -------- -------- Raw materials, principally parts and supplies..... $ 57,343 $ 62,666 Finished goods.................................... 73,022 83,318 -------- -------- $130,365 $145,984 ======== ========
Inventories are net of allowances (primarily for finished goods) of $2,829,000 and $3,185,000 at May 31, 2000 and 2001, 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. 6. Property and Equipment Property and equipment, net, consist of the following (table in thousands):
May 31, Estimated ------------------ Useful Lives 2000 2001 ------------ -------- -------- (Years) Land.................................... -- $ 1,430 $ 1,472 -------- Building and improvements............... up to 31 17,989 20,513 Equipment............................... 3--7 69,860 70,620 -------- -------- 89,279 92,605 Less accumulated depreciation........... (45,426) (45,847) -------- -------- $ 43,853 $ 46,758 ======== ========
F-11 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the fiscal years ended May 31, 1999, 2000 and 2001, the Company recorded depreciation expense of $15,135,000, $14,223,000 and $13,619,000, respectively. 7. Intangible Assets Intangible assets, net, consist of the following (table in thousands):
May 31, ----------------- 2000 2001 ------- -------- Goodwill................................ $ 7,543 $ 11,973 Trademarks.............................. 23,227 23,227 Other................................... 3,642 5,846 ------- -------- 34,412 41,046 Less accumulated amortization........... (7,265) (10,529) ------- -------- $27,147 $ 30,517 ======= ========
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. The Company made $3,125,000 of additional payments to NordicTrack during the fiscal year ended May 31, 2000, which were classified as trademark costs as a result of the contingent purchase price agreement. 8. Other Assets Other assets, net, consist of the following (table in thousands):
May 31, --------------- 2000 2001 ------- ------- Deferred financing costs, net........... $12,952 $11,333 Barter credits.......................... 2,720 1,277 Long-term receivables, net.............. 2,250 626 Other................................... 921 11 ------- ------- $18,843 $13,247 ======= =======
At May 31, 2000 and 2001, capitalized deferred financing costs are net of accumulated amortization of $2,667,000 and $5,856,000, respectively. Long-term receivables consist of receivables whose collection is not considered to be current because the customer is in bankruptcy and whose carrying values have been written down to net realizable value. At May 31, 2000 and 2001, long-term receivables are net of an allowance for doubtful accounts of $18,573,000 and $22,093,000, 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, ------------------ 2000 2001 -------- -------- Revolving Credit Facility................................... $ 26,981 $ 46,478 Term Loan A................................................. 27,954 23,182 Term Loan B................................................. 79,175 78,075 Term Loan C................................................. 55,997 58,482 Intellectual Property Loan.................................. 12,750 9,750 12% Subordinated Notes, including face amount of $44,282 and unamortized net gain of $5,632 at May 31, 2000 and $4,332 at May 31, 2001.................................... 49,914 48,614 Other....................................................... 403 92 -------- -------- 253,174 264,673 Less current portion..................................... (10,976) (11,346) -------- -------- Total long-term debt................................. $242,198 $253,327 ======== ========
Credit Agreement In connection with the September 1999 Restructuring, the Company entered into new credit facilities (the "New Credit Facilities") of $300 million with a syndicate of banks and financial services companies. The New Credit Facilities consist of a $120 million revolving credit facility ("Revolving Credit Facility"), a $30 million term loan ("Term Loan A"), a $80 million term loan ("Term Loan B"), a $55 million term loan ("Term Loan C") and a $15 million term loan ("Intellectual Property Loan" or "IP Loan"). All loans under the New Credit Facilities are collateralized by a first priority security interest in all of the existing and subsequently acquired assets of the Company and its domestic and Canadian subsidiaries, subject to specified exceptions, and a pledge of 65% of the stock of the Company's first-tier foreign subsidiaries. The IP Loan contains special provisions granting it priority over the other loans on the proceeds of a liquidation of the Company's patents, trademarks and other intellectual property. All loans are cross-collateralized and contain cross default provisions. All of the outstanding common stock of the Company, owned by HF Holdings, has been pledged to the lenders under the New Credit Facilities. If the Company was to default under these New Credit Facilities, the lenders would foreclose on the pledge and take control of the Company. Revolving Credit Facility The Revolving Credit Facility 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 Revolving Credit Facility expires on August 31, 2004. The terms and conditions include a clean down period to reduce the outstanding borrowings on the Revolving Credit Facility to $50 million or less for a period of 60 consecutive days or more, during the period from May 1 through August 31, 2001 and $45 million for subsequent years for the same period of time. In addition, borrowing availability is limited to defined percentages of qualified assets as specified in the New Credit Facilities 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 Revolving Credit Facility is due monthly. In addition, a fee of .25% per annum of the average unused daily balance for the preceding calendar quarter is due quarterly if such average unused daily balance exceeded $60 million. F-13 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 due 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 due at maturity. The Term Loan C expires on March 1, 2005. Intellectual Property 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 the Company's option, all loans 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 additional interest at 5% per annum which is added to the loan principal quarterly. If the Revolving Credit Facility is terminated, Term Loans A, B, C and the IP Loan will also immediately be due and payable in full. In addition, if the Revolving Credit Facility 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 New Credit Facilities were used to refinance the Company's 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 the Company's and its 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 certain acquisitions, modify terms of the indenture, engage in mergers or consolidations, enter into operating leases or engage in transactions with affiliates. In addition, the Company is 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. At May 31, 2001, the Company was in compliance with all of its debt covenants. 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. F-14 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12% Subordinated Notes The new 12% Subordinated Notes are due September 2005 and are guaranteed by each of the Company's domestic subsidiaries (Note 19). Interest will be due each January 15 and July 15 of each year, beginning on January 15, 2000. The 12% 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. The Company is currently paying a rate of 13.5% on the 12% Notes until the notes are registered pursuant to an effective registration statement under the Securities Act of 1933. The table below reflects the scheduled principal payment terms of the Company's long-term debt (in thousands):
Year ending May 31, ------------------- 2002........ $ 11,346 2003........ 13,300 2004........ 13,981 2005........ 226,046 -------- $264,673 ========
In connection with the Restructuring, the Company amended the indentures governing the 13% Notes to delete substantially all restrictive covenants contained in those indentures. Three affiliated investment funds who did not tender their $1.5 million principal amount of 13% Notes filed an action against the Company, its directors and others seeking compensatory and punitive damages in an unspecified amount. On May 18, 2000, the Company consummated a settlement agreement with the plaintiffs under which the Company would acquire the $1.5 million principal amount of 13% Notes owned by the plaintiffs for a purchase price of $1.8 million plus accrued interest in return for a complete release of all claims against the defendants. A charge of $.3 million was recognized as a result of the settlement. For the fiscal year ended May 31, 2000, an extraordinary loss of approximately $3.2 million ($1.9 million net of income tax benefit) was recorded on the extinguishment of the existing credit facility and the remaining 13% Notes. F-15 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Stockholder's Equity The Company has 3,000 shares of $.01 par value common stock authorized, and 1,000 shares issued and outstanding. Subsequent to the Restructuring, the Company established a new junior management stock option plan (the "Plan") and issued 333,300 options to purchase common stock of HF Holdings with an exercise price of $5.83 to members of the Plan. These options have a ten-year life, 25% vest immediately and the balance vests in 25% increments on each anniversary of the grant date. The following table summarizes activity under the Plan for the fiscal years ended May 31, 2000 and 2001:
May 31, 2000 May 31, 2001 ----------------- ----------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price -------- -------- -------- -------- Outstanding at beginning of year................................. -- -- 333,300 $5.83 Granted.......................................................... 333,300 $5.83 -- -- Expired.......................................................... -- -- -- -- Exercised........................................................ -- -- -- -- Forfeited........................................................ -- -- -- -- -------- -------- Outstanding at end of year....................................... 333,300 $5.83 333,300 $5.83 ======== ======== Options exercisable at end of year............................... 83,325 166,650 ======== ======== Weighted average fair market value of options granted during year $ 1.51 $ -- ======== ========
The following table summarizes information about stock options outstanding at May 31, 2001:
Options Outstanding Options Exercisable - --------------------------------------- --------------------------------------------- Weighted Average Remaining Contractual Range of Number Life Weighted Average Number Weighted Average Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price - --------------- ----------- ----------- ---------------- ----------- ---------------- $5.83 333,300 8.3 $5.83 166,650 $5.83
No compensation expense has been recognized for these options. Had the compensation expense associated with these options been determined based on the fair value of such options on the respective grant dates, the Company's pro forma net income (loss) would have been as indicated below (in thousands):
Year ended May 31, ------------------ 2000 2001 ------- ------- Net income (loss): As reported.... $(6,656) $13,306 Pro forma...... (6,865) 13,173
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) risk-free interest rate of 6.00%; (2) expected life of five years; (3) dividend yield of zero; and (4) a volatility of zero. F-16 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Income Taxes The provision for (benefit from) income taxes consists of the following (in thousands):
Year ended May 31, ------------------------ 1999 2000 2001 ------- ------- ------- Current: Federal.................................. $ -- $ 412 $ 2,720 State.................................... 106 77 233 Foreign.................................. 2,457 1,280 1,118 ------- ------- ------- Total current........................ 2,563 1,769 4,071 ------- ------- ------- Deferred: Federal.................................. 8,224 1,503 (1,041) State.................................... 1,286 218 (90) Foreign.................................. 11 423 543 ------- ------- ------- Total deferred....................... 9,521 2,144 (588) ------- ------- ------- Provision for income taxes before extraordinary loss........................ 12,084 3,913 3,483 Benefit from extraordinary loss on extinguishment of debt.................... -- (1,244) -- ------- ------- ------- Total provision for income taxes..... $12,084 $ 2,669 $ 3,483 ======= ======= =======
The components of the Company's income (loss) before income taxes and extraordinary item are as follows (in thousands):
Year ended May 31, -------------------------- 1999 2000 2001 -------- ------- ------- Domestic................................ $(17,150) $(6,452) $14,964 Foreign................................. 4,549 2,465 1,825 -------- ------- ------- $(12,601) $(3,987) $16,789 ======== ======= ======= Income (loss) before taxes and extraordinary item.................... $(12,601) $ (795) $16,789 Pre-tax extraordinary loss.............. -- (3,192) -- -------- ------- ------- $(12,601) $(3,987) $16,789 ======== ======= =======
The provision for income tax differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows:
Year ended May 31, --------------- 1999 2000 2001 ---- ---- ---- Statutory federal income tax rate....... (35)% (35)% 35% State tax provision (benefit)........... 8 (2) 3 Losses for which no benefit has been recognized............................ 6 40 -- Benefit from net operating loss related to Restructuring...................... -- -- (17) Foreign income taxes.................... -- -- 9 Foreign tax credit...................... -- -- (1) Other................................... -- 8 (8) Change in valuation allowance........... 117 49 -- --- --- --- Provision for income taxes.............. 96% 60% 21% === === ===
F-17 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of May 31, 2000 and 2001, the Company recorded gross deferred tax assets and gross deferred tax liabilities as follows (in thousands):
May 31, ----------------- 2000 2001 -------- ------- Gross deferred tax assets.................... $ 32,991 $19,741 Gross deferred tax liabilities............... (2,936) (5,239) -------- ------- 30,055 14,502 Valuation allowance.......................... (24,086) (7,620) -------- ------- $ 5,969 $ 6,882 ======== =======
At May 31, 2000 and 2001 net deferred tax assets consist of the following (in thousands):
May 31, ----------------- 2000 2001 -------- ------- Foreign net operating loss carryforwards..... $ 6,570 $ 7,620 Domestic net operating loss carryforwards.... 17,516 -- Property and equipment....................... (2,542) (2,364) Reserves and allowances...................... 4,295 4,637 Uniform capitalization of inventory.......... (394) 647 Restructuring gain........................... 3,828 2,944 Other, net................................... 782 1,018 -------- ------- 30,055 14,502 Valuation allowance.......................... (24,086) (7,620) -------- ------- Net deferred tax asset....................... $ 5,969 $ 6,882 ======== =======
During fiscal year ended May 31, 2001, the valuation allowance decreased by $16,466,000 due to the elimination of net operating loss carryforwards that would provide no future benefit to the Company. During fiscal years ended May 31, 1999 and 2000, the valuation allowance increased by $13,140,000 and $6,456,000, respectively, primarily as a result of the increase in the net operating loss carryforwards that may not be realized. Management believes that it is more likely than not that the Company will generate sufficient future taxable income, primarily due to the Restructuring, to realize the balance of the net deferred tax asset at May 31, 2001. 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, an additional valuation allowance against this deferred tax asset would result in a charge to earnings. During the fiscal year ended May 31, 2001, the Company utilized approximately $9.5 million in net operating loss carryforwards generated during the period from September 1999 to May 2000. During the fiscal years ended May 31, 1999 and 2000, the Company did not realize any income tax benefit from federal and state net operating loss carryforwards. At May 31, 2001, the Company had approximately $19.6 million of foreign net operating loss carryforwards which may be carried forward indefinitely. The Company has provided a full valuation allowance against the deferred tax asset related to these carryforwards. F-18 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Supplemental Disclosures of Cash Flow Information
Year Ended May 31, ----------------------- 1999 2000 2001 ------- ------- ------- Cash paid during the period for (in thousands): Interest paid............................... $33,979 $34,121 $34,063 Income taxes paid, net...................... 27 3,688 6,131
Non-cash investing and financing activities: During the fiscal years ended May 31, 2000 and 2001, the Company added interest of $1.2 million and $2.9 million, respectively, to long-term debt. During the fiscal year ended May 31, 2000, the Company exchanged the 13% Notes for 12% Notes (Notes 2 and 9); issued warrants to the holders of 13% Notes (Note 2); wrote-off deferred financing fees related to the 13% Notes (Note 2); and canceled loans to officers (Note 14). 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 warehouse and production facilities and 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 maintenance and insurance. Future minimum payments under noncancellable operating leases consist of the following (in thousands):
Year ending May 31, ------------------- 2002........... $12,997 2003........... 10,491 2004........... 8,764 2005........... 6,433 2006........... 1,906 Thereafter..... 2,280 ------- $42,871 =======
Rental expense under noncancellable operating leases was approximately $9,550,000, $8,527,000 and $9,682,000 for the fiscal years ended May 31, 1999, 2000 and 2001, 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. F-19 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 (Note 18). The 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 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. The Company has received a letter of investigation from the Consumer Product Safety Commission (the "Commission") wherein the Commission is proposing to level a civil penalty of $4.5 million against the Company for its alleged failure to comply with Section 15(b) of the Consumer Product Safety Act ("CPSA"), 15 U.S.C. 2064(b). The Company has responded to the Commission's letter through its outside counsel by letter dated November 29, 1999 and subsequent communications between the parties. The Company does not believe the amount of any final penalty, if any, will have a material adverse effect upon the Company 's results of operations or financial position (Note 18). 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 upon the Company's results of operations or financial position. The Company has received a proposed assessment from United States Customs Service for approximately $1.3 million with respect to a series of issues regarding compliance with the North American Free Trade Agreement ("NAFTA"). The Company believes it has complied with NAFTA. The proposed assessment is currently being vigorously defended by the Company's attorney. The Company does not believe the outcome will have a material adverse effect upon the Company's results of operations or financial position. 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, 2000 and 2001, the Company had an accrual for warranty costs on products sold of approximately $2,570,000 and $2,557,000, 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, 2000 and 2001 were $368,000, $512,000 and $540,000, respectively. Employment Agreements--On September 27, 1999, the Company entered into new three-year employment agreements with two senior officers. The employment agreements provide for the continued employment of the Chairman and Chief Executive Officer with a base salary of $525,000 and the President and Chief Operating Officer with a base salary of $475,000. The Company 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. F-20 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The employment agreements prohibit the executives from engaging in outside business activity during the term, subject to certain 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 the Company may, at the Company's option, extend such period for up to two additional years by paying the executive his salary and bonus during the extended period). Internal Revenue Service Audit--The Company is under examination by the Internal Revenue Service (the "IRS") for its taxable year ended May 31, 1996. As of May 31, 2001, this examination remains in process and has not been completed (Notes 17 and 18). 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 the fiscal years ended May 31, 1995 and 1997. The IRS has inquired about the Company's treatment of a substantial amount of banking, professional and other fees incurred in its fiscal year ended May 31, 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 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 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 1997 deductions should be disallowed, as noted above, the Company's available net operating loss carryforwards would be reduced. Based on information currently available to the Company, the Company does not believe that the reduction in its net operating losses would materially adversely affect its 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 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 previously outstanding notes (the "Old Notes") as a result of the Old Notes being determined to have been issued with original issue discount ("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 Management Fees The Company has an agreement with major shareholders of IHF Capital and HF Holdings who provide management and advisory services to the Company. Total annual fees due under this agreement are $800,000 for the fiscal years ended May 31, 1999, 2000 and 2001. The Company recorded management fee expense of $800,000 each year. In addition, the Company paid a fee of $3,500,000 upon closing of the Restructuring to certain major shareholders of HF Holdings. In addition, if the Company enters into any acquisition transaction involving at least $10 million, the Company must pay a fee of approximately 1% of the gross purchase price, including liabilities assumed, of the transaction to these shareholders. 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 $56,610 per month. In connection with its F-21 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) lease commitments, the Company recorded $864,000, $938,000 and $903,000 of rental expense for the fiscal years ended May 31, 1999, 2000 and 2001, respectively. In addition, the Company advanced $280,000 to FG as a security deposit on the aircraft lease. Receivables from Officers and Parent In connection with the purchase of stock in 1994, 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. During the fiscal year ended May 31, 2000, as a result of the Restructuring, the Company canceled these notes. The stock collateralizing such loans was delivered back to the Company. As part of the Restructuring, HF Holdings loaned to senior management an aggregate of $2.2 million against non-recourse notes with a maturity of 10 years. HF Holdings used funds advanced from the Company to make the loans. The notes bear interest at a rate equal to that of the New Credit Facilities, payable in cash until the first date as of which the cumulative net taxable income of the Company arising on or after the date of consummation of the Restructuring exceeds $0. As of May 31, 2001, these notes are non-interest bearing. The notes may be accelerated upon specified defaults and liquidity events, and are collaterized by shares of HF Holdings common stock. In addition, as part of the Restructuring, ICON made loans in the aggregate amount of $452,000 to certain members of junior management. Such loans were forgiven (both as to principal and interest) as of May 31, 2000. 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. Therefore, the loan of $2,367,000 was canceled and the amount was treated as a return of capital to IHF Capital. Management Equity Grant In connection with the Restructuring, HF Holdings granted two members of senior management 666,700 shares of HF Holdings common stock at no cost. The Company recognized a compensation charge and contribution of capital of $3,175,000, the estimated fair value assigned to this common stock grant. 15. Acquisition of Business On December 20, 2000, the Company acquired the assets of a corporation. The aggregate purchase price was $4,000,000, less cash acquired of $3,438. The acquisition was accounted for under the purchase method of accounting. The terms of the purchase agreement provide for a contingent earn-out not to exceed $8,000,000 based upon the future sales and earnings targets of the acquired corporation through August 31, 2004. The costs of the acquisition have been allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed as reflected in the following table (in thousands). The results of the operations of the acquired business have been included in the accompanying financial statements since their date of acquisition. The acquired corporation's historical revenue and net income for the period preceding the acquisition date is not significant to the Company. F-22 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fair value of assets acquired: Accounts receivable...................................... $ 756 Inventories.............................................. 835 Property and equipment................................... 429 Goodwill................................................. 4,430 Other.................................................... 32 ------- Total assets acquired................................ 6,482 Liabilities assumed: Accounts payable......................................... (2,320) Other.................................................... (100) Note payable............................................. (65) ------- Total liabilities assumed............................ (2,485) ------- Cash paid for acquisition................................... $ 3,997 =======
16. Geographic Segment Information 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 (in thousands):
Long-lived assets Revenues for the years ended May 31, (net) as of May 31, ------------------------------------ ------------------- 1999 2000 2001 2000 2001 -------- -------- -------- ------- ------- United States....... $648,641 $671,550 $748,301 $70,000 $81,448 Foreign............. 61,608 61,472 72,195 10,010 10,288 -------- -------- -------- ------- ------- Total............ $710,249 $733,022 $820,496 $80,010 $91,736 ======== ======== ======== ======= =======
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. 17. Subsequent Events On August 29, 2001, the Company received notification from the IRS that, based upon a Field Service Advice memorandum, the IRS will no longer pursue disallowance of $26 million of fee-related deductions claimed by the Company in fiscal year 1995, an issue previously under question in the IRS audit referred to in Note 13. 18. Subsequent Events (Unaudited) Product Liability--In November 2001, the Company renewed its product liability insurance policy discussed in Note 13. The policy provides coverage for the period from October 1, 2001 to October 1, 2002 of up to $5 million in the aggregate. The policy has a deductible on each claim of $500,000. In November 2001, the Company settled the Consumer Product Safety Commission's letter of investigation discussed in Note 13 by paying a civil penalty totaling $0.5 million. F-23 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other Litigation--In December 2001, a claim was made against the Company alleging the Company received $1.6 million of preferential transfers in connection with the 1999 Service Merchandise bankruptcy proceedings. The proposed claim is currently being vigorously defended by the Company's attorney. At this time, the Company and its counsel are unable to determine the likelihood of an unfavorable outcome or the amount or range of potential recovery or loss. Product Recall--In January 2002, the Company notified the CPSC that it would be recalling and remediating a defect in the Hikers product. To date, the Company has not received any reports of injuries. The Company does not believe that this recall will have a material effect on its financial position or results of operations. Internal Revenue Service Audit--In February 2002, the IRS completed its examination discussed in Note 13. The Company signed a settlement agreement with the IRS that concludes the examination and results in no significant impact to the Company's financial position or results of operations. New 11.25% Senior Subordinated Notes--In April 2002, the Company issued 11.25% Senior Subordinated Notes (11.25% Notes) with a face principal amount of $155,000,000 at a price of 98.589%. The 11.25% Notes mature in April 2012 and require semi-annual interest payments. The Company, at its option, may redeem the 11.25% Notes after April 2007 at redemption prices set forth in the note agreement. The 11.25% Notes are guaranteed on an unsecured, senior subordinated basis by the Company's existing and future domestic subsidiaries. New 2002 Credit Facilities--In April 2002, the Company entered into new credit facilities (the "New 2002 Credit Facilities") of $235,000,000 with a syndicate of banks and financial services companies. The new 2002 Credit Facilities consist of a $210,000,000 revolving credit line (the "2002 Revolver"), 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. Borrowing availability is limited to certain percentages of qualified assets as specified in the agreement. The letter of credit margin of 2% and an unused facility fee of .50% per annum of the average unused daily balance of the 2002 Revolver is due monthly. The new 2002 Credit Facilities include a $25,000,000 Term Loan (2002 Term Loan) with a 58-month term. The 2002 Term Loan amortizes quarterly at a rate of $1,250,000. At the Company's option, the 2002 Revolver and 2002 Term Loan bear interest at either (a) a floating rate equal to the Index Rate plus the applicable margin of 1.25% and 1.75%, respectively, or (b) a floating rate equal to the LIBOR rate plus the applicable margin of 2.625% and 3.125%, respectively. If the 2002 Revolver is terminated, the 2002 Term Loan will immediately be due and payable in full. In addition, if the 2002 Revolver is terminated or if the 2002 Term Loan is prepaid, certain prepayment premiums will apply. The Company used the net proceeds of the 11.25% Notes and the New 2002 Credit Facilities to repay all outstanding indebtedness under the existing credit agreement, to redeem in full all of the outstanding 12% subordinated notes due 2005 and pay accrued interest and premiums thereon, and pay certain transaction fees and expenses. F-24 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 19. Consolidating Condensed Financial Statements The Company's subsidiaries Jumpking, Inc., 510152 N.B. Ltd., Universal Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc. and Free Motion Fitness, 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 Company's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Company'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 Company's subsidiaries, could limit the Company'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 Company's principal direct subsidiaries by virtue of the guarantees, the Company 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 Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Company, including the holders of the 12% Notes. The following supplemental consolidating condensed financial statements are presented (in thousands): 1. Consolidating condensed balance sheets as of May 31, 2000 and 2001 and March 2, 2002 (unaudited) and consolidating condensed statements of operations and cash flows for each of the years in the three-year period ended May 31, 2001 and for the nine month periods ended March 3, 2001 (unaudited) and March 2, 2002 (unaudited). 2. The Company's 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 Company and all of its subsidiaries. F-25 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Balance Sheet
May 31, 2000 ----------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash....................... $ 3,633 $ 533 $ 1,698 $ -- $ 5,864 Accounts receivable, net... 98,455 30,877 8,355 (9,594) 128,093 Inventories, net........... 100,507 24,850 5,538 (530) 130,365 Deferred income taxes...... 1,891 218 -- -- 2,109 Other current assets....... 4,723 2,358 932 -- 8,013 --------- ------- -------- --------- --------- Total current assets.......... 209,209 58,836 16,523 (10,124) 274,444 --------- ------- -------- --------- --------- Property and equipment, net... 38,692 4,794 367 -- 43,853 Receivable from affiliates.... 54,612 7,216 -- (61,828) -- Intangible assets, net........ 19,985 5,773 1,389 -- 27,147 Deferred income taxes......... 3,656 204 -- -- 3,860 Investment in subsidiaries.... 44,309 -- -- (44,309) -- Other assets, net............. 18,837 -- 6 -- 18,843 --------- ------- -------- --------- --------- Total Assets........ $ 389,300 $76,823 $ 18,285 $(116,261) $ 368,147 ========= ======= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt........... $ 10,901 $ 75 $ -- $ -- $ 10,976 Accounts payable........... 79,298 23,044 11,691 (9,594) 104,439 Accrued expenses........... 19,096 848 1,777 -- 21,721 Interest payable........... 4,926 56 -- -- 4,982 --------- ------- -------- --------- --------- Total current liabilities..... 114,221 24,023 13,468 (9,594) 142,118 --------- ------- -------- --------- --------- Long-term debt................ 242,198 -- -- -- 242,198 --------- ------- -------- --------- --------- Payable to affiliates......... 31,642 10,299 19,887 (61,828) -- Stockholder's equity (deficit): Common stock and additional paid-in capital.................. 232,484 11,097 4,881 (44,307) 204,155 Receivable from Parent..... (2,200) -- -- -- (2,200) Accumulated other comprehensive loss....... -- (690) (791) (2) (1,483) Accumulated deficit........ (229,045) 32,094 (19,160) (530) (216,641) --------- ------- -------- --------- --------- Total stockholder's (equity) deficit..................... 1,239 42,501 (15,070) (44,839) (16,169) --------- ------- -------- --------- --------- Total Liabilities and Stockholder's Equity (Deficit)................... $ 389,300 $76,823 $ 18,285 $(116,261) $ 368,147 ========= ======= ======== ========= =========
F-26 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Balance Sheet
May 31, 2001 ----------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash................................... $ 1,615 $ 613 $ 1,096 $ -- $ 3,324 Accounts receivable, net............... 110,586 33,543 11,156 (12,339) 142,946 Inventories, net....................... 103,903 35,584 6,949 (452) 145,984 Deferred income taxes.................. 4,714 344 -- -- 5,058 Other current assets................... 11,394 3,110 1,342 -- 15,846 --------- ------- -------- --------- --------- Total current assets...................... 232,212 73,194 20,543 (12,791) 313,158 --------- ------- -------- --------- --------- Property and equipment, net............... 39,934 6,230 594 -- 46,758 Receivable from affiliates................ 73,872 6,314 -- (80,186) -- Intangible assets, net.................... 25,093 5,424 -- -- 30,517 Deferred income taxes..................... 1,625 199 -- -- 1,824 Investment in subsidiaries................ 44,909 -- -- (44,909) -- Other assets, net......................... 7,872 4,061 1,314 -- 13,247 --------- ------- -------- --------- --------- Total Assets.................... $ 425,517 $95,422 $ 22,451 $(137,886) $ 405,504 ========= ======= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt...... $ 11,255 $ 91 $ -- $ -- $ 11,346 Accounts payable....................... 92,423 21,788 18,283 (12,339) 120,155 Accrued expenses....................... 16,316 1,557 2,080 -- 19,953 Interest payable....................... 4,118 -- -- -- 4,118 --------- ------- -------- --------- --------- Total current liabilities................. 124,112 23,436 20,363 (12,339) 155,572 --------- ------- -------- --------- --------- Long-term debt............................ 253,326 1 -- -- 253,327 --------- ------- -------- --------- --------- Payable to affiliates..................... 29,337 31,778 19,071 (80,186) -- Stockholder's equity (deficit): Common stock and additional paid-in capital.............................. 232,484 11,099 5,481 (44,909) 204,155 Receivable from Parent................. (2,200) -- -- -- (2,200) Accumulated other comprehensive loss... (20) (1,314) (681) -- (2,015) Accumulated deficit.................... (211,522) 30,422 (21,783) (452) (203,335) --------- ------- -------- --------- --------- Total stockholder's equity (deficit)...... 18,742 40,207 (16,983) (45,361) (3,395) --------- ------- -------- --------- --------- Total Liabilities and Stockholder's Equity (Deficit)............................... $ 425,517 $95,422 $ 22,451 $(137,886) $ 405,504 ========= ======= ======== ========= =========
F-27 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Balance Sheet
March 2, 2002 (Unaudited) ----------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash................................... $ 4,598 $ 5,234 $ 1,595 $ -- $ 11,427 Accounts receivable, net............... 142,782 47,892 13,328 (22,460) 181,542 Inventories, net....................... 61,524 51,602 8,988 (205) 121,909 Deferred income taxes.................. 5,331 849 1 -- 6,181 Other current assets................... 4,719 9,008 2,252 -- 15,979 --------- -------- -------- --------- --------- Total current assets...................... 218,954 114,585 26,164 (22,665) 337,038 --------- -------- -------- --------- --------- Property and equipment, net............... 34,057 10,834 775 -- 45,666 Receivable from affiliates................ 88,766 11,884 -- (100,650) -- Intangible assets, net.................... 26,307 5,161 -- -- 31,468 Deferred income taxes..................... 12,205 193 -- -- 12,398 Investment in subsidiaries................ 44,909 -- -- (44,909) -- Other assets, net......................... 17,245 3,683 1,250 -- 22,178 --------- -------- -------- --------- --------- Total Assets........................... $ 442,443 $146,340 $ 28,189 $(168,224) $ 448,748 ========= ======== ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt...... $ 10,636 $ 35 $ -- $ -- $ 10,671 Accounts payable....................... 92,671 26,487 23,205 (22,460) 119,903 Accrued expenses....................... 16,077 7,326 2,660 -- 26,063 Income taxes payable................... 10,453 2,248 274 -- 12,975 Interest payable....................... 1,165 -- -- -- 1,165 --------- -------- -------- --------- --------- Total current liabilities................. 131,002 36,096 26,139 (22,460) 170,777 --------- -------- -------- --------- --------- Long-term debt............................ 253,273 32 -- -- 253,305 --------- -------- -------- --------- --------- Payable to affiliates..................... 11,827 68,219 20,604 (100,650) -- Stockholder's equity (deficit): Common stock and additional paid-in capital.............................. 206,323 37,260 5,481 (44,909) 204,155 Receivable from Parent................. (2,200) -- -- -- (2,200) Accumulated other comprehensive loss................................. -- (1,809) (1,198) -- (3,007) Accumulated deficit.................... (157,782) 6,542 (22,837) (205) (174,282) --------- -------- -------- --------- --------- Total stockholder's equity (deficit)............................... 46,341 41,993 (18,554) (45,114) 24,666 --------- -------- -------- --------- --------- Total Liabilities and Stockholder's Equity (Deficit)............................... $ 442,443 $146,340 $ 28,189 $(168,224) $ 448,748 ========= ======== ======== ========= =========
F-28 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Statement of Operations
Year Ended May 31, 1999 ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ Net sales.............................. $586,872 $85,465 $37,912 $ -- $710,249 Cost of sales.......................... 435,525 58,373 21,635 (1,515) 514,018 -------- ------- ------- ------- -------- Gross profit........................... 151,347 27,092 16,277 1,515 196,231 Total operating expenses............... 131,837 21,167 15,746 -- 168,750 -------- ------- ------- ------- -------- Income from operations................. 19,510 5,925 531 1,515 27,481 Interest expense....................... (30,487) (1,015) (1,554) -- (33,056) Amortization of deferred financing fees (6,992) -- -- -- (6,992) Other expense, net..................... (34) -- -- -- (34) -------- ------- ------- ------- -------- Income (loss) before income taxes...... (18,003) 4,910 (1,023) 1,515 (12,601) Provision for income taxes............. 9,823 1,621 640 -- 12,084 -------- ------- ------- ------- -------- Net income (loss)...................... $(27,826) $ 3,289 $(1,663) $ 1,515 $(24,685) ======== ======= ======= ======= ========
Supplemental Consolidating Condensed Statement of Operations
Year Ended May 31, 2000 ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ Net sales.............................. $594,388 $107,458 $31,176 $ -- $733,022 Cost of sales.......................... 433,492 77,047 20,850 233 531,622 -------- -------- ------- ----- -------- Gross profit........................... 160,896 30,411 10,326 (233) 201,400 Total operating expenses............... 128,095 25,446 12,416 -- 165,957 -------- -------- ------- ----- -------- Income from operations................. 32,801 4,965 (2,090) (233) 35,443 Interest expense....................... (31,742) (797) (1,360) -- (33,899) Amortization of deferred financing fees (2,743) -- -- -- (2,743) Other income, net...................... 404 -- -- -- 404 -------- -------- ------- ----- -------- Income (loss) before income taxes and extraordinary item................... (1,280) 4,168 (3,450) (233) (795) Provision for income taxes............. 2,742 1,024 147 -- 3,913 -------- -------- ------- ----- -------- Income (loss) before extraordinary item (4,022) 3,144 (3,597) (233) (4,708) Extraordinary loss on extinguishment of debt, net of income tax benefit of $1,244............................... (1,948) -- -- -- (1,948) -------- -------- ------- ----- -------- Net income (loss)...................... $ (5,970) $ 3,144 $(3,597) $(233) $ (6,656) ======== ======== ======= ===== ========
F-29 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Statement of Operations
Year Ended May 31, 2001 ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ Net sales.............................. $670,354 $111,878 $38,264 $ -- $820,496 Cost of sales.......................... 474,343 81,163 25,055 (77) 580,484 -------- -------- ------- ---- -------- Gross profit........................... 196,011 30,715 13,209 77 240,012 Total operating expenses............... 138,895 31,063 14,151 -- 184,109 -------- -------- ------- ---- -------- Income from operations................. 57,116 (348) (942) 77 55,903 Interest expense....................... (31,875) (1,408) (1,488) -- (34,771) Amortization of deferred financing fees (3,189) -- -- -- (3,189) Other income, net...................... (1,154) -- -- -- (1,154) -------- -------- ------- ---- -------- Income (loss) before income taxes...... 20,898 (1,756) (2,430) 77 16,789 Provision for income taxes............. 3,089 60 334 -- 3,483 -------- -------- ------- ---- -------- Net income (loss)...................... $ 17,809 $ (1,816) $(2,764) $ 77 $ 13,306 ======== ======== ======= ==== ========
Supplemental Consolidating Condensed Statement of Operations
Nine Months Ended March 3, 2001 (Unaudited) ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ (in thousands) Net sales.............................. $552,522 $78,812 $28,727 $ -- $660,061 Cost of sales.......................... 393,792 55,372 18,533 28 467,725 -------- ------- ------- ---- -------- Gross profit........................... 158,730 23,440 10,194 (28) 192,336 Total operating expenses............... 105,609 21,403 9,658 -- 136,670 -------- ------- ------- ---- -------- Income from operations................. 53,121 2,037 536 (28) 55,666 Interest expense....................... (25,137) (847) (1,108) -- (27,092) Amortization of deferred financing fees (2,342) -- -- -- (2,342) -------- ------- ------- ---- -------- Income (loss) before income taxes...... 25,642 1,190 (572) (28) 26,232 Provision for income taxes............. 10,969 613 380 -- 11,962 -------- ------- ------- ---- -------- Net income (loss)...................... $ 14,673 $ 577 $ (952) $(28) $ 14,270 ======== ======= ======= ==== ========
F-30 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Statement of Operations
Nine Months Ended March 2, 2002 (Unaudited) ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ (in thousands) Net sales.............................. $531,697 $150,524 $32,867 $ -- $715,088 Cost of sales.......................... 385,846 99,107 21,656 (248) 506,361 -------- -------- ------- ----- -------- Gross profit........................... 145,851 51,417 11,211 248 208,727 Total operating expenses............... 87,135 54,596 10,800 -- 152,531 -------- -------- ------- ----- -------- Income from operations................. 58,716 (3,179) 411 248 56,196 Interest expense....................... (17,207) (1,152) (1,348) -- (19,707) Amortization of deferred financing fees (2,652) -- -- -- (2,652) -------- -------- ------- ----- -------- Income (loss) before income taxes...... 38,857 (4,331) (937) 248 33,837 Provision for income taxes............. 5,467 (800) 117 -- 4,784 -------- -------- ------- ----- -------- Net income (loss)...................... $ 33,390 $ (3,531) $(1,054) $ 248 $ 29,053 ======== ======== ======= ===== ========
Supplemental Consolidating Condensed Statement of Cash Flows
Year Ended May 31, 1999 ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ (in thousands) Operating activities: Net cash provided by (used in) operating activities: $ 30,970 $ 8,644 $(1,595) $-- $ 38,019 --------- ------- ------- --- --------- Investing activities: Net cash used in investing activities: (18,805) (1,075) (187) -- (20,067) --------- ------- ------- --- --------- Financing activities: Borrowings (payments) on revolving credit facility, net.................. 229,121 (7,397) 1,397 -- 223,121 Payments on other long-term debt........ (237,369) -- -- -- (237,369) Payment of fees--debt portion........... (2,846) -- -- -- (2,846) Receivable from parent.................. (5) -- -- -- (5) --------- ------- ------- --- --------- Net cash provided by (used in) financing activities: (11,099) (7,397) 1,397 -- (17,099) Effect of exchange rate changes on cash. -- (162) (308) -- (470) --------- ------- ------- --- --------- Net increase (decrease) in cash......... 1,066 10 (693) -- 383 Cash, beginning of period............... 1,556 67 2,269 -- 3,892 --------- ------- ------- --- --------- Cash, end of period..................... $ 2,622 $ 77 $ 1,576 $-- $ 4,275 ========= ======= ======= === =========
F-31 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Statement of Cash Flows
Year Ended May 31, 2000 ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ (in thousands) Operating activities: Net cash provided by (used in) operating activities: $ 4,950 $(4,950) $ (115) $ 656 $ 541 --------- ------- ------ --------- --------- Investing activities: Net cash used in investing activities: (18,445) (1,306) (160) -- (19,911) --------- ------- ------ --------- --------- Financing activities: Borrowings (payments) on revolving credit facility, net.................. (108,756) (4,295) -- -- (113,051) Proceeds from new....................... 180,000 -- -- -- 180,000 Payments on new term notes.............. (5,321) -- -- -- (5,321) Payments on old term notes.............. (19,464) -- -- -- (19,464) Payments on other long-term debt........ (470) (110) -- -- (580) Payments to 13% note holders............ (40,908) -- -- -- (40,908) Contributed capital..................... 205,988 -- -- (165,988) 40,000 Payment of fees-equity portion.......... (4,375) -- -- -- (4,375) Payment of fees-debt portion............ (14,876) -- -- -- (14,876) Other................................... (177,311) 11,530 449 165,332 -- --------- ------- ------ --------- --------- Net cash provided by (used in) financing activities: 14,507 7,125 449 (656) 21,425 Effect of exchange rate changes on cash. -- (414) (52) -- (466) --------- ------- ------ --------- --------- Net increase (decrease) in cash......... 1,012 455 122 -- 1,589 Cash, beginning of period............... 2,622 77 1,576 -- 4,275 --------- ------- ------ --------- --------- Cash, end of period..................... $ 3,634 $ 532 $1,698 $ -- $ 5,864 ========= ======= ====== ========= =========
F-32 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Statement of Cash Flows
Year Ended May 31, 2001 ----------------------------------------------------------------- ICON Combined Combined Health & Guarantor Non-Guarantor Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ (in thousands) Operating activities: Net cash provided by (used in) operating activities: $ 27,960 $(14,425) $ (330) $(798) $ 12,407 -------- -------- ------ ----- -------- Investing activities: Net cash provided by (used in) investing activities: (16,526) (7,271) 149 863 (22,785) -------- -------- ------ ----- -------- Financing activities: Borrowings (payments) on revolving credit facility, net.......................... 19,497 -- -- -- 19,497 Payments on other long-term debt......... (393) 17 -- -- (376) Payments on new term notes............... (9,273) -- -- -- (9,273) Payment of fees-debt portion............. (1,153) -- -- -- (1,153) Other.................................... (22,195) 22,381 (186) -- -- -------- -------- ------ ----- -------- Net cash provided by (used in) financing activities: (13,517) 22,398 (186) -- 8,695 Effect of exchange rate changes on cash.. -- (622) (235) -- (857) -------- -------- ------ ----- -------- Net increase (decrease) in cash.......... (2,083) 80 (602) 65 (2,540) Cash, beginning of period................ 3,633 533 1,698 -- 5,864 -------- -------- ------ ----- -------- Cash, end of period...................... $ 1,550 $ 613 $1,096 $ 65 $ 3,324 ======== ======== ====== ===== ========
F-33 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Statement of Cash Flows
Nine Months Ended March 3, 2001 (unaudited) ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ (in thousands) Operating activities: Net cash used in operating activities: $(24,341) $(10,305) $ (344) $ -- $(34,990) -------- -------- ------ ----- -------- Investing activities: Net cash provided by (used in) investing activities: (10,531) (6,194) 208 -- (16,517) -------- -------- ------ ----- -------- Financing activities: Borrowings (payments) on revolving credit facility, net.................... 60,675 -- -- -- 60,675 Proceeds on new term notes................ -- -- -- -- -- Payments on other long-term debt.......... (431) (33) -- (464) Payments on old term notes................ (6,884) -- -- -- (6,884) Payments of fees--debt portion............ (1,545) -- (1,545) Other..................................... (17,861) 17,551 310 -- -- -------- -------- ------ ----- -------- Net cash provided by financing activities: 33,954 17,518 310 51,782 Effect of exchange rate changes on cash... -- (798) 46 (752) -------- -------- ------ ----- -------- Net increase (decrease) in cash........... (918) 221 220 (477) Cash, beginning of period................. 3,632 533 1,699 -- 5,864 -------- -------- ------ ----- -------- Cash, end of period....................... $ 2,714 $ 754 $1,919 $ -- $ 5,387 ======== ======== ====== ===== ========
F-34 ICON HEALTH & FITNESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Consolidating Condensed Statement of Cash Flows
Nine Months Ended March 2, 2002 (unaudited) ------------------------------------------------------------------- Combined Combined ICON Health Guarantor Non-Guarantor & Fitness, Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------------- ------------ ------------- ------------ ------------ (in thousands) Operating activities: Net cash provided by (used in) operating activities: $ 28,105 $ 1,412 $ (132) $-- $ 26,561 -------- ------- ------ --- -------- Investing activities: Net cash used in investing activities: (11,172) (2,672) (383) -- (14,227) -------- ------- ------ --- -------- Financing activities: Borrowings (payments) on revolving credit facility, net.................. 4,855 -- -- -- 4,855 Payments on other long-term debt........ (5,177) -- -- -- (5,177) Payments on old term notes.............. (2,389) (25) -- -- (2,414) Payments of fees--debt portion.......... (503) -- (503) Other................................... (9,382) 8,479 903 -- -- -------- ------- ------ --- -------- Net cash provided by (used in) financing activities: (12,596) 8,454 903 -- (3,239) Effect of exchange rate changes on cash. -- (1,104) 112 (992) -------- ------- ------ --- -------- Net increase in cash.................... 4,337 3,266 500 8,103 Cash, beginning of period............... 1,036 1,192 1,096 -- 3,324 -------- ------- ------ --- -------- Cash, end of period..................... $ 5,373 $ 4,458 $1,596 $-- $ 11,427 ======== ======= ====== === ========
F-35 Valuation Qualifying Accounts Financial Statement Schedule II (in thousands)
Year Ended May 31, ---------------------------- 1999 2000 2001 -------- -------- -------- Accounts Receivable-- Allowances for Doubtful Accounts, Advertising Discounts and Credit Memos: Balance at beginning of year............................................... $ 6,887 $ 8,219 $ 7,004 Additions: Charged to costs and expenses (allowance for doubtful accounts and credit memos)......................................................... 13,249 2,055 3,582 Charged to costs and expenses (discounts and advertising)............... 19,263 29,714 41,668 Recoveries on accounts charged off...................................... 205 156 -- Deductions: Accounts charged off (allowance for doubtful accounts and credit memos). (12,010) (2,759) (5,044) Accounts charged off (advertising)...................................... (19,375) (30,381) (40,458) -------- -------- -------- Balance at end of year..................................................... $ 8,219 $ 7,004 $ 6,752 ======== ======== ======== Year Ended May 31, ---------------------------- 1999 2000 2001 -------- -------- -------- Inventory Reserve: Balance at beginning of year............................................... $ 3,335 $ 4,815 $ 2,829 Additions: Charged to costs and expenses (Inventory reserve)....................... -- 769 506 Charged to costs and expenses (NordicTrack purchase accounting)......... 2,216 -- -- Deductions: NordicTrack purchase accounting......................................... -- (2,216) -- Reduction in reserve.................................................... (736) (539) (150) -------- -------- -------- Balance at end of year..................................................... $ 4,815 $ 2,829 $ 3,185 ======== ======== ======== Year Ended May 31, ---------------------------- 1999 2000 2001 -------- -------- -------- Warranty Reserve: Balance at beginning of year............................................... $ 4,783 $ 2,301 $ 2,570 Additions: Charged to costs and expenses........................................... -- 269 50 Deductions: Reduction in reserve.................................................... (2,482) -- (43) -------- -------- -------- Balance at end of year..................................................... $ 2,301 $ 2,570 $ 2,577 ======== ======== ========
Year Ended May 31, ------------------------ 1999 2000 2001 ------- ------- -------- Income Taxes, Valuation Allowance: Balance at beginning of year...... $ 4,490 $17,630 $ 24,086 Additions:........................ 13,140 6,456 -- Deductions:....................... -- -- (16,466) ------- ------- -------- Balance at end of year............ $17,630 $24,086 $ 7,620 ======= ======= ========
F-36 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, Inc., ICON Health & Fitness, Inc. 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 April 9, 2002 between ICON Health & Fitness, Inc., the Guarantors set forth therein and The Bank of New York, as Trustee 5.1* Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation 10.1* Lease Agreement, dated January 29, 1990, by and between The Prudential Insurance Company of America and Unit Distribution of Utah 10.2* Sublease, dated July 6, 1994, by and between Unit Distribution of Utah and ICON Health & Fitness, Inc. (formerly known as Proform Fitness Products, Inc. and Weslo, Inc.), including amendments thereto 10.3/*/ Lease, dated June 29, 1998, by and between Ogden City and ICON Health & Fitness, Inc., including all amendments thereto 10.4* Lease Agreement by and between Panattoni/Hillwood Development Company, LLC and ICON Health & Fitness, Inc, including all amendments thereto
II-1 10.5* Lease Agreement, dated March 30, 2000, by and between International Center I, LLC and ICON Health & Fitness, Inc. 10.6* Lease, dated March 1, 1997, by and between Aeroterm De Montreal, Inc. and ICON of Canada Inc. 10.7* Lease, dated October 1, 1994, by and between Freeport Center Associates and Proform Fitness Products, Inc., including all amendments thereto 10.8* Deed of Lease, dated January 26, 2001, by and between Indome 43 Inc. and ICON of Canada Inc. 10.9 Purchase Agreement, dated as of March 28, 2002, by and between ICON Health & Fitness, Inc., the Guarantors named therein, Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., and Fleet Securities, Inc. (the "Purchase Agreement") 10.10 Registration Rights Agreement dated April 9, 2002 by and between ICON Health and Fitness, Inc., the Guarantors set forth therein and Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc. and Fleet Securities, Inc. 10.11 Credit Agreement dated as of April 9, 2002 among ICON Health & Fitness, Inc., HF Holdings, Inc., JumpKing, Inc., Universal Technical Services, ICON International Holdings, Inc., ICON IP, Inc., Free Motion Fitness, Inc., NordicTrack, Inc., ICON du Canada Inc. and 510152 N.B. Ltd., General Electric Capital Corporation, as Agent and Lender, and GECC Capital Markets Group, Inc. 10.12 Stockholders Agreement, dated as of September 27, 1999, among HF Holdings, Inc., ICON Health & Fitness, Inc., HF Investment Holdings, LLC, Bain, certain Bain designees, Scott Watterson and Gary Stevenson and Credit Suisse First Boston Corporation 10.13 Joinder and Supplement to Stockholders Agreement, among HF Holdings, Inc., ICON Health & Fitness, Inc. and the Employee Stockholders named therein 10.14 Employment Agreement, dated as of September 27, 1999, between HF Holdings, Inc., ICON Health & Fitness, Inc. and Scott Watterson 10.15 Employment Agreement, dated as of September 27, 1999, between HF Holdings, Inc., ICON Health & Fitness, Inc. and Gary Stevenson 10.16 Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings, Inc. by Scott Watterson in the principal amount of $1,209,340 10.17 Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings, Inc. by Gary Stevenson in the principal amount of $990,660 10.18 Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings, Inc. and Scott Watterson 10.19 Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings, Inc. and Gary Stevenson 10.20 1999 HF Holdings, Inc. Junior Management Stock Option Plan 10.21 1999 ICON Health & Fitness, Inc. Junior Management Deferred Bonus Plan 10.22 Management Agreement, dated as of September 27, 1999, among HF Holdings, Inc. ICON Health & Fitness, Inc. and a Bain affiliate 10.23 Management Agreement, dated as of September 27, 1999, among ICON Health & Fitness, Inc., HF Holdings, Inc. and Scott Watterson 10.24 Management Agreement, dated as of September 27, 1999, among ICON Health & Fitness, Inc., HF Holdings, Inc. and Gary Stevenson 10.25 Tax Agreement, dated as of September 27, 1999, among HF Holdings, Inc. and its subsidiaries 12.1 Statements re Computation of Ratios 21.1 Subsidiaries of Registrant 23.1 Consent of PricewaterhouseCoopers LLP
II-2 23.2* Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (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 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
- -------- * To be filed by amendment 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 respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. 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 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. II-3 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 30th day of May, 2002. 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 virtue 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 --------- ----- ---- /s/ SCOTT R. WATTERSON Chairman of the Board and May 30, 2002 - ----------------------------- Chief Executive Officer Scott R. Watterson (Principal Executive Officer) /s/ GARY E. STEVENSON President and Chief Operating May 30, 2002 - ----------------------------- Officer and Director Gary E. Stevenson /s/ S. FRED BECK Chief Financial and May 30, 2002 - ----------------------------- Accounting Officer, Vice S. Fred Beck President and Treasurer (Principal Financial and Accounting Officer) /S/ ROBERT C. GAY Vice Chairman of the Board May 30, 2002 - ----------------------------- Robert C. Gay /s/ RONALD P. MIKA Director May 29, 2002 - ----------------------------- Ronald P. Mika II-4 Signature Title Date --------- ----- ---- /s/ GREG BENSON Director May 30, 2002 - ----------------------------- Greg Benson - ----------------------------- Director David J. Matlin /s/ CHRIS R. PECHOCK Director May 30, 2002 - ----------------------------- Chris R. Pechock /s/ STANLEY C. TUTTLEMAN Director May 30, 2002 - ----------------------------- Stanley C. Tuttleman - ----------------------------- Director W. McComb Dunwoody II-5 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 30th day of May, 2002. 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 --------- ----- ---- /s/ S. FRED BECK President and Sole May 30, 2002 - ----------------------------- Director (Principal S. Fred Beck Executive, Financial and Accounting Officer) II-6 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 30th day of May, 2002. 510152 N.B. LTD. By: /s/ M. JOSEPH BROUGH ----------------------------- 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 --------- ----- ---- /s/ M. JOSEPH BROUGH President and Sole May 30, 2002 - ----------------------------- Director (Principal M. Joseph Brough Executive, Financial and Accounting Officer) II-7 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 30th day of May, 2002. UNIVERSAL TECHNICAL SERVICES, INC. By: /s/ GARY E. STEVENSON ----------------------------- 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 --------- ----- ---- /s/ GARY E. STEVENSON President and May 30, 2002 - ----------------------------- Director (Principal Gary E. Stevenson Executive Officer) /s/ S. FRED BECK Assistant Secretary and May 30, 2002 - ----------------------------- Director (Principal S. Fred Beck Financial and Accounting Officer) II-8 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 30th day of May, 2002. ICON INTERNATIONAL HOLDINGS, INC. By: /s/ GARY E. STEVENSON ----------------------------- 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 --------- ----- ---- /s/ GARY E. STEVENSON President and Director May 30, 2002 - ----------------------------- (Principal Executive Gary E. Stevenson Officer) /s/ S. FRED BECK Treasurer and Director May 30, 2002 - ----------------------------- (Principal Financial and S. Fred Beck Accounting Officer) II-9 SIGNATURES Pursuant to the requirements of the Securities Act, NordickTrack, 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 30th day of May, 2002. NORDICKTRACK, INC. By: /S/ DAVID WATTERSON ----------------------------- Name: David Watterson 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 --------- ----- ---- /S/ DAVID WATTERSON President and Sole Director May 30, 2002 - ----------------------------- (Principal Executive David Watterson Officer) /S/ S. FRED BECK Treasurer (Principal May 30, 2002 - ----------------------------- Financial and Accounting S. Fred Beck Officer) II-10 SIGNATURES Pursuant to the requirements of the Securities Act, FreeMotion 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 30th day of May, 2002. FREEMOTION FITNESS, INC. By: /S/ ROY SIMONSON ----------------------------- Name: Roy Simonson 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 --------- ----- ---- /S/ GARY E. STEVENSON Director May 30, 2002 - ----------------------------- Gary E. Stevenson /S/ DAVID WATTERSON Director May 30, 2002 - ----------------------------- David Watterson /S/ ROY SIMONSON President and Director May 30, 2002 - ----------------------------- (Principal Executive Roy Simonson Officer) /S/ LYNN BRENCHLEY Director May 28, 2002 - ----------------------------- Lynn Brenchley /S/ S. FRED BECK Treasurer and Director May 28, 2002 - ----------------------------- (Principal Financial and S. Fred Beck Accounting Officer) II-11 EXHIBIT INDEX 2.1 Agreement and Plan of Merger dated as of September 27, 1999, among HF Holdings, Inc., ICON Health & Fitness, Inc. 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 April 9, 2002 between ICON Health & Fitness, Inc., the Guarantors set forth therein and The Bank of New York, as Trustee 5.1* Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation 10.1* Lease Agreement, dated January 29, 1990, by and between The Prudential Insurance Company of America and Unit Distribution of Utah 10.2* Sublease, dated July 6, 1994, by and between Unit Distribution of Utah and ICON Health & Fitness, Inc. (formerly known as Proform Fitness Products, Inc. and Weslo, Inc.), including amendments thereto 10.3/*/ Lease, dated June 29, 1998, by and between Ogden City and ICON Health & Fitness, Inc., including all amendments thereto 10.4* Lease Agreement by and between Panattoni/Hillwood Development Company, LLC and ICON Health & Fitness, Inc, including all amendments thereto 10.5* Lease Agreement, dated March 30, 2000, by and between International Center I, LLC and ICON Health & Fitness, Inc. 10.6* Lease, dated March 1, 1997, by and between Aeroterm De Montreal, Inc. and ICON of Canada Inc. 10.7* Lease, dated October 1, 1994, by and between Freeport Center Associates and Proform Fitness Products, Inc., including all amendments thereto 10.8* Deed of Lease, dated January 26, 2001, by and between Indome 43 Inc. and ICON of Canada Inc. 10.9 Purchase Agreement, dated as of March 28, 2002, by and between ICON Health & Fitness, Inc., the Guarantors named therein, Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., and Fleet Securities, Inc. (the "Purchase Agreement") 10.10 Registration Rights Agreement dated April 9, 2002 by and between ICON Health and Fitness, Inc., the Guarantors set forth therein and Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc. and Fleet Securities, Inc. 10.11 Credit Agreement dated as of April 9, 2002 among ICON Health & Fitness, Inc., HF Holdings, Inc., JumpKing, Inc., Universal Technical Services, ICON International Holdings, Inc., ICON IP, Inc., Free Motion Fitness, Inc., NordicTrack, Inc., ICON du Canada Inc. and 510152 N.B. Ltd., General Electric Capital Corporation, as Agent and Lender, and GECC Capital Markets Group, Inc. 10.12 Stockholders Agreement, dated as of September 27, 1999, among HF Holdings, Inc., ICON Health & Fitness, Inc., HF Investment Holdings, LLC, Bain, certain Bain designees, Scott Watterson and Gary Stevenson and Credit Suisse First Boston Corporation 10.13 Joinder and Supplement to Stockholders Agreement, among HF Holdings, Inc., ICON Health & Fitness, Inc. and the Employee Stockholders named therein 10.14 Employment Agreement, dated as of September 27, 1999, between HF Holdings, Inc., ICON Health & Fitness, Inc. and Scott Watterson 10.15 Employment Agreement, dated as of September 27, 1999, between HF Holdings, Inc., ICON Health & Fitness, Inc. and Gary Stevenson
10.16 Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings, Inc. by Scott Watterson in the principal amount of $1,209,340 10.17 Non-Recourse Note, dated as of September 27, 1999, issued to HF Holdings, Inc. by Gary Stevenson in the principal amount of $990,660 10.18 Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings, Inc. and Scott Watterson 10.19 Pledge and Security Agreement, dated as of September 27, 1999, between HF Holdings, Inc. and Gary Stevenson 10.20 1999 HF Holdings, Inc. Junior Management Stock Option Plan 10.21 1999 ICON Health & Fitness, Inc. Junior Management Deferred Bonus Plan 10.22 Management Agreement, dated as of September 27, 1999, among HF Holdings, Inc. ICON Health & Fitness, Inc. and a Bain affiliate 10.23 Management Agreement, dated as of September 27, 1999, among ICON Health & Fitness, Inc., HF Holdings, Inc. and Scott Watterson 10.24 Management Agreement, dated as of September 27, 1999, among ICON Health & Fitness, Inc., HF Holdings, Inc. and Gary Stevenson 10.25 Tax Agreement, dated as of September 27, 1999, among HF Holdings, Inc. and its subsidiaries 12.1 Statements re Computation of Ratios 21.1 Subsidiaries of Registrant 23.1 Consent of PricewaterhouseCoopers LLP 23.2* Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (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 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
- -------- * To be filed by amendment EX-2.1 3 dex21.txt AGREEMENT AND PLAN OF MERGER 9/27/1999 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. 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. [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 -------------------- EX-3.1 4 dex31.txt EXHIBIT 3.1 - CERTIFICATE OF INCORPORATION 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 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 EX-3.2 5 dex32.txt EXHIBIT 3.2 - BYLAWS 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. 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 3.1. 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 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. 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. 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 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 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 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. EX-4.1 6 dex41.txt EXHIBIT 4.1 - INDENTURE DATED 04/09/02 EXHIBIT 4.1 EXECUTION COPY - -------------------------------------------------------------------------------- ICON HEALTH & FITNESS, INC. and each of the Guarantors named herein SERIES A AND SERIES B 11.25% SENIOR SUBORDINATED NOTES DUE 2012 __________________ INDENTURE Dated as of April 9, 2002 __________________ and THE BANK OF NEW YORK, as Trustee - -------------------------------------------------------------------------------- CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section 310(a)(1) 7.10 (a)(2) .............................................................. 7.10 (a)(3) .............................................................. N.A. (a)(4) .............................................................. N.A. (a)(5) .............................................................. 7.10 (b) ................................................................. 7.10 (c) ................................................................. N.A. 311(a) ................................................................. 7.11 (b) ................................................................. 7.11 (c) ................................................................. N.A. 312(a) ................................................................. 2.05 (b) 13.03 (c) ................................................................. 13.03 313(a) ................................................................. 7.06 (b)(2) .............................................................. 7.06; 7.07 (c) ................................................................. 7.06; 13.02 (d) ................................................................. 7.06 314(a) ................................................................. 4.03;13.02; 13.05 (c)(1) .............................................................. 13.04 (c)(2) .............................................................. 13.04 (c)(3) .............................................................. N.A. (e) ................................................................. 13.05 (f) ................................................................. N.A. 315(a) ................................................................. 7.01 (b) ................................................................. 7.05,13.02 (c) ................................................................. 7.01 (d) ................................................................. 7.01 (e) ................................................................. 6.11 316(a) (last sentence) ................................................. 2.09 (a)(1)(A) ........................................................... 6.05 (a)(1)(B) ........................................................... 6.04 (a)(2) .............................................................. N.A. (b) ................................................................. 6.07 (c) ................................................................. 2.12 317(a)(1) .............................................................. 6.08 (a)(2) .............................................................. 6.09 (b) ................................................................. 2.04 318(a) ................................................................. 13.01 (b) ................................................................. N.A. (c) ................................................................. 13.01
N.A. means not applicable * This Cross Reference Table is not part of the Indenture. TABLE OF CONTENTS
Page ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01 Definitions.............................................. 1 Section 1.02 Other Definitions........................................ 21 Section 1.03 Incorporation by Reference of Trust Indenture Act........ 21 Section 1.04 Rules of Construction.................................... 22 ARTICLE 2. THE NOTES Section 2.01 Form and Dating.......................................... 22 Section 2.02 Execution and Authentication............................. 24 Section 2.03 Registrar and Paying Agent............................... 24 Section 2.04 Paying Agent to Hold Money in Trust...................... 24 Section 2.05 Holder Lists............................................. 25 Section 2.06 Transfer and Exchange.................................... 25 Section 2.07 Replacement Notes........................................ 37 Section 2.08 Outstanding Notes........................................ 37 Section 2.09 Treasury Notes........................................... 37 Section 2.10 Temporary Notes.......................................... 37 Section 2.11 Cancellation............................................. 38 Section 2.12 Defaulted Interest....................................... 38 ARTICLE 3. REDEMPTION AND PREPAYMENT Section 3.01 Notices to Trustee....................................... 38 Section 3.02 Selection of Notes to Be Redeemed or Purchased........... 38 Section 3.03 Notice of Redemption..................................... 39 Section 3.04 Effect of Notice of Redemption........................... 40 Section 3.05 Deposit of Redemption or Purchase Price.................. 40 Section 3.06 Notes Redeemed or Purchased in Part...................... 40 Section 3.07 Optional Redemption...................................... 40 Section 3.08 Mandatory Redemption..................................... 41 Section 3.09 Offer to Purchase by Application of Excess Proceeds...... 41 ARTICLE 4. COVENANTS Section 4.01 Payment of Notes......................................... 43 Section 4.02 Maintenance of Office or Agency.......................... 43 Section 4.03 Reports.................................................. 43 Section 4.04 Compliance Certificate................................... 44 Section 4.05 Taxes.................................................... 45 Section 4.06 Stay, Extension and Usury Laws........................... 45 Section 4.07 Restricted Payments...................................... 45 Section 4.08 Dividend and Other Payment Restrictions Affecting Subsidiaries............................................. 47 Section 4.09 Incurrence of Indebtedness and Issuance of Preferred Stock.......................................... 49
i Section 4.10 Asset Sales. ............................................. 51 Section 4.11 Transactions with Affiliates. ............................ 53 Section 4.12 Liens. ................................................... 54 Section 4.13 Business Activities. ..................................... 54 Section 4.14 Corporate Existence. ..................................... 54 Section 4.15 Offer to Repurchase Upon Change of Control. .............. 55 Section 4.16 Anti-Layering ............................................ 56 Section 4.17 Payments for Consent. .................................... 57 Section 4.18 Additional Subsidiary Guarantees. ........................ 57 Section 4.19 Designation of Restricted and Unrestricted Subsidiaries .. 57 Section 4.20 Sale and Leaseback Transactions .......................... 57 ARTICLE 5. SUCCESSORS Section 5.01 Merger, Consolidation, or Sale of Assets. ................ 58 Section 5.02 Successor Corporation Substituted. ....................... 59 ARTICLE 6. DEFAULTS AND REMEDIES Section 6.01 Events of Default. ....................................... 59 Section 6.02 Acceleration. ............................................ 61 Section 6.03 Other Remedies. .......................................... 62 Section 6.04 Waiver of Past Defaults. ................................. 62 Section 6.05 Control by Majority. ..................................... 62 Section 6.06 Limitation on Suits. ..................................... 62 Section 6.07 Rights of Holders of Notes to Receive Payment. ........... 63 Section 6.08 Collection Suit by Trustee. .............................. 63 Section 6.09 Trustee May File Proofs of Claim. ........................ 63 Section 6.10 Priorities. .............................................. 63 Section 6.11 Undertaking for Costs. 64 ARTICLE 7. TRUSTEE Section 7.01 Duties of Trustee. ....................................... 64 Section 7.02 Rights of Trustee. ....................................... 65 Section 7.03 Individual Rights of Trustee. ............................ 66 Section 7.04 Trustee's Disclaimer. .................................... 66 Section 7.05 Notice of Defaults. ...................................... 66 Section 7.06 Reports by Trustee to Holders of the Notes. .............. 66 Section 7.07 Compensation and Indemnity. .............................. 67 Section 7.08 Replacement of Trustee. .................................. 67 Section 7.09 Successor Trustee by Merger, etc. ........................ 68 Section 7.10 Eligibility; Disqualification. ........................... 68 Section 7.11 Preferential Collection of Claims Against Company. ....... 69 ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance.. 69 Section 8.02 Legal Defeasance and Discharge. .......................... 69 Section 8.03 Covenant Defeasance. ..................................... 69 Section 8.04 Conditions to Legal or Covenant Defeasance. .............. 70
ii Section 8.05 Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions...................... 71 Section 8.06 Repayment to Company. ..................................... 71 Section 8.07 Reinstatement. ............................................ 72 ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER Section 9.01 Without Consent of Holders of Notes. ...................... 72 Section 9.02 With Consent of Holders of Notes. ......................... 73 Section 9.03 Compliance with Trust Indenture Act. ...................... 74 Section 9.04 Revocation and Effect of Consents. ........................ 74 Section 9.05 Notation on or Exchange of Notes. ......................... 74 Section 9.06 Trustee to Sign Amendments, etc. .......................... 75 ARTICLE 10. SUBORDINATION Section 10.01 Agreement to Subordinate. ................................. 75 Section 10.02 Certain Definitions. ...................................... 75 Section 10.03 Liquidation; Dissolution; Bankruptcy. ..................... 76 Section 10.04 Default on Designated Senior Debt. ........................ 76 Section 10.05 Acceleration of Notes. .................................... 77 Section 10.06 When Distribution Must Be Paid Over. ...................... 77 Section 10.07 Notice by Company. ........................................ 78 Section 10.08 Subrogation. .............................................. 78 Section 10.09 Relative Rights. .......................................... 78 Section 10.10 Subordination May Not Be Impaired by Company. ............. 78 Section 10.11 Distribution or Notice to Representative. ................. 79 Section 10.12 Rights of Trustee and Paying Agent. ....................... 79 Section 10.13 Authorization to Effect Subordination. .................... 79 Section 10.14 Amendments. ............................................... 79 ARTICLE 11. NOTE GUARANTEES Section 11.01 Guarantee. ................................................ 79 Section 11.02 Limitation on Guarantor Liability. ........................ 81 Section 11.03 Execution and Delivery of Subsidiary Guarantee. ........... 81 Section 11.04 Guarantors May Consolidate, etc., on Certain Terms. ....... 81 Section 11.05 Releases Following Sale of Assets. ........................ 82 Section 11.06 Subordination of Subsidiary Guarantee. .................... 83 Section 11.07 Release Following Designation as an Unrestricted Subsidiary. ............................................... 83 ARTICLE 12. SATISFACTION AND DISCHARGE Section 12.01 Satisfaction and Discharge. ............................... 83 Section 12.02 Application of Trust Money. ............................... 84 ARTICLE 13. MISCELLANEOUS Section 13.01 Trust Indenture Act Controls. ............................. 84 Section 13.02 Notices. .................................................. 84 Section 13.03 Communication by Holders of Notes with Other Holders of Notes. ......................................... 85
iii Section 13.04 Certificate and Opinion as to Conditions Precedent. ......... 86 Section 13.05 Statements Required in Certificate or Opinion. .............. 86 Section 13.06 Rules by Trustee and Agents. ................................ 86 Section 13.07 No Personal Liability of Directors, Officers, Employees and Stockholders. ........................................... 86 Section 13.08 Governing Law. .............................................. 87 Section 13.09 No Adverse Interpretation of Other Agreements. .............. 87 Section 13.10 Successors. ................................................. 87 Section 13.11 Severability. ............................................... 87 Section 13.12 Counterpart Originals. ...................................... 87 Section 13.13 Table of Contents, Headings, etc. ........................... 87
EXHIBITS Exhibit A1 FORM OF NOTE Exhibit A2 FORM OF REGULATION S TEMPORARY GLOBAL NOTE Exhibit B FORM OF CERTIFICATE OF TRANSFER Exhibit C FORM OF CERTIFICATE OF EXCHANGE Exhibit D FORM OF CERTIFICATE OF ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR Exhibit E FORM OF NOTE GUARANTEE Exhibit E1 FORM OF NOTE GUARANTEE (QUEBEC GUARANTOR) Exhibit F FORM OF SUPPLEMENTAL INDENTURE iv INDENTURE dated as of April 9, 2002 among ICON Health & Fitness, Inc., a Delaware corporation (the "Company"), the Guarantors (as defined) and The Bank of New York, a New York banking corporation, as trustee (the "Trustee"). The Company, the Guarantors and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders (as defined) of the 11.25% Series A Senior Subordinated Notes due 2012 (the "Series A Notes") and the 11.25% Series B Senior Subordinated Notes due 2012 (the "Series B Notes" and, together with the Series A Notes, the "Notes"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01 Definitions. "144A Global Note" means a Global Note substantially in the form of Exhibit A1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of, and registered in the name of, the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold in reliance on Rule 144A. "Acquired Debt" 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. "Additional Interest" means all Additional Interest then owing pursuant to Section 5 of the Registration Rights Agreement. "Additional Notes" means Notes issued under this Indenture in accordance with Sections 2.02 and 4.09 hereof, as part of the same series as the Notes issued on the date of this Indenture. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control," as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person will be deemed to be control. For purposes of this definition, the terms "controlling," "controlled by" and "under common control with" have correlative meanings. No Person (other than the Company or any Restricted Subsidiary of the Company) in whom a Receivables Subsidiary makes an Investment in connection with a Qualified Receivables Transaction shall be deemed to be an Affiliate of the Company or any of its Restricted Subsidiaries solely by reason of such Investment. "Agent" means any Registrar, co-registrar, Paying Agent or additional paying agent. 1 "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Clearstream that apply to such transfer or exchange. "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 and the granting of Liens permitted under the terms of this Indenture; provided that the sale, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole shall be governed by Sections 4.15 and 5.01 and not by Section 4.10; and (2) the issuance of Equity Interests in any of the Company's Restricted Subsidiaries or the sale of Equity Interests in any of its Restricted Subsidiaries. Notwithstanding the preceding, the following items shall not be deemed to be Asset Sales: (1) any single transaction or series of related transactions that involves assets having a fair market value of less than $2.0 million; (2) a transfer of assets between or among the Company and its Restricted Subsidiaries, (3) an issuance of Equity Interests by a Restricted Subsidiary to the Company or to another Restricted Subsidiary; (4) the sale or lease of equipment, inventory, accounts receivable or other assets in the ordinary course of business; (5) the licensing or sub-licensing of intellectual property in the ordinary course of business consistent with past practice; (6) the sale, lease or other disposition of obsolete equipment; (7) the sale or other disposition of cash or Cash Equivalents; (8) a Restricted Payment or Permitted Investment that is permitted by Section 4.07; (9) sales of accounts receivable and related assets of the type specified in the definition of "Qualified Receivables Transaction" to a Receivables Subsidiary for the fair market value thereof, including cash in an amount at least equal to 75% of the book value thereof as determined in accordance with GAAP, it being understood that, for the purposes of this clause (9), notes received in exchange for the transfer of accounts receivable and related assets will be deemed cash if the Receivables Subsidiary or other payor is required to repay said notes as soon as practicable from available cash collections less amounts required to be established as reserves pursuant to contractual agreements with entities that are not Affiliates of the Company entered into as part of a Qualified Receivables Transaction; and (10) transfers of accounts receivable and related assets of the type specified in the definition of "Qualified Receivables Transaction" (or a fractional undivided interest therein) by a Receivables Subsidiary in a Qualified Receivables Transaction. 2 "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. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular "person" (as that term is used in Section 13(d)(3) of the Exchange Act), such "person" will be deemed to have beneficial ownership of all securities that such "person" has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. The terms "Beneficially Owns" and "Beneficially Owned" have a corresponding meaning. "Board of Directors" means: (1) with respect to a corporation, the board of directors of the corporation; (2) with respect to a partnership, the Board of Directors of the general partner of the partnership; and (3) with respect to any other Person, the board or committee of such Person serving a similar function. "Borrowing Base" means, as of any date, an amount equal to: (1) 85% of the face amount of all accounts receivable owned by the Company and the Guarantors as of the end of the most recent fiscal quarter preceding such date that were not more than 90 days past due; plus (2) 60% of the book value of all inventory owned by the Company and the Guarantors during the period of December 1 through June 30 of any fiscal year or 70% of the book value of all inventory owned by the Company and its Restricted Subsidiaries during the period from July 1 through November 30 of any fiscal year, in each case as of the end of the most recent fiscal quarter preceding such date; provided, however, that any accounts receivable owned by a Receivables Subsidiary, or which the Company or any Guarantor has agreed to transfer to a Receivables Subsidiary, shall be excluded for purposes of determining such amount. "Broker-Dealer" has the meaning set forth in the Registration Rights Agreement. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP. 3 "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. "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 of the United States government (provided that the full faith and credit of the United States is pledged in support of those securities) having maturities of not more than six 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, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case, with any domestic commercial bank having capital and surplus in excess of $500.0 million and a Thomson Bank Watch Rating of "B" or better; (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above; (5) commercial paper having the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Rating Services and in each case maturing within six months after the date of acquisition; and (6) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (5) of this definition. "Clearstream" means Clearstream Banking, S.A. "Change of Control" means the occurrence of any of the following: (1) the direct or indirect 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 properties or assets of the Company and its Restricted Subsidiaries, taken as a whole, to any "person" (as that term is used in Section 13(d)(3) of the Exchange Act) other than a Principal or a Related Party of a Principal; (2) the adoption of a plan relating to the liquidation or dissolution of the Company; (3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their 4 Related Parties, becomes the Beneficial Owner, directly or indirectly, of more than 50% of the Voting Stock of the Company, measured by voting power rather than number of shares; provided, that any transaction that results in any "person" (as defined above) Beneficially Owning less than 50% of the Voting Stock of the Company, measured by voting power rather than number of shares, subject to the Stockholders Agreement or the LLC Agreement shall not, in any case, constitute a Change of Control under this clause (3) unless such person Beneficially Owns in the aggregate more than 50% of the Voting Stock of the Company; (4) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors; or (5) the first day on which HF Holdings ceases to own 100% of the outstanding Equity Interests of the Company. "Company" means the issuer, and any and all successors thereto. "Consolidated Cash Flow" means, with respect to any specified Person for any period, the Consolidated Net Income of such Person for such period plus: (1) an amount equal to any extraordinary loss plus any net loss realized by such Person or any of its Restricted Subsidiaries in connection with an Asset Sale, to the extent such losses were deducted in computing such Consolidated Net Income; plus (2) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus (3) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income; plus (4) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income; minus (5) non-cash items increasing such Consolidated Net Income for such period, other than the accrual of revenue or the reversal of reserves in the ordinary course of business, in each case, on a consolidated basis and determined in accordance with GAAP. 5 "Consolidated Net Income" means, with respect to any specified Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that: (1) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person or a Restricted Subsidiary of the Person; (2) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination 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 regulation applicable to that Restricted Subsidiary or its stockholders; (3) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded; (4) the cumulative effect of a change in accounting principles shall be excluded; and (5) the Net Income (but not loss) of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the specified Person or one of its Subsidiaries. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who: (1) was a member of such Board of Directors on the date of this Indenture; (2) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election; or (3) was nominated for election by, or is a designee of, a Principal. "Corporate Trust Office" means the principal office of the Trustee at which at any time its corporate trust business shall be administered, which office at the date hereof is located at 101 Barclay Street, Floor 21 West, New York, New York 10286, Attention: Corporate Trust Department, or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or the principal corporate trust office of any successor Trustee (or such other address as such successor Trustee may designate from time to time by notice to the Holders and the Company). "Corporate Trust Office of the Trustee" will be at the address of the Trustee specified in Section 13.02 hereof or such other address as to which the Trustee may give notice to the Company. "Credit Agreement" means that certain Credit Agreement, dated as of April 9, 2002, by and among the Company, the lenders signatory thereto and General Electric Capital Corporation, as administrative agent, providing for up to $210,000,000 of revolving loan credit borrowings and a term loan of $25.0 million, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time. 6 "Credit Facilities" means, one or more debt facilities (including, without limitation, the Credit Agreement) or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Custodian" means the Trustee, as custodian with respect to the Notes in global form, or any successor entity thereto. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.06 hereof, substantially in the form of Exhibit A1 hereto except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder of the Capital Stock), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder of the Capital Stock, in whole or in part, on or prior to the date that is 91 days after the date on which the Notes mature. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders of the Capital Stock have the right to require the Company to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with Section 4.07 hereof. "Domestic Subsidiary" means any Subsidiary of the Company that was formed under the laws of the United States or any state of the United States or the District of Columbia or that guarantees or otherwise provides direct credit support for any Indebtedness of the Company. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means any public offering of Capital Stock of the Company (other than Disqualified Stock). "Euroclear" means Euroclear Bank S.A./N.V., as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means the Notes issued in the Exchange Offer pursuant to Section 2.06(f) hereof. 7 "Exchange Offer" has the meaning set forth in the Registration Rights Agreement. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Existing Indebtedness" means the Indebtedness of the Company and its Restricted Subsidiaries (other than Indebtedness under the Credit Agreement) in existence on the date of this Indenture, until such amounts are repaid. "Fixed Charges" means, with respect to any specified Person for any period, the sum, without duplication, of: (1) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations; plus (2) the consolidated interest of such Person and its Restricted Subsidiaries that was capitalized during such period; plus (3) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries, whether or not such Guarantee or Lien is called upon; plus (4) the product of (a) all dividends, whether paid or accrued and whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividends on Equity Interests payable solely in Equity Interests of the Company (other than Disqualified Stock) or to the Company or a Restricted Subsidiary of the Company, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any specified Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the specified Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary working capital borrowings) or issues, repurchases or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated and on or prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or such issuance, repurchase or redemption of preferred stock, and the use of the proceeds therefrom as if the same had occurred at the beginning of the applicable four-quarter reference period. 8 In addition, for purposes of calculating the Fixed Charge Coverage Ratio: (1) acquisitions that have been made by the specified Person or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be given pro forma effect as if they had occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated on a pro forma basis in accordance with Regulation S-X under the Securities Act, but without giving effect to clause (3) of the proviso set forth in the definition of Consolidated Net Income; (2) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded; and (3) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges shall not be obligations of the specified Person or any of its Restricted Subsidiaries following the Calculation Date. "Foreign Subsidiary" means any Subsidiary of the Company that is not a Domestic Subsidiary. "GAAP" means generally accepted accounting principles in the United States 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 such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of this Indenture. "Global Notes" means, individually and collectively, each of the Restricted Global Notes and the Unrestricted Global Notes, substantially in the form of Exhibit A1 hereto issued in accordance with Section 2.01, 2.06(b)(3), 2.06(b)(4), 2.06(d)(2) or 2.06(f) hereof. "Global Note Legend" means the legend set forth in Section 2.06(g)(2), which is required to be placed on all Global Notes issued under this Indenture. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America, and the payment for which the United States pledges its full faith and credit. "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. "Guarantors" means each of: (1) each Domestic Subsidiary of the Company; and (2) any other subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of this Indenture; 9 and their respective successors and assigns. "Hedging Obligations" means, with respect to any specified Person, the obligations of such Person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; and (2) any commodities future contract, commodity option or other similar agreement or arrangement designed to protect against fluctuations in the price of commodities used by that entity at the time; (3) agreements entered into for the purpose of fixing or hedging the risks associated with fluctuations in foreign currency exchange rates; and (4) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "HF Holdings" means HF Holdings, Inc., a Delaware corporation. "Holder" means a Person in whose name a Note is registered. "IAI Global Note" means a Global Note substantially in the form of Exhibit A1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee that will be issued in a denomination equal to the outstanding principal amount of the Notes sold to Institutional Accredited Investors. "Indebtedness" means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent: (1) in respect of borrowed money; (2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof); (3) in respect of banker's acceptances; (4) representing Capital Lease Obligations; (5) representing the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or (6) representing any Hedging Obligations, if and to the extent any of the preceding items (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of the specified Person prepared in accordance with GAAP. In addition, the term "Indebtedness" includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person) and, to the extent not otherwise included, the Guarantee by the specified Person of any Indebtedness of any other Person. 10 The amount of any Indebtedness outstanding as of any date shall be: (1) the accreted value of the Indebtedness, in the case of any Indebtedness issued with original issue discount; and (2) the principal amount of the Indebtedness, together with any interest on the Indebtedness that is more than 30 days past due, in the case of any other Indebtedness. "Indenture" means this Indenture, as amended or supplemented from time to time. "Indirect Participant" means a Person who holds a beneficial interest in a Global Note through a Participant. "Initial Purchasers" means Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc. and Fleet Securities, Inc. "Institutional Accredited Investor" means an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, who are not also QIBs. "Investments" means, with respect to any Person, all direct or indirect investments by such Person in other Persons (including Affiliates) in the forms of loans (including Guarantees or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of Section 4.07. The acquisition by the Company or any Restricted Subsidiary of the Company of a Person that holds an Investment in a third Person shall be deemed to be an Investment by the Company or such Restricted Subsidiary in such third Person in an amount equal to the fair market value of the Investment held by the acquired Person in such third Person in an amount determined as provided in the final paragraph of Section 4.07. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on such payment for the intervening period. "Letter of Transmittal" means the letter of transmittal to be prepared by the Company and sent to all Holders of the Notes for use by such Holders in connection with the Exchange Offer. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and, except in connection with any Qualified Receivables Transaction, any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction. 11 "LLC Agreement" means that certain Limited Liability Company Agreement by and among Credit Suisse First Boston Corporation, affiliates of Bain Capital, LLC and certain other persons listed therein, as in effect on the date of this Indenture; provided, however, that such Limited Liability Company Agreement may be amended from time to time if after giving effect to such amendment Credit Suisse First Boston Corporation and its affiliates and Bain Capital, LLC and its affiliates Beneficially Own more than 50% of the common equity of HF Holdings subject to the LLC Agreement. "Net Income" means, with respect to any specified Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however: (1) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with: (a) any Asset Sale; or (b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries; and (2) any extraordinary gain (but not loss), together with any related provision for taxes on such extraordinary gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result of the Asset Sale, taxes paid or payable as a result of the Asset Sale, in each case, after taking into account any available tax credits or deductions and any tax sharing arrangements, and amounts required to be applied to the repayment of Indebtedness, other than Indebtedness under a Credit Facility, secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustments in respect of the sale price of such asset or assets established in accordance with GAAP. "New Brunswick Guarantor" means 510152 N.B. Ltd., a Guarantor incorporated in New Brunswick, Canada. "Non-Recourse Debt" means Indebtedness: (1) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender; (2) no default with respect to which (including any rights that the holders of the Indebtedness 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 the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment of the Indebtedness to be accelerated or payable prior to its stated maturity; and (3) as to which the lenders have been notified in writing, or the terms of which provide, that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Non-U.S. Person" means a Person who is not a U.S. Person. 12 "Notes" has the meaning assigned to it in the preamble to this Indenture. For purposes of this Indenture, the term "Notes" shall include any Additional Notes issued under the Indenture in accordance with Section 2.02 and 4.09 hereof, as part of the same series of Notes issued on the date of this Indenture. "Obligations" means any principal, interest, penalties, fees, expenses, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 13.05 hereof. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 13.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Participant" means, with respect to the Depositary, Euroclear or Clearstream, a Person who has an account with the Depositary, Euroclear or Clearstream, respectively (and, with respect to DTC, shall include Euroclear and Clearstream). "Permitted Business" means any business that derives a majority of its revenues from the business engaged in by the Company and its Restricted Subsidiaries on the date of original issuance of the Notes and/or activities that are reasonably similar, ancillary or related to, or a reasonable extension, development or expansion of, the businesses in which the Company and its Restricted Subsidiaries are engaged on the date of original issuance of the Notes. "Permitted Investments" means: (1) any Investment in the Company or in a Restricted Subsidiary of the Company; (2) any Investment in Cash Equivalents; (3) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment: (a) such Person becomes a Restricted Subsidiary of the Company; or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company; (4) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.10 hereof; (5) any acquisition of assets (including Capital Stock) in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company or HF Holdings; 13 (6) any Investments received in compromise of obligations of such persons incurred in the ordinary course of trade creditors or customers that were incurred in the ordinary course of business, including pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of any trade creditor or customer; (7) Investments arising in connection with Hedging Obligations; (8) Investments existing on the date of this Indenture; (9) loans or advances by the Company or any of its Restricted Subsidiaries to employees of the Company or any of its Restricted Subsidiaries that are entered into in the ordinary course of business and that are approved by the Board of Directors of the Company; provided that the aggregate principal amount of all such loans or advances do not exceed $1.5 million at any one time outstanding; (10) the acquisition by a Receivables Subsidiary in connection with a Qualified Receivables Transaction of Equity Interests of a trust or other Person established by such Receivables Subsidiary to effect such Qualified Receivables Transaction; and any other Investment by the Company or a Restricted Subsidiary of the Company in a Receivables Subsidiary or any Investment by a Receivables Subsidiary in any other Person in connection with a Qualified Receivables Transaction, provided, that such other Investment is in the form of a note or other instrument that the Receivables Subsidiary or other Person is required to repay as soon as practicable from available cash collections less amounts required to be established as reserves pursuant to contractual agreements with entities that are not Affiliates of the Company entered into as part of a Qualified Receivables Transaction; and (11) other Investments in any Person other than HF Holdings or an Affiliate of HF Holdings that is not also a Subsidiary of the Company having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (11) that are at the time outstanding not to exceed $ 10.0 million. "Permitted Liens" means: (1) Liens on all assets of the Company or any Subsidiary securing Senior Debt; (2) Liens in favor of the Company or the Guarantors; (3) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with the Company or any Restricted Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets of the Company or any Restricted Subsidiary other than those of the Person merged into or consolidated with the Company or the Restricted Subsidiary; (4) Liens on property existing at the time of acquisition of the property by the Company or any Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition; 14 (5) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business (including, without limitation, landlord liens on lease properties); (6) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by Section 4.09(b)(4) hereof covering only the assets acquired with such Indebtedness; (7) Liens existing on the date of this Indenture; (8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as is required in conformity with GAAP has been made therefor; (9) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries; (10) carriers' warehousemen's, mechanics', landlords', materialmen's, repairmen's or other like liens arising in the ordinary course of business in respect of obligations not overdue for a period in excess of 60 days or which are being contested in good faith by appropriate proceedings promptly instituted and diligently prosecuted; provided that any reserve or other appropriate provisions as shall be required to conform with GAAP shall have been made therefore; (11) easements, right-of-way, zoning and similar restrictions and other similar encumbrances or title defects incurred, or leases or subleases granted to others, in the ordinary course of business, which do not in any case materially detract from the value of the property subject thereto or do not interfere with, or adversely affect in any material respect, the ordinary conduct of the business of the Company and its Restricted Subsidiaries taken as a whole; (12) liens in favor of customs and revenue authorities to secure payment of custom duties in connection with the importation of goods in the ordinary course of business and other similar liens arising in the ordinary course of business; (13) leases or subleases granted to third persons not interfering with the ordinary course of business of the Company or any of its Restricted Subsidiaries; (14) liens (other than any Lien imposed by ERISA or any rule or regulation promulgated thereunder) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, and other types of social security; (15) deposits, in an aggregate amount not to exceed $250,000, made in the ordinary course of business to secure liability to insurance carriers; (16) any attachment or judgment Lien not constituting an Event of Default under Section 6.01(6) hereof; (17) any interest or title of a lessor or sublessor under any operating lease; (18) liens arising solely by virtue of any statutory, contractual or common law provisions relating to banker's liens, right of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a depositary institution; provided that: 15 (a) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company or the issuer, as applicable, in excess of those set forth by regulations promulgated by the Federal Reserve Board of the United States or other applicable governmental or banking regulatory authority; and (b) such deposit account is not intended by the Company or any of its Restricted Subsidiaries to provide collateral to the depositary institution; (19) liens under any title retention agreement entered into in the ordinary course of business; (20) liens arising under Uniform Commercial Code financing statement filings regarding operating leases entered into by the Company and its Restricted Subsidiaries in the ordinary course of business; (21) Liens on assets of the Company or a Receivables Subsidiary incurred in connection with a Qualified Receivables Transaction; (22) Liens on assets of Foreign Subsidiaries; and (23) Liens incurred in the ordinary course of business of the Company or any Subsidiary of the Company with respect to obligations that do not exceed $10.0 million at any one time outstanding. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that: (1) the principal amount (or accreted value, if applicable) or, in the case of a Credit Facility, the committed amount of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) or, in the case of a Credit Facility, the committed amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus all accrued interest on such Indebtedness and the amount of all expenses and premiums incurred in connection with such extension, refinancing, renewal, replacement, defeasement or refund); (2) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (4) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. 16 "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company or government or other entity. "Principals" means Bain Capital, LLC and its affiliates and Credit Suisse First Boston Corporation and its affiliates and the collective parties to the Stockholders Agreement or the LLC Agreement. "Private Placement Legend" means the legend set forth in Section 2.06(g)(1) to be placed on all Notes issued under this Indenture except where otherwise permitted by the provisions of this Indenture. "Qualified Receivables Transaction" means any transaction or series of transactions entered into by the Company or any of its Restricted Subsidiaries pursuant to which the Company or any of its Restricted Subsidiaries sells, conveys or otherwise transfers to (i) a Receivables Subsidiary (in the case of a transfer by the Company or any of its Restricted Subsidiaries) and (ii) any other Person (in the case of a transfer by a Receivables Subsidiary), or grants a security interest in, any accounts receivable (whether now existing or arising 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 all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable. "Quebec Guarantor" means ICON du Canada Inc., a corporation incorporated in the Province of Quebec, Canada. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Receivables Subsidiary" means a Subsidiary of the Company which engages in no activities other than in connection with the financing of accounts receivable and which is designated by the Board of Directors of the Company as a Receivables Subsidiary (a) no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which (i) is guaranteed by the Company or any of its Restricted Subsidiaries (excluding guarantees of Obligations (other than the principal of, and interest on, Indebtedness) pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Receivables Transaction), (ii) is recourse to or obligates the Company or any of its Restricted Subsidiaries in any way other than pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Receivables Transaction or (iii) subjects any property or asset of the Company or any of its Restricted Subsidiaries (other than accounts receivable and related assets as provided in the definition of "Qualified Receivables Transaction"), directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to representations, warranties, covenants and indemnities entered into in the ordinary course of business in connection with a Qualified Receivables Transaction, (b) with which neither the Company nor any of its Restricted Subsidiaries has any material contract, agreement, arrangement or understanding other than on terms 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, other than fees payable in the ordinary course of business in connection with servicing accounts receivable and (c) with which neither the Company nor any of its Restricted Subsidiaries has any obligation to maintain or preserve such Subsidiary's financial condition or cause such Subsidiary to achieve certain levels of operating results. Any such designation by the Board of Directors of the Company will be evidenced to the trustee by filing with the trustee a certified copy of the resolution of the Board of Directors of the Company giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing conditions. 17 "Registration Rights Agreement" means the Registration Rights Agreement, dated as of April 9, 2002, among the Company, the Guarantors and the other parties named on the signature pages thereof, as such agreement may be amended, modified or supplemented from time to time and, with respect to any Additional Notes, one or more registration rights agreements among the Company, the Guarantors and the other parties thereto, as such agreement(s) may be amended, modified or supplemented from time to time relating to rights given by the Company to the purchasers of Additional Notes to register such Additional Notes. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Note" means a Regulation S Temporary Global Note or Regulation S Permanent Global Note, as appropriate. "Regulation S Permanent Global Note" means a permanent Global Note in the form of Exhibit A1 hereto bearing the Global Note Legend and the Private Placement Legend and deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Regulation S Temporary Global Note upon expiration of the Restricted Period. "Regulation S Temporary Global Note" means a temporary Global Note in the form of Exhibit A2 hereto deposited with or on behalf of and registered in the name of the Depositary or its nominee, issued in a denomination equal to the outstanding principal amount of the Notes initially sold in reliance on Rule 903 of Regulation S. "Related Party" means: (1) any controlling stockholder, 80% (or more) owned Subsidiary, or immediate family member (in the case of an individual) of any Principal; or (2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of any one or more Principals and/or such other Persons referred to in the immediately preceding clause (1). "Responsible Officer," when used with respect to the Trustee, means any officer within the Corporate Trust Department of the Trustee (or any successor group of the Trustee) 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 and who shall here direct responsibility for the administration of this Indenture. "Restricted Definitive Note" means a Definitive Note bearing the Private Placement Legend. "Restricted Global Note" means a Global Note bearing the Private Placement Legend. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Period" means the 40-day distribution compliance period as defined in Regulation S. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. 18 "Rule 144" means Rule 144 promulgated under the Securities Act. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated the Securities Act. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal or any final amount of principal on any series of Indebtedness, the date on which the payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Stockholders Agreement" means that certain Stockholders Agreement by and among certain common equity stockholders of HF Investment Holdings, LLC, including Credit Suisse First Boston Corporation, affiliates of Bain Capital, LLC and certain other persons listed therein, as in effect on the date of this Indenture; provided, however, that such Stockholders Agreement may be amended from time to time if after giving effect to such amendment Credit Suisse First Boston Corporation and its affiliates and Bain Capital, LLC and its affiliates Beneficially Own more than 50% of the common equity of HF Holdings subject to the Stockholders Agreement. "Subsidiary" means, with respect to any specified Person: (1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees of the corporation, association or other business entity is at the time owned or controlled, directly or indirectly, by that 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 that Person or one or more Subsidiaries of that Person (or any combination thereof). "Subsidiary Guarantee" means, the Guarantee, whether direct or indirect, by each Guarantor of the Company's payment obligations under this Indenture and the Notes, executed pursuant to the terms of this Indenture. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. 19 "Trustee" means the party named as such in the preamble to this Indenture until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Unrestricted Global Note" means a permanent global Note substantially in the form of Exhibit A1 attached hereto that bears the Global Note Legend and that has the "Schedule of Exchanges of Interests in the Global Note" attached thereto, and that is deposited with or on behalf of and registered in the name of the Depositary, representing a series of Notes that do not bear the Private Placement Legend. "Unrestricted Definitive Note" means one or more Definitive Notes that do not bear and are not required to bear the Private Placement Legend. "Unrestricted Subsidiary" means any Subsidiary of the Company 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 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; (3) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (5) has at least one director on its Board of Directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any designation of a Subsidiary of the Company as an Unrestricted Subsidiary shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the preceding conditions and was permitted by Section 4.07. If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date and, if such Indebtedness is not permitted to be incurred as of such date under Section 4.09, the Company shall be in default of such covenant. The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (1) such Indebtedness is permitted under the covenant described under Section 4.09, calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation. 20 "U.S. Person" means a U.S. Person as defined in Rule 902(o) under the Securities Act. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to 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 of the Indebtedness, 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. "Wholly Owned Subsidiary" of any Person means a 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 1.02 Other Definitions. Defined in Term Section ---- ------- "Affiliate Transaction" ................................ 4.11 "Asset Sale Offer" ..................................... 3.09 "Authentication Order" ................................. 2.02 "Change of Control Offer" .............................. 4.15 "Change of Control Payment" ............................ 4.15 "Change of Control Payment Date" ....................... 4.15 "Covenant Defeasance" .................................. 8.03 "Designated Senior Debt" ............................... 10.02 "DTC" .................................................. 2.03 "Event of Default" ..................................... 6.01 "Excess Proceeds" ...................................... 4.10 "incur" ................................................ 4.09 "Legal Defeasance" ..................................... 8.02 "Offer Amount" ......................................... 3.09 "Offer Period" ......................................... 3.09 "Paying Agent" ......................................... 2.03 "Permitted Debt" ....................................... 4.09 "Permitted Junior Securities" .......................... 10.02 "Purchase Date" ........................................ 3.09 "Registrar" ............................................ 2.03 "Representative" ....................................... 10.02 "Restricted Payments" .................................. 4.07 "Senior Debt" .......................................... 10.02 Section 1.03 Incorporation by Reference of Trust Indenture Act. 21 Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security Holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the Notes and the Subsidiary Guarantees means the Company and the Guarantors, respectively, and any successor obligor upon the Notes and the Subsidiary Guarantees, respectively. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.04 Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) "will" shall be interpreted to express a command; (6) provisions apply to successive events and transactions; and (7) references to sections of or rules under the Securities Act will be deemed to include substitute, replacement of successor sections or rules adopted by the SEC from time to time. ARTICLE 2. THE NOTES Section 2.01 Form and Dating. (a) General. The Notes and the Trustee's certificate of authentication will be substantially in the form of Exhibit A1 hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note will be dated the date of its authentication. The Notes shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes will constitute, and are hereby expressly made, a part of this Indenture and the Company, the Guarantors and the Trustee, by their execution and delivery 22 of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Notes. Notes issued in global form will be substantially in the form of Exhibits A1 or A2 attached hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Notes issued in definitive form will be substantially in the form of Exhibit A1 attached hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Each Global Note will represent such of the outstanding Notes as will be specified therein and each shall provide that it represents the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby will be made by the Trustee or the Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. (c) Temporary Global Notes. Notes offered and sold in reliance on Regulation S will be issued initially in the form of the Regulation S Temporary Global Note, which will be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, at its New York office, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Clearstream Bank, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Restricted Period will be terminated upon the receipt by the Trustee of: (1) a written certificate from the Depositary, together with copies of certificates from Euroclear and Clearstream Bank certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Note (except to the extent of any beneficial owners thereof who acquired an interest therein during the Restricted Period pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a 144A Global Note or an IAI Global Note bearing a Private Placement Legend, all as contemplated by Section 2.06(b) hereof); and (2) an Officers' Certificate from the Company. Following the termination of the Restricted Period, beneficial interests in the Regulation S Temporary Global Note will be exchanged for beneficial interests in Regulation S Permanent Global Notes pursuant to the Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Notes, the Trustee will cancel the Regulation S Temporary Global Note. The aggregate principal amount of the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. (3) Euroclear and Clearstream Procedures Applicable. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Clearstream Banking" and "Customer Handbook" of Clearstream will be applicable to transfers of beneficial interests in the Regulation S Temporary Global Note and the Regulation S Permanent Global Notes that are held by Participants through Euroclear or Clearsteam. 23 Section 2.02 Execution and Authentication. Two Officers must sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note will nevertheless be valid. A Note will not be valid until authenticated by the manual signature of the Trustee. The signature will be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee will, upon receipt of a written order of the Company signed by two Officers (an "Authentication Order"), authenticate Notes for original issue up to the aggregate principal amount set forth in such Authentication Order. The aggregate principal amount of Notes outstanding at any time may not exceed the aggregate amount of Notes authenticated for original issue pursuant to all Authentication Orders issued by the Company, except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders or an Affiliate of the Company. Section 2.03 Registrar and Paying Agent. The Company will maintain an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Notes may be presented for payment ("Paying Agent"). The Registrar will keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company will notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Custodian with respect to the Global Notes. Section 2.04 Paying Agent to Hold Money in Trust. The Company will require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or Additional Interest, if any, or interest on the Notes, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) will have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it will segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon 24 any bankruptcy or reorganization proceedings relating to the Company, the Trustee will serve as Paying Agent for the Notes. Section 2.05 Holder Lists. The Trustee will preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is not the Registrar, the Company will furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company shall otherwise comply with TIA (S) 312(a). Section 2.06 Transfer and Exchange. (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Notes will be exchanged by the Company for Definitive Notes if: (1) the Company delivers to the Trustee notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary; or (2) the Company in its sole discretion determines that the Global Notes (in whole but not in part) should be exchanged for Definitive Notes and delivers a written notice to such effect to the Trustee; provided that in no event shall the Regulation S Temporary Global Note be exchanged by the Company for Definitive Notes prior to (x) the expiration of the Restricted Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule 903(b)(3)(ii)(B) under the Securities Act. Upon the occurrence of either of the preceding events in (1) or (2) above, Definitive Notes shall be issued in such names as the Depositary shall instruct the Trustee. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note. A Global Note may not be exchanged for another Note other than as provided in this Section 2.06(a), however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.06(b), (c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes will be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes will be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also will require compliance with either subparagraph (1) or (2) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (1) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a 25 beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend; provided, however, that prior to the expiration of the Restricted Period, transfers of beneficial interests in the Regulation S Temporary Global Note may not be made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchasers). Beneficial interests in any Unrestricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(1). (2) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(1) above, the transferor of such beneficial interest must deliver to the Registrar either: (A) both: (i) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged; and (ii) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase; or (B) both: (i) written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged; and (ii) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (1) above; provided that in no event shall Definitive Notes be issued upon the transfer or exchange of beneficial interests in the Regulation S Temporary Global Note prior to (A) the expiration of the Restricted Period and (B) the receipt by the Registrar of any certificates required pursuant to Rule 903 under the Securities Act. Upon consummation of an Exchange Offer by the Company in accordance with Section 2.06(f) hereof, the requirements of this Section 2.06(b)(2) shall be deemed to have been satisfied upon receipt by the Registrar of the instructions contained in the Letter of Transmittal delivered by the Holder of such beneficial interests in the Restricted Global Notes. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(h) hereof. (3) Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof 26 in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.06(b)(2) above and the Registrar receives the following: (A) if the transferee will take delivery in the form of a beneficial interest in the 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transferee will take delivery in the form of a beneficial interest in the Regulation S Temporary Global Note or the Regulation S Permanent Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transferee will take delivery in the form of a beneficial interest in the IAI Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable. (4) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in an Unrestricted Global Note. A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if the exchange or transfer complies with the requirements of Section 2.06(b)(2) above and: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of the beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (i) a Broker-Dealer, (ii) a Person participating in the distribution of the Exchange Notes or (iii) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (i) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (ii) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; 27 and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Note has not yet been issued, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Note. (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. (1) Beneficial Interests in Restricted Global Notes to Restricted Definitive Notes. If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon receipt by the Registrar of the following documentation: (A) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; or (F) if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof, 28 the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Restricted Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c)(1) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Restricted Definitive Notes to the Persons in whose names such Notes are so registered. Any Restricted Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c)(1) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. (2) Beneficial Interests in Regulation S Temporary Global Note to Definitive Notes. Notwithstanding Sections 2.06(c)(1)(A) and (C) hereof, a beneficial interest in the Regulation S Temporary Global Note may not be exchanged for a Definitive Note or transferred to a Person who takes delivery thereof in the form of a Definitive Note prior to (A) the expiration of the Restricted Period and (B) the receipt by the Registrar of any certificates required pursuant to Rule 903(b)(3)(ii)(B) under the Securities Act, except in the case of a transfer pursuant to an exemption from the registration requirements of the Securities Act other than Rule 903 or Rule 904. (3) Beneficial Interests in Restricted Global Notes to Unrestricted Definitive Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (i) a Broker-Dealer, (ii) a Person participating in the distribution of the Exchange Notes or (iii) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (i) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or (ii) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; 29 and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (4) Beneficial Interests in Unrestricted Global Notes to Unrestricted Definitive Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.06(b)(2) hereof, the Trustee will cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company will execute and the Trustee will authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(4) will be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest requests through instructions to the Registrar from or through the Depositary and the Participant or Indirect Participant. The Trustee will deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(4) will not bear the Private Placement Legend. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests. (1) Restricted Definitive Notes to Beneficial Interests in Restricted Global Notes. If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; (B) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such Restricted Definitive Note is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such Restricted Definitive Note is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) through (D) above, a 30 certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; (F) if such Restricted Definitive Note is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (G) if such Restricted Definitive Note is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee will cancel the Restricted Definitive Note, increase or cause to be increased the aggregate principal amount of, in the case of clause (A) above, the appropriate Restricted Global Note, in the case of clause (B) above, the 144A Global Note, in the case of clause (C) above, the Regulation S Global Note, and in all other cases, the IAI Global Note. (2) Restricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (i) a Broker-Dealer, (ii) a Person participating in the distribution of the Exchange Notes or (iii) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (i) if the Holder of such Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (ii) if the Holder of such Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the 31 Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.06(d)(2), the Trustee will cancel the Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. (3) Unrestricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee will cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Notes. If any such exchange or transfer from a Definitive Note to a beneficial interest is effected pursuant to subparagraphs (2)(B), (2)(D) or (3) above at a time when an Unrestricted Global Note has not yet been issued, the Company will issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee will authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of Definitive Notes so transferred. (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.06(e), the Registrar will register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder must present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by its attorney, duly authorized in writing. In addition, the requesting Holder must provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(e). (1) Restricted Definitive Notes to Restricted Definitive Notes. Any Restricted Definitive Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Note if the Registrar receives the following: (A) if such Restricted Definitive Note is being transferred to a QIB in accordance with Rule 144A under the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if such Restricted Definitive Note is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (D) if such Restricted Definitive Note is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the 32 Securities Act other than those listed in subparagraphs (A) through (C) above, a certificate to the effect set forth in Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable; or (E) if such Restricted Definitive Note is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof. (2) Restricted Definitive Notes to Unrestricted Definitive Notes. Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the applicable Letter of Transmittal that it is not (i) a broker-dealer, (ii) a Person participating in the distribution of the Exchange Notes or (iii) a Person who is an affiliate (as defined in Rule 144) of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (i) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (ii) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (3) Unrestricted Definitive Notes to Unrestricted Definitive Notes. A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a request to register such a transfer, the Registrar shall register the Unrestricted Definitive Notes pursuant to the instructions from the Holder thereof. 33 (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Company will issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee will authenticate: (1) one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered into the Exchange Offer by Persons that certify in the applicable Letters of Transmittal that (A) they are not Broker-Dealers, (B) they are not participating in a distribution of the Exchange Notes and (C) they are not affiliates (as defined in Rule 144) of the Company; and (2) Unrestricted Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Notes, the Trustee will cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly, and the Company will execute and the Trustee will authenticate and deliver to the Persons designated by the Holders of Definitive Notes so accepted Unrestricted Definitive Notes in the appropriate principal amount. (g) Legends. The following legends will appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. (1) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: "THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE." 34 (B) Notwithstanding the foregoing, any Global Note or Definitive Note issued pursuant to subparagraphs (b)(4), (c)(3), (c)(4), (d)(2), (d)(3), (e)(2), (e)(3) or (f) of this Section 2.06 (and all Notes issued in exchange therefor or substitution thereof) will not bear the Private Placement Legend. (2) Global Note Legend. Each Global Note will bear a legend in substantially the following form: "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (1) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.06 OF THE INDENTURE, (2) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (3) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), 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 SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN." (3) Regulation S Temporary Global Note Legend. The Regulation S Temporary Global Note will bear a legend in substantially the following form: "THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON." (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note will be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note will be reduced accordingly and an 35 endorsement will be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note will be increased accordingly and an endorsement will be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (i) General Provisions Relating to Transfers and Exchanges. (1) To permit registrations of transfers and exchanges, the Company will execute and the Trustee will authenticate Global Notes and Definitive Notes upon receipt of an Authentication Order in accordance with Section 2.02 or at the Registrar's request. (2) No service charge will be made to a Holder of a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 3.09, 4.10, 4.15 and 9.05 hereof). The Registrar will not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (3) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes will be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (4) The Company will not be required: (A) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection; (B) to register the transfer of or to exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part; or (C) to register the transfer of or to exchange a Note between a record date and the next succeeding interest payment date. (5) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (6) The Trustee will authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.02 hereof. (7) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. 36 Section 2.07 Replacement Notes. If any mutilated Note is surrendered to the Trustee or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, the Company will issue and the Trustee, upon receipt of an Authentication Order, will authenticate a replacement Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company may charge for its expenses in replacing a Note. Every replacement Note is an additional obligation of the Company and will be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. Section 2.08 Outstanding Notes. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note; however, Notes held by the Company or a Subsidiary of the Company shall not be deemed to be outstanding for purposes of Section 3.07(b) hereof. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes will be deemed to be no longer outstanding and will cease to accrue interest. Section 2.09 Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, will be considered as though not outstanding, except that for the purposes of determining whether the Trustee will be protected in relying on any such direction, waiver or consent, only Notes that the Trustee knows are so owned will be so disregarded. Section 2.10 Temporary Notes. Until certificates representing Notes are ready for delivery, the Company may prepare and the Trustee, upon receipt of an Authentication Order, will authenticate temporary Notes. Temporary Notes will be substantially in the form of certificated Notes but may have variations that the Company considers appropriate for temporary Notes and as may be reasonably acceptable to the Trustee. Without unreasonable delay, the Company will prepare and the Trustee will authenticate definitive Notes in exchange for temporary Notes. 37 Holders of temporary Notes will be entitled to all of the benefits of this Indenture. Section 2.11 Cancellation. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent will forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else will cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and will dispose of canceled Notes (subject to the record retention requirement of the Exchange Act). The Company may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation. Section 2.12 Defaulted Interest. If the Company defaults in a payment of interest on the Notes, it will pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company will notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment. The Company will fix or cause to be fixed each such special record date and payment date, provided that no such special record date may be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) will mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. ARTICLE 3. REDEMPTION AND PREPAYMENT Section 3.01 Notices to Trustee. If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it must furnish to the Trustee, at least 30 days but not more than 60 days before a redemption date, an Officers' Certificate setting forth: (1) the clause of this Indenture pursuant to which the redemption shall occur; (2) the redemption date; (3) the principal amount of Notes to be redeemed; and (4) the redemption price. Section 3.02 Selection of Notes to Be Redeemed or Purchased. If less than all of the Notes are to be redeemed or purchased in an offer to purchase at any time, the Trustee will select Notes for redemption or purchase as follows: (1) if the Notes are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the Notes are listed; or (2) if the Notes are not listed on any national securities exchange, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate. 38 In the event of partial redemption or purchase by lot, the particular Notes to be redeemed or purchased will be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption or purchase date by the Trustee from the outstanding Notes not previously called for redemption or purchase. The Trustee will promptly notify the Company in writing of the Notes selected for redemption or purchase and, in the case of any Note selected for partial redemption or purchase, the principal amount thereof to be redeemed or purchased. Notes and portions of Notes selected will be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Notes of a Holder are to be redeemed or purchased, the entire outstanding amount of Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed or purchased. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption or purchase also apply to portions of Notes called for redemption or purchase. Section 3.03 Notice of Redemption. Subject to the provisions of Section 3.09 hereof, at least 30 days but not more than 60 days before a redemption date, the Company will mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address, except that redemption notices may be mailed more than 60 days prior to a redemption date if the notice is issued in connection with a defeasance of the Notes or a satisfaction and discharge of this Indenture pursuant to Articles 8 or 12 of this Indenture. The notice will identify the Notes to be redeemed (including the CUSIP numbers) and will state: (1) the redemption date; (2) the redemption price; (3) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the redemption date upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion will be issued upon cancellation of the original Note; (4) the name and address of the Paying Agent; (5) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (6) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (7) the paragraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (8) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee will give the notice of redemption in the Company's name and at its expense; provided, however, that the Company has delivered to the Trustee, at least 45 days 39 prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. Section 3.04 Effect of Notice of Redemption. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. Section 3.05 Deposit of Redemption or Purchase Price. One Business Day prior to the redemption or purchase price date, the Company will deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption or purchase price of and accrued interest and Additional Interest, if any, on all Notes to be redeemed or purchased on that date. The Trustee or the Paying Agent will promptly return to the Company any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption or purchase price of, and accrued interest and Additional Interest, if any, on, all Notes to be redeemed or purchased. If the Company complies with the provisions of the preceding paragraph, on and after the redemption or purchase date, interest will cease to accrue on the Notes or the portions of Notes called for redemption or purchase. If a Note is redeemed or purchased on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption or purchase is not so paid upon surrender for redemption or purchase because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption or purchase date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Notes and in Section 4.01 hereof. Section 3.06 Notes Redeemed or Purchased in Part. Upon surrender of a Note that is redeemed or purchased in part, the Company will issue and, upon receipt of an Authentication Order, the Trustee will authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed or unpurchased portion of the Note surrendered. Section 3.07 Optional Redemption. (a) At any time prior to April 1, 2005, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of Notes issued under this Indenture at a redemption price of 111.25% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the redemption date, with the net cash proceeds of one or more Equity Offerings, provided that: (1) at least 65% of the aggregate principal amount of Notes issued under this Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its Subsidiaries); and (2) the redemption occurs within 90 days of the date of the closing of such Equity Offering. 40 (b) Except pursuant to the preceding paragraph, the Notes may not be redeemed at the option of the Company prior to April 1, 2007. (c) After April 1, 2007, the Company may redeem all or a part of the Notes upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, and Additional Interest, if any, thereon, to the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below: Year Percentage ---- ---------- 2007 ........................................................ 105.6 2008 ........................................................ 103.7 2009 ........................................................ 101.8 2010 and thereafter ......................................... 100.000% (d) Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. (e) In the event that the Company is required to commence a Change of Control Offer to all Holders to purchase Notes, it will follow the procedures specified in Section 4.15. Section 3.08 Mandatory Redemption. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. Section 3.09 Offer to Purchase by Application of Excess Proceeds. In the event that, pursuant to Section 4.10 hereof, the Company is required to commence an offer to all Holders to purchase Notes (an "Asset Sale Offer"), it will follow the procedures specified below. The Asset Sale Offer shall be made to all Holders and all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in this Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets. The Asset Sale Offer will remain open for a period of at least 20 Business Days following its commencement and not more than 30 Business Days, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than three Business Days after the termination of the Offer Period (the "Purchase Date"), the Company will apply all Excess Proceeds (the "Offer Amount") to the purchase of Notes and such other pari passu Indebtedness (on a pro rata basis, if applicable) or, if less than the Offer Amount has been tendered, all Notes and other Indebtedness tendered in response to the Asset Sale Offer. Payment for any Notes so purchased will be made in the same manner as interest payments are made. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest, and Additional Interest, if any, will be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest will be payable to Holders who tender Notes pursuant to the Asset Sale Offer. Upon the commencement of an Asset Sale Offer, the Company will send, by first class mail, a notice to the Trustee and each of the Holders, with a copy to the Trustee. The notice will contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to the Asset Sale Offer. The notice, which will govern the terms of the Asset Sale Offer, will state: 41 (1) that the Asset Sale Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer will remain open; (2) the Offer Amount, the purchase price and the Purchase Date; (3) that any Note not tendered or accepted for payment will continue to accrue interest; (4) that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Asset Sale Offer will cease to accrue interest after the Purchase Date; (5) that Holders electing to have a Note purchased pursuant to an Asset Sale Offer may elect to have Notes purchased in integral multiples of $1,000 only; (6) that Holders electing to have a Note purchased pursuant to any Asset Sale Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, or transfer by book-entry transfer, to the Company, a Depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice at least three days before the Purchase Date; (7) that Holders will be entitled to withdraw their election if the Company, the Depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased; (8) that, if the aggregate principal amount of Notes and other pari passu Indebtedness surrendered by Holders exceeds the Offer Amount, the Company will select the Notes and other pari passu Indebtedness to be purchased on a pro rata basis based on the principal amount of Notes and such other pari passu Indebtedness surrendered (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, will be purchased); and (9) that Holders whose Notes were purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). On or before the Purchase Date, the Company will, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer, or if less than the Offer Amount has been tendered, all Notes tendered, and will deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, will promptly (but in any case not later than five days after the Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Notes tendered by such Holder and accepted by the Company for purchase, and the Company will promptly issue a new Note, and the Trustee, upon written request from the Company will authenticate and mail or deliver such new Note to such Holder, in a principal amount equal to any unpurchased portion of the Note surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Asset Sale Offer on the Purchase Date. 42 Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. ARTICLE 4. COVENANTS Section 4.01 Payment of Notes. The Company will pay or cause to be paid the principal of, premium, if any, and interest and Additional Interest, if any, on the Notes on the dates and in the manner provided in the Notes. Principal, premium, if any, and interest and Additional Interest, if any will be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and interest then due. The Company will pay all Additional Interest, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. The Company will pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it will pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Additional Interest (without regard to any applicable grace period) at the same rate to the extent lawful. Section 4.02 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 Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes 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 such office or agency. If at any time the Company fails to maintain any such required office or agency or fails 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. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission will 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 of 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 2.03 hereof. Section 4.03 Reports. (a) Whether or not required by the rules and regulations of the SEC, so long as any Notes are outstanding, the Company will furnish to the Holders of Notes, within the time periods specified in the SEC's rules and regulations: 43 (1) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report on the annual financial statements by the Company's certified independent accountants; and (2) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports. If the Company has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph shall include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in Management's Discussion and Analysis of Financial Condition and Results of Operations, of the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company. In addition, following the consummation of the Exchange Offer contemplated Company will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the SEC for public availability within the time periods specified in the SEC's rules and regulations (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. The Company will at all times comply with TIA (S) 314(a). (b) For so long as any Notes remain outstanding, the Company and the 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 144A(d)(4) under the Securities Act. Section 4.04 Compliance Certificate. (a) The Company and each Guarantor (to the extent that such Guarantor is so required under the TIA) shall deliver to the Trustee, within 120 days after the end of each fiscal year, an Officers' Certificate (one of the signatories of which is the chief executive officer, chief financial officer or chief accounting officer) stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company 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 and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default has 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 Notes 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. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03(a) above shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article 4 or Article 5 hereof or, if any such 44 violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) So long as any of the Notes are outstanding, the Company shall deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. Section 4.05 Taxes. The Company will pay, and will cause each of its Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and governmental levies except such as are contested in good faith and by appropriate proceedings or where the failure to effect such payment is not adverse in any material respect to the Holders of the Notes. Section 4.06 Stay, Extension and Usury Laws. The Company and each of the Guarantors covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company and each of the Guarantors (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, by resort to any such law, 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 has been enacted. Section 4.07 Restricted Payments. (a) The Company shall not, and shall 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 the Company's or any of its Restricted Subsidiaries' Equity Interests (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 the Company's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or to the Company or a Restricted Subsidiary of the Company); (2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company; (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes or the Subsidiary Guarantees, except a payment of interest or principal at the Stated Maturity thereof; or (4) make any Restricted Investment (all such payments and other actions set forth in these clauses (1) through (4) above being collectively referred to as "Restricted Payments"), 45 unless, at the time of and after giving effect to such Restricted Payment: (1) no Default or Event of Default has occurred and is continuing or would occur as a consequence of such Restricted Payment; and (2) the Company would, 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 pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of this Indenture (excluding Restricted Payments permitted by clauses (2), (3), (4), (6), (7) and (8) of Section 4.07(b) hereof), is less than the sum, without duplication, of: (a) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of this Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by the Company since the date of this Indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock) or from the issue or sale of convertible or exchangeable Disqualified Stock or convertible or exchangeable debt securities of the Company that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Subsidiary of the Company), plus (c) to the extent that any Restricted Investment that was made after the date of this Indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (i) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (ii) the initial amount of such Restricted Investment, plus (d) to the extent that any of the Unrestricted Subsidiaries is redesignated as a Restricted Subsidiary after the date of this Indenture, the fair market value of the Company's Investment in such Subsidiary as of the date of such redesignation. (b) So long as no Default has occurred and is continuing or would be caused thereby, the provisions of Section 4.07(a) will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration of the dividend, if at the date of declaration the dividend payment would have complied with the provisions of this Indenture; (2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of the Company or any Guarantor or of any Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of, Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, 46 repurchase, retirement, defeasance or other acquisition shall be excluded from clause (3)(b) of the preceding paragraph; (3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of the Company or any Guarantor with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (4) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its Equity Interests on a pro rata basis; (5) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company or any Restricted Subsidiary of the Company held by any member of the Company's (or any of its Subsidiaries') current or former employees, officers or directors pursuant to any management equity subscription agreement, stock option agreement, employment agreement, severance agreement, employee benefits plan or similar agreement or plan; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests may not exceed $5.0 million; (6) repurchases of Equity Interests deemed to occur upon exercise of stock options if those Equity Interests represent a portion of the exercise price of those options; (7) distributions to a parent corporation for administrative expenses in an amount not to exceed $500,000 in any fiscal year; (8) cash dividends to a parent corporation in amounts required for that parent corporation to pay any federal, state or local income taxes to the extent that such income taxes are directly attributable to the income of the Company and its Subsidiaries; and (9) other Restricted Payments in an amount not to exceed $5.0 million. 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 Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee. 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 $5.0 million. Not later than the date of making any Restricted Payment, 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 Section 4.08 were computed, together with a copy of any fairness opinion or appraisal required by this Indenture. Section 4.08 Dividend and Other Payment Restrictions Affecting Subsidiaries. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to: (1) pay dividends or make any other distributions on its Capital Stock to the Company or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to the Company or any of its Restricted Subsidiaries; 47 (2) make loans or advances to the Company or any of its Restricted Subsidiaries; or (3) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries. (b) The restrictions in Section 4.08(a) will not apply to encumbrances or restrictions existing under or by reason of: (1) agreements governing Existing Indebtedness and Credit Facilities as in effect on the date of this Indenture and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of those agreements, provided that the amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in those agreements on the date of this Indenture; (2) this Indenture, the Notes and the Subsidiary Guarantees; (3) applicable law; (4) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness or Capital Stock was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of this Indenture to be incurred; (5) customary non-assignment provisions in contracts or leases entered into in the ordinary course of business and consistent with past practices; (6) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on that property of the nature described in clause (3) of Section 4.08(a); (7) any agreement for the sale or other disposition of the Capital Stock or assets of a Restricted Subsidiary that restricts distributions by that Restricted Subsidiary pending the closing of such sale or other disposition; (8) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; (9) Liens securing Indebtedness otherwise permitted to be incurred under Section 4.12 that limit the right of the debtor to dispose of the assets subject to such Liens; (10) provisions with respect to the disposition or distribution of assets or property in joint venture agreements, assets sale agreements, stock sale agreements and other similar agreements entered into in the ordinary course of business; (11) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; (12) agreements not described in clause (1) in effect on the date of this Indenture; 48 (13) covenants in agreements relating to the Indebtedness of Foreign Subsidiaries; (14) Indebtedness or other contractual requirements of a Receivables Subsidiary in connection with a Qualified Receivables Transaction, provided that such restrictions apply only to such Receivables Subsidiary; and (15) any amendments to any of the foregoing that, when taken as a whole, are not more restrictive than those contained in the agreement being amended. Section 4.09 Incurrence of Indebtedness and Issuance of Preferred Stock. (a) The Company shall not, and shall not permit any of its 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 Debt), and the Company shall, and shall not permit any of the Guarantors to, issue any Disqualified Stock and will not permit any of its Subsidiaries that do not guarantee the Notes to issue any shares of preferred stock; provided, however, that the Company and any Guarantor may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock, if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least (a) 2.25 to 1.0, if such incurrence or issuance is on or prior to April 1, 2004 or (b) 2.50 to 1.0, if such incurrence or issuance is after April 1, 2004, in each case, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred or Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period; (b) The provisions of Section 4.09(a) will not prohibit the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (1) the incurrence by the Company and any Guarantor of additional Indebtedness and letters of credit under Credit Facilities in an aggregate principal amount at any one time outstanding under this clause (1)(with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Subsidiaries thereunder) not to exceed the greater of (x) $235.0 million (provided that such amount shall be reduced to the extent of any reduction or elimination of any commitment under any Credit Facility resulting from or relating to the formation of any Receivables Subsidiary or the consummation of any Qualified Receivables Transaction and shall thereafter be increased to an amount not greater than $235.0 million to the extent of any increase in the commitment under any Credit Facility resulting from or relating to the termination of any Qualified Receivables Transaction or the elimination of any Receivables Subsidiary) or (y) the amount of the Borrowing Base as of the date of such incurrence; (2) the incurrence by the Company and its Restricted Subsidiaries of the Existing Indebtedness; (3) the incurrence by the Company and the Guarantors of Indebtedness represented by the Notes and the related Subsidiary Guarantees to be issued on the date of this Indenture and the Exchange Notes and the related Subsidiary Guarantees to be issued pursuant to the Registration Rights Agreement; (4) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (including, without limitation, Capital Lease Obligations) incurred for the purpose of financing all or any part 49 of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (4), not to exceed $10.0 million at any time outstanding; (5) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by this Indenture to be incurred under this Section 4.09(a) or clauses (2), (3), (4), (5), (10) or (13) of this Section 4.09(b); (6) 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 Guarantor is the obligor on such Indebtedness, 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 the Company, or the Subsidiary Guarantee (other than in the case of intercompany Indebtedness of a Guarantor to the Company), in the case of a Guarantor except to the extent such Notes are pledged as collateral for Senior Debt; and (b) (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary of the Company and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary of the Company; will 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 (6); (7) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations in the ordinary course of business or to the extent required under the Credit Facilities; (8) the guarantee by the Company or any of the Guarantors of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of this Section 4.09; (9) the incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event will be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company that was not permitted by this clause (9); (10) the incurrence by the Company or any Restricted Subsidiary of Indebtedness arising from agreements of the Company or any Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided, however, that (i) such Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary (contingent obligations referred to in a footnote or footnotes to financial statements and not 50 otherwise reflected on the balance sheet shall not be deemed to be reflected on such balance sheet for purposes of this clause (i)) and (ii) the maximum assumable liability in respect of such Indebtedness shall at no time exceed the gross proceeds, including noncash proceeds (the fair market value of such noncash proceeds being measured at the time received and without giving effect to any subsequent changes in value), actually received by the Company and/or the Restricted Subsidiary in connection with such disposition; (11) the incurrence by any Foreign Subsidiaries of the Company in an aggregate principal amount (or accreted value, as applicable) at any time outstanding including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (11), not to exceed $10.0 million; (12) the incurrence by a Receivables Subsidiary of Indebtedness in a Qualified Receivables Transaction that is without recourse to the Company or to any other Restricted Subsidiary of the Company or their assets (other than such Receivables Subsidiary and its assets and, as to the Company or any of its Restricted Subsidiaries, other than pursuant to representations, warranties, covenants and indemnities customary for such transactions) and is not guaranteed by any such Person; and (13) the incurrence by the Company or any of the Guarantors of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (13), not to exceed $7.0 million. The accrual of interest, the 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 Disqualified Stock in the form of additional shares of the same class of Disqualified Stock shall not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this Section 4.09; provided, in each such case, that the amount thereof is included in Fixed Charges of the Company as accrued. For purposes of determining compliance with this Section 4.09, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (13) above, or is entitled to be incurred pursuant to this Section 4.09(a), the Company will, in its sole discretion, be permitted to classify such item of Indebtedness on the date of its incurrence, or later reclassify all or a portion of such item of Indebtedness, in any manner that complies with this Section 4.09. Indebtedness under Credit Facilities outstanding on the date on which Notes are first issued and authenticated under this Indenture will be deemed to have been incurred on such date in reliance on the exception provided by clause (1) of the definition of Permitted Debt. Section 4.10 Asset Sales. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless: (1) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of the Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of; 51 (2) the fair market value is determined by the Company's Board of Directors and evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee; and (3) at least 75% of the consideration received in the Asset Sale by the Company or such Restricted Subsidiary is in the form of cash. For purposes of this provision, each of the following will be deemed to be cash: (a) any liabilities, as shown on the Company's or such Restricted Subsidiary's most recent balance sheet, of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Subsidiary Guarantee) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability; (b) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted within 30 days by the Company or such Restricted Subsidiary into cash, to the extent of the cash received in that conversion; and (c) any payment of Senior Debt secured by the assets sold in the Asset Sale. Within 365 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply those Net Proceeds at its option: (1) to repay Senior Debt and, if the Senior Debt repaid is revolving credit Indebtedness, to correspondingly reduce commitments with respect thereto; (2) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another Permitted Business; (3) to make capital expenditures; (4) to acquire other long-term assets that are used or useful in a Permitted Business; or (5) for any combination of clauses (1) through (4) above. Pending the final application of any Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest the Net Proceeds in any manner that is not prohibited by this Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding paragraph will constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0 million within five business days thereof, the Company will make an Asset Sale Offer to all Holders of Notes and all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in this Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets in accordance with Section 3.09 hereof to purchase the maximum principal amount of Notes and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of principal amount plus accrued and unpaid interest and Additional Interest, if any, to the date of purchase, and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use those Excess 52 Proceeds for any purpose not otherwise prohibited by this Indenture. If the aggregate principal amount of Notes and other pari passu Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and such other pari passu Indebtedness to be purchased on a pro rata basis based on the principal amount of Notes and such other pari passu Indebtedness tendered. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds will be reset at zero. The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with each repurchase of Notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of Section 3.09 or 4.10 of this Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under those provisions of this Indenture by virtue of such conflict. Section 4.11 Transactions with Affiliates. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate Transaction"), unless: (1) the Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person; and (2) the Company delivers to the Trustee: (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $2.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with this Section 4.11 and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors; and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. (b) The following items will not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of Section 4.11(a): (1) any employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary; (2) payment of fees, compensation, benefits, indemnities or similar payments and issuances of stock options to officers, directors and employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business; 53 (3) transactions between or among the Company and/or its Restricted Subsidiaries or transactions between a Receivables Subsidiary and any Person in which the Receivables Subsidiary has an Investment; (4) transactions with a Person that is an Affiliate of the Company solely because the Company owns an Equity Interest in, or controls, such Person; (5) payment of reasonable directors fees to Persons who are not otherwise Affiliates of the Company; (6) loans or advances by the Company or any of its Restricted Subsidiaries to employees of the Company or any of its Restricted Subsidiaries that are entered into in the ordinary course of business and that are approved by the Board of Directors of the Company; provided that the aggregate principal amount of all such loans or advances do not exceed $1.5 million at any one time outstanding; (7) sales of Equity Interests (other than Disqualified Stock) to Affiliates of the Company; (8) Restricted Payments that are permitted by Section 4.07 hereof; (9) transactions pursuant to the Stockholders Agreement; (10) payments of fees and the reimbursement of expenses by the Company for management services pursuant to the management agreements, each dated September 27, 1999, with Bain Capital, LLC, Credit Suisse First Boston Corporation and Gary Stevenson and Scott Watterson, as such agreements may be amended from time to time; provided that such amendments do not contain modifications that are materially adverse to the Holders; and (11) payments of rent and other expenses by the Company to FG Aviation, Inc. made pursuant to the aircraft lease agreement, dated February 8, 2002, as such agreement may be amended from time to time; provided that such amendments do not contain modifications that are materially adverse to the Holders. Section 4.12 Liens. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or trade payables on any asset now owned or hereafter acquired, except Permitted Liens. Section 4.13 Business Activities. The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole. Section 4.14 Corporate Existence. Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect: 54 (1) its corporate existence, and the corporate, partnership or other existence of each of its Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary; and (2) the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, 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 Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes. Section 4.15 Offer to Repurchase Upon Change of Control. (a) Upon the occurrence of a Change of Control, the Company will make an offer (a "Change of Control Offer") to each Holder to repurchase all or any part (equal to $1,000 or an integral multiple of $1,000) of each Holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Additional Interest on the Notes repurchased, if any, to the date of purchase (the "Change of Control Payment"). Within thirty days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and stating: (1) that the Change of Control Offer is being made pursuant to this Section 4.15 and that all Notes tendered will be accepted for payment; (2) the purchase price and the purchase date, which shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"); (3) that any Note not tendered will continue to accrue interest; (4) that, unless the Company defaults in the payment of the Change of Control Payment, all Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control Payment Date; (5) that Holders electing to have any Notes purchased pursuant to a Change of Control Offer will be required to surrender the Notes, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have the Notes purchased; and (7) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion must be equal to $1,000 in principal amount or an integral multiple thereof. 55 The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change in Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of Sections 3.09 or 4.15 of this Indenture, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under Section 3.09 or this Section 4.15 by virtue of such conflict. (b) On the Change of Control Payment Date, the Company shall, to the extent lawful and subject to the provisions set forth under Article 10: (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer; (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions of Notes properly tendered; and (3) deliver or cause to be delivered to the Trustee the Notes properly accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions of Notes being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes properly tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each new Note will be in a principal amount of $1,000 or an integral multiple thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. Within 60 days following a Change of Control, the Company shall either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of Notes required by this Section 4.15. 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. The provisions described above that require the Company to make a Change of Control Offer following a Change of Control will be applicable whether or not any other provisions of this Indenture are applicable. Except as described above with respect to a Change of Control, this Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. (c) Notwithstanding anything to the contrary in this Section 4.15, the Company 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 in this Section 4.15 and Section 3.09 hereof and purchases all Notes validly tendered and not withdrawn under the Change of Control Offer. Section 4.16 Anti-Layering The Company shall not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt of the Company and senior in any respect in right of payment to the Notes. No Guarantor will incur, create, issue, assume, 56 guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to the Senior Debt of such Guarantor and senior in any respect in right of payment to such Guarantor's Subsidiary Guarantee. Section 4.17 Payments for Consent. The Company shall not, and shall 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 this Indenture or the Notes unless such consideration is offered to be paid and is paid to all Holders of the Notes 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 4.18 Additional Subsidiary Guarantees. If the Company or any of its Subsidiaries acquires or creates another Domestic Subsidiary (other than a Receivables Subsidiary) after the date of this Indenture, then that newly acquired or created Domestic Subsidiary will become a Guarantor and execute a supplemental indenture substantially in the form attached as Exhibit F hereto and deliver an opinion of counsel and an officer's certificate satisfactory to the Trustee within 10 Business Days of the date on which it was acquired or created; provided, however, that any such Domestic Subsidiary that has been properly designated as an Unrestricted Subsidiary in accordance with this Indenture shall not be required to become a Guarantor so long as it continues to constitute an Unrestricted Subsidiary. Section 4.19 Designation of Restricted and Unrestricted Subsidiaries The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if that designation would not cause a Default. If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate fair market value of all outstanding Investments owned by the Company and its Restricted Subsidiaries in the Subsidiary properly designated will be deemed to be an Investment made as of the time of the designation and will reduce the amount available for Restricted Payments under the first paragraph of Section 4.07 or under one or more clauses of the definition of Permitted Investments, as applicable, as determined by the Company. That designation will only be permitted if the Investment would be permitted at that time and if the Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a Default. Any such Unrestricted Subsidiary properly designated to be a Restricted Subsidiary will become a Guarantor and execute a supplemental indenture and deliver an opinion of counsel satisfactory to the Trustee within 10 Business Days of the date of such designation. Section 4.20 Sale and Leaseback Transactions The Company shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that the Company or any Restricted Subsidiary may enter into a sale and leaseback transaction if: (a) the Company or that Restricted Subsidiary, as applicable, could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction under Section 4.09 and (b) incurred a Lien to secure such Indebtedness pursuant to Section 4.12; 57 (b) the gross cash proceeds of that sale and leaseback transaction are at least equal to the fair market value, as determined in good faith by the Board of Directors and set forth in an officers' certificate delivered to the Trustee, of the property that is the subject of that sale and leaseback transaction; and (c) the transfer of assets in that sale and leaseback transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with Section 4.10. Notwithstanding the foregoing, the Company or any of its Restricted Subsidiaries may enter into sale and leaseback transactions that in the aggregate amount do not exceed $2.0 million in any twelve-month period without complying with the above provisions. ARTICLE 5. SUCCESSORS Section 5.01 Merger, Consolidation, or Sale of Assets. The Company shall not, directly or indirectly: (1) consolidate or merge with or into another Person (whether or not the Company is the surviving corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company and its Restricted Subsidiaries taken as a whole, in one or more related transactions, to another Person; unless: (1) either: (a) the Company is the surviving corporation; or (b) the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, conveyance or other disposition has been made is a corporation organized or existing under the laws of the United States, any state of the United States or the District of Columbia; (2) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, transfer, conveyance or other disposition has been made assumes all the obligations of the Company under the Notes, this Indenture and the Registration Rights Agreement pursuant to a supplemental indenture or other agreements reasonably satisfactory to the Trustee; (3) immediately after such transaction no Default or Event of Default exists; and (4) the Company or the Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, conveyance or other disposition has been made shall, on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if the same had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09. In addition, the Company shall not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. This Section 5.01 shall not apply to: (1) a sale, assignment, transfer, conveyance or other disposition of assets between or among the Company and any of the Guarantors; (2) a merger or consolidation of a Restricted Subsidiary into the Company; or 58 (3) the merger or consolidation of the Company into an affiliate of the Company consummated for the sole purpose of reincorporating in another jurisdiction under the laws of the United States, any state of the United States or the District of Columbia. Section 5.02 Successor Corporation Substituted. Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in a transaction that is subject to, and that complies with the provisions of, Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, 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 successor corporation 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 successor Person 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 Notes except in the case of a sale of all of the Company's assets in a transaction that is subject to, and that complies with the provisions of, Section 5.01 hereof. ARTICLE 6. DEFAULTS AND REMEDIES Section 6.01 Events of Default. Each of the following is an "Event of Default": (1) the Company defaults for 30 days in the payment when due of interest on, or Additional Interest with respect to, the Notes, whether or not prohibited by the subordination provisions of this Indenture; (2) the Company defaults in the payment when due (at maturity, upon redemption or otherwise) of the principal of, or premium, if any, on the Notes, whether or not prohibited by the subordination provisions of this Indenture; (3) the Company or any of its Subsidiaries fails to comply with the provisions of Section 4.07, 4.15 or 5.01 hereof; (4) failure by the Company or any of its Subsidiaries for 30 days after notice to comply with the provisions of Section 4.09 or 4.10 hereof;" (5) the Company fails to observe or perform any other covenant, representation, warranty or other agreement in this Indenture or the Notes for 60 days after notice to the Company by the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding voting as a single class; (6) a default occurs under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Subsidiaries (or the payment of which is guaranteed by the Company or any of its Subsidiaries), whether such Indebtedness or guarantee now exists, or is created after the date of this Indenture, if that default: 59 (A) is caused by a failure to pay principal of, or interest or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default"); or (B) results in the acceleration of such Indebtedness prior to its express maturity, and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $15.0 million or more; (7) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, which judgment or judgments are not paid, discharged or stayed for a period of 60 days; provided that the aggregate of all such undischarged judgments exceeds $15.0 million (net of applicable insurance which has not been denied in writing by the insurer); and (8) the Company, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary pursuant to or within the meaning of Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, or (E) generally is not paying its debts as they become due; or (9) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary in an involuntary case; (B) appoints a custodian of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of the property of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; or (C) orders the liquidation of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days; or 60 (10) except as permitted by this Indenture, any Subsidiary Guarantee is 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 Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee. Section 6.02 Acceleration. In the case of an Event of Default specified in clause (8) or (9) of Section 6.01 hereof, with respect to the Company or any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately by notice in writing to the Trustee and the Company; provided that so long as any Indebtedness permitted to be incurred pursuant to Credit Facilities shall be outstanding, such acceleration shall not be effective until the earlier of (1) the acceleration of such Indebtedness under Credit Facilities or (2) five business days after receipt by the Company of written notice of such acceleration. Upon any such declaration, the Notes shall become due and payable immediately. Notwithstanding the foregoing, if an Event of Default specified in clause (8) or (9) of Section 6.01 hereof occurs with respect to the Company, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes shall be due and payable immediately without further action or notice. The Holders of a majority in aggregate principal amount of the then outstanding Notes by written notice to the Trustee may on behalf of all of the Holders rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal, interest or premium that has become due solely because of the acceleration) have been cured or waived. If an Event of Default occurs on or after April 1, 2007 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to Section 3.07 hereof, then, upon acceleration of the Notes, an equivalent premium shall also become and be immediately due and payable, to the extent permitted by law, anything in this Indenture or in the Notes to the contrary notwithstanding. If an Event of Default occurs prior to April 1, 2007 by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding the prohibition on redemption of the Notes prior to such date, then, upon acceleration of the Notes, an additional premium shall also become and be immediately due and payable in an amount, for each of the years beginning on April 1, as set forth below (expressed as a percentage of the principal amount of the Notes on the date of payment that would otherwise be due but for the provisions of this sentence): Year Percentage ---- ---------- 2002 .................................................. 11.250% 2003 .................................................. 10.125% 2004 .................................................. 9.000% 2005 .................................................. 7.875% 2006 .................................................. 6.750% 61 Section 6.03 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium and Additional Interest, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 6.04 Waiver of Past Defaults. Holders of not less than a majority in aggregate principal amount of the then outstanding Notes by notice to the Trustee may on behalf of the Holders of all of the Notes waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, premium and Additional Interest, if any, or interest on, the Notes (including in connection with an offer to purchase); provided, however, that the Holders of a majority in aggregate principal amount of the then outstanding Notes may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration. 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 impair any right consequent thereon. Section 6.05 Control by Majority. Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability. Section 6.06 Limitation on Suits. A Holder of a Note may pursue a remedy with respect to this Indenture or the Notes only if: (1) the Holder of a Note gives to the Trustee written notice of a continuing Event of Default; (2) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (3) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and 62 (5) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. Section 6.07 Rights of Holders of Notes to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium and Additional Interest, if any, and interest on the Note, on or after the respective due dates expressed in the Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. Section 6.08 Collection Suit by Trustee. If an Event of Default specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium and Additional Interest, if any, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and 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. Section 6.09 Trustee May File Proofs of Claim. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian 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 to the Trustee any amount due to 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 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. 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 Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10 Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: 63 First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium and Additional Interest, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium and Additional Interest, if any and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. Section 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE 7. TRUSTEE Section 7.01 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee will exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (1) the duties of the Trustee will be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee will examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: 64 (1) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (2) the Trustee will not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee will not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section 7.01. (e) No provision of this Indenture will require the Trustee to expend or risk its own funds or incur any liability. The Trustee will be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder has offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee will not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 7.02 Rights of Trustee. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee will not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel will be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and will not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee will not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company will be sufficient if signed by an Officer of the Company. (f) The Trustee will 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 unless such Holders have offered to the Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. (g) The Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. 65 (h) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Notes and this Indenture. (i) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other Person employed to act hereunder. (j) The Trustee may request that the Company deliver an Officer's Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officer's Certificate may be signed by any person authorized to sign an Officer's Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded. Section 7.03 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. Section 7.04 Trustee's Disclaimer. The Trustee will not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it will not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it will not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. Section 7.05 Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee will mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, premium or Additional Interest, if any, or interest on any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. Section 7.06 Reports by Trustee to Holders of the Notes. (a) Within 60 days after each March 15 beginning with the March 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee will mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA (S) 313(a) (but if no event described in TIA (S) 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also will comply with TIA (S) 313(b)(2). The Trustee will also transmit by mail all reports as required by TIA (S) 313(c). 66 (b) A copy of each report at the time of its mailing to the Holders of Notes will be mailed by the Trustee to the Company and filed by the Trustee with the SEC and each stock exchange on which the Notes are listed in accordance with TIA (S) 313(d). The Company will promptly notify the Trustee when the Notes are listed on any stock exchange. Section 7.07 Compensation and Indemnity. (a) The Company will pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder as shall be agreed upon, in writing, by the Company and Trustee. The Trustee's compensation will not be limited by any law on compensation of a trustee of an express trust. The Company will reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses will include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. (b) The Company and the Guarantor will indemnify the Trustee and any predecessor trustee against any and all losses, liabilities, expenses, damages or taxes (other than taxes based upon, measured by or determined by the income of the Trustee.) incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company and the Guarantors (including this Section 7.07) and defending itself against any claim (whether asserted by the Company, the Guarantors or any Holder or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee will notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company will not relieve the Company or any of the Guarantors of their obligations hereunder. The Company or such Guarantor will defend the claim and the Trustee will cooperate in the defense. The Trustee may have separate counsel of its selection and the Company will pay the reasonable fees and expenses of such counsel. Neither the Company nor any Guarantor need pay for any settlement made without its consent, which consent will not be unreasonably withheld. (c) The obligations of the Company and the Guarantors under this Section 7.07 will survive the satisfaction and discharge of this Indenture. (d) To secure the Company's payment obligations in this Section 7.07, the Trustee will have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Notes. Such Lien will survive the satisfaction and discharge of this Indenture. (e) When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(7) or (8) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. (f) The Trustee will comply with the provisions of TIA (S) 313(b)(2) to the extent applicable. Section 7.08 Replacement of Trustee. (a) A resignation or removal of the Trustee and appointment of a successor Trustee will become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. 67 (b) The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10 hereof; (2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a custodian or public officer takes charge of the Trustee or its property; or (4) the Trustee becomes incapable of acting. (c) If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company will promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. (d) If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction at the expense of the Company in the case of the Trustee, for the appointment of a successor Trustee. (e) If the Trustee, after written request by any Holder who has been a Holder for at least six months, fails to comply with Section 7.10, such Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (f) A successor Trustee will deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee will become effective, and the successor Trustee will have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee will mail a notice of its succession to Holders. The retiring Trustee will promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof will continue for the benefit of the retiring Trustee. Section 7.09 Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act will be the successor Trustee. Section 7.10 Eligibility; Disqualification. There will at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that has a combined capital and surplus of at least $50 million as set forth in its most recent published annual report of condition. 68 This Indenture will always have a Trustee who satisfies the requirements of TIA (S) 310(a)(1), (2) and (5). The Trustee is subject to TIA (S) 310(b). Section 7.11 Preferential Collection of Claims Against Company. The Trustee is subject to TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated therein. ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance. The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon compliance with the conditions set forth below in this Article 8. Section 8.02 Legal Defeasance and Discharge. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company and each of the Guarantors will, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from their obligations with respect to all outstanding Notes (including the Subsidiary Guarantees) on the date the conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose, Legal Defeasance means that the Company and the Guarantors will be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes (including the Subsidiary Guarantees), which will thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and the other Sections of this Indenture referred to in clauses (1) and (2) below, and to have satisfied all their other obligations under such Notes, the Subsidiary Guarantees and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which will survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, or interest or premium and Additional Interest, if any, on such Notes when such payments are due from the trust referred to in Section 8.04 hereof; (2) the Company's obligations with respect to such Notes under Article 2 and Section 4.02 hereof; (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's and the Guarantors' obligations in connection therewith; and (4) this Article 8. Subject to compliance with this Article 8, the Company may exercise its option under this Section 8.02 notwithstanding the prior exercise of its option under Section 8.03 hereof. Section 8.03 Covenant Defeasance. 69 Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company and the Guarantors will, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from each of their obligations under the covenants contained in Sections 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18, 4.19 hereof and clause (4) of Section 5.01 hereof with respect to the outstanding Notes on and after the date the conditions set forth in Section 8.04 hereof are satisfied (hereinafter, "Covenant Defeasance"), and the Notes will thereafter be deemed not "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 will continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes will not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes and Subsidiary Guarantees, the Company and the 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 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 will not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Notes and Subsidiary Guarantees will be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03 hereof, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(8) through 6.01(9) hereof will not constitute Events of Default. Section 8.04 Conditions to Legal or Covenant Defeasance. In order to exercise either Legal Defeasance or Covenant Defeasance under either Section 8.02 or 8.03 hereof: (1) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, cash in United States dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Additional Interest, if any, and interest on the outstanding Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be; (2) in the case of an election under Section 8.02 hereof, the Company has delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that: (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling; or (B) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal 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 Legal Defeasance had not occurred; (3) in the case of an election under Section 8.03 hereof, the Company must deliver to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for 70 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; (4) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit); (5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (6) the Company must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; and (7) the Company must deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. Section 8.05 Deposited Money and Government Securities to be Held in Trust; Other Miscellaneous Provisions. Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Notes will be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium and Additional Interest, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company will pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Notwithstanding anything in this Article 8 to the contrary, the Trustee will deliver or pay to the Company from time to time upon the request of the Company any money or non-callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(1) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. Section 8.06 Repayment to Company. 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, premium or Additional Interest, if any, or interest on any Note and remaining unclaimed for two years after such principal, premium or Additional Interest, if any, or 71 interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) will be discharged from such trust; and the Holder of such Note will thereafter be permitted to 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, will thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which will not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. Section 8.07 Reinstatement. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 or 8.03 hereof, as the case may be, 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 Guarantor's obligations under this Indenture and the Notes and the Subsidiary Guarantees will be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 or 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium or Additional Interest, if any, or interest on any Note following the reinstatement of its obligations, the Company will be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER Section 9.01 Without Consent of Holders of Notes. Notwithstanding Section 9.02 of this Indenture, the Company, the Guarantors and the Trustee may amend or supplement this Indenture, the Subsidiary Guarantees or the Notes without the consent of any Holder of a Note: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated Notes in addition to or in place of certificated Notes or to alter the provisions of Article 2 hereof (including the related definitions) in a manner that does not materially adversely affect any Holder; (3) to provide for the assumption of the Company's or a Guarantor's obligations to the Holders of the Notes by a successor to the Company pursuant to Article 5 or Article 12 hereof; (4) to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights hereunder of any Holder of the Note; (5) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA; (6) to provide for the issuance of Additional Notes in accordance with the limitations set forth in this Indenture as of the date hereof; or 72 (7) to allow any Guarantor to execute a supplemental indenture and/or a Subsidiary Guarantee with respect to the Notes. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee will join with the Company and the Guarantors in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee will not be obligated to enter into such amended or supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. Section 9.02 With Consent of Holders of Notes. Except as provided below in this Section 9.02, the Company and the Trustee may amend or supplement this Indenture (including, without limitation, Section 3.09, 4.10 and 4.15 hereof), the Subsidiary Guarantees and the Notes with the consent of the Holders of at least a majority in principal amount of the Notes (including, without limitation, Additional Notes, if any) then outstanding voting as a single class (including, without limitation, consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes), and, subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of Default (other than a Default or Event of Default in the payment of the principal of, premium or Additional Interest, if any, or interest on the Notes, except a payment default resulting from an acceleration that has been rescinded) or compliance with any provision of this Indenture, the Subsidiary Guarantees or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes voting as a single class (including consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes). Section 2.08 hereof shall determine which Notes are considered to be "outstanding" for purposes of this Section 9.02. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 hereof, the Trustee will join with the Company in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture directly affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but will not be obligated to, enter into such amended or supplemental Indenture. It is not be necessary for the consent of the Holders of Notes under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it is sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company will mail to the Holders of Notes affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, will not, however, in any way impair or affect the validity of any such amended or supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding voting as a single class may waive compliance in a particular instance by the Company with any provision of this Indenture or the Notes. However, without the consent of each Holder affected, an amendment or waiver under this Section 9.02 may not (with respect to any Notes held by a non-consenting Holder): 73 (1) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any Note or alter or waive any of the provisions with respect to the redemption of the Notes except as provided above with respect to Sections 3.09, 4.10 and 4.15 hereof; (3) reduce the rate of or change the time for payment of interest, including default interest, on any Note; (4) waive a Default or Event of Default in the payment of principal of or premium or Additional Interest, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the then outstanding Notes and a waiver of the payment default that resulted from such acceleration); (5) make any Note payable in money other than that stated in the Notes; (6) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of, or interest or premium or Additional Interest, if any, on the Notes; (7) make any change in Section 6.04 or 6.07 hereof or in the foregoing amendment and waiver provisions; or (8) waive a redemption payment with respect to any Note other than a payment required by Sections 3.09, 4.10 and 4.15 hereof (9) release any Guarantor from any of its obligations under its Subsidiary Guarantee or this Indenture, except in accordance with the terms of this Indenture. In addition, any amendment to, or waiver of, the provisions of this Indenture relating to subordination that adversely affects the rights of the Holders of Notes will require the consent of the Holders of at least 75% in aggregate principal amount of Notes then outstanding. Section 9.03 Compliance with Trust Indenture Act. Every amendment or supplement to this Indenture or the Notes will be set forth in a amended or supplemental Indenture that complies with the TIA as then in effect. Section 9.04 Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder of a Note or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. Section 9.05 Notation on or Exchange of Notes. 74 The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall, upon receipt of an Authentication Order, authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note will not affect the validity and effect of such amendment, supplement or waiver. Section 9.06 Trustee to Sign Amendments, etc. The Trustee will sign any amended or supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplemental Indenture until the Board of Directors approves it. In executing any amended or supplemental indenture, the Trustee will be entitled to receive and (subject to Section 7.01 hereof) will be fully protected in relying upon, in addition to the documents required by Section 13.04 hereof, an Officers' Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental Indenture is authorized or permitted by this Indenture. ARTICLE 10. SUBORDINATION Section 10.01 Agreement to Subordinate. The Company agrees, and each Holder by accepting a Note agrees, that the Indebtedness evidenced by the Notes is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the prior payment in full of all Senior Debt (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Debt. Section 10.02 Certain Definitions. "Designated Senior Debt" means: (1) any Indebtedness outstanding under the Credit Facilities; and (2) after payment in full of all Obligations under the Credit Facilities, any other Senior Debt permitted under this Indenture the principal amount of which is $25.0 million or more and that has been designated by the Company as "Designated Senior Debt." "Permitted Junior Securities" means: (1) Equity Interests in the Company or any Guarantor; or (2) debt securities that are subordinated to all Senior Debt and any debt securities issued in exchange for Senior Debt) to substantially the same extent as, or to a greater extent than, the Notes and the Subsidiary Guarantees are subordinated to Senior Debt under this Indenture. "Representative" means the indenture trustee or other trustee, agent or representative for any Senior Debt. 75 "Senior Debt" means: (1) all Indebtedness of the Company or any Guarantor outstanding under Credit Facilities and all Hedging Obligations with respect thereto; (2) any other Indebtedness of the Company or any Guarantor permitted to be incurred under the terms of this Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Notes or any Subsidiary Guarantee, and (3) all Obligations with respect to the items listed in the preceding clauses (1) and (2). Notwithstanding anything to the contrary in the preceding, Senior Debt will not include: (1) any liability for federal, state, local or other taxes owed or owing by the Company; (2) any Indebtedness of the Company or any of its Subsidiaries to the Company or any of its Affiliates; (3) any trade payables; or (4) the portion of any Indebtedness that is incurred in violation of this Indenture. Section 10.03 Liquidation; Dissolution; Bankruptcy. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, in an assignment for the benefit of creditors or any marshaling of the Company's assets and liabilities: (1) holders of Senior Debt will be entitled to receive payment in full in cash of all Obligations due in respect of such Senior Debt (including interest after the commencement of any bankruptcy proceeding at the rate specified in the applicable Senior Debt) before the Holders of Notes will be entitled to receive any payment with respect to the Notes (except that Holders of Notes may receive and retain Permitted Junior Securities and payments made from any defeasance trust created pursuant to Section 8.01 hereof); and (2) until all Obligations with respect to Senior Debt (as provided in clause (1) above) are paid in full in cash, any distribution to which Holders would be entitled but for this Article 10 will be made to holders of Senior Debt (except that Holders of Notes may receive and retain Permitted Junior Securities and payments made from any defeasance trust created pursuant to Section 8.01 hereof), as their interests may appear. Section 10.04 Default on Designated Senior Debt. (a) The Company may not make any payment or distribution to the Trustee or any Holder in respect of Obligations with respect to the Notes and may not acquire from the Trustee or any Holder any Notes for cash or property (other than Permitted Junior Securities and payments made from any defeasance trust created pursuant to Section 8.01 hereof) until all principal and other Obligations with respect to the Senior Debt have been paid in full in cash if: 76 (1) payment default on Designated Senior Debt occurs and is continuing beyond any applicable grace period in the agreement, indenture or other document governing such Designated Senior Debt; or (2) any other default occurs and is continuing on any series of Designated Senior Debt that permits holders of that series of Designated Senior Debt to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company of the holders of any Designated Senior Debt. If the Trustee receives any such Payment Blockage Notice, no subsequent Payment Blockage Notice will be effective for purposes of this Section unless and until (A) at least 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (B) all scheduled payments of principal, premium and Additional Interest, if any, and interest on the Notes that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee may be, or may be made, the basis for a subsequent Payment Blockage Notice unless such default has have been waived for a period of not less than 90 days. (b) The Company may and will resume payments on and distributions in respect of the Notes and may acquire them upon the earlier of: (1) in the case of a payment default, upon the date upon which such default is cured or waived, or (2) in the case of a nonpayment default, upon the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless the maturity of any Designated Senior Debt has been accelerated, if this Article 10 otherwise permits the payment, distribution or acquisition at the time of such payment or acquisition. Section 10.05 Acceleration of Notes. If payment of the Notes is accelerated because of an Event of Default, the Company will promptly notify holders of Senior Debt of the acceleration. Section 10.06 When Distribution Must Be Paid Over. In the event that the Trustee or any Holder receives any payment of any Obligations with respect to the Notes (other than Permitted Junior Securities and payments made from any defeasance trust created pursuant to Section 8.01 hereof) at a time when the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section 10.04 hereof, such payment will be held by the Trustee or such Holder, in trust for the benefit of, and will be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the agreement, indenture or other document (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. 77 With respect to the holders of Senior Debt, the Trustee undertakes to perform only those obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt will be read into this Indenture against the Trustee. The Trustee will not be deemed to owe any fiduciary duty to the holders of Senior Debt, and will not be liable to any such holders if the Trustee pays over or distributes to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior Debt are then entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. Section 10.07 Notice by Company. The Company will promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Notes to violate this Article 10, but failure to give such notice will not affect the subordination of the Notes to the Senior Debt as provided in this Article 10. Section 10.08 Subrogation. After all Senior Debt is paid in full in cash and until the Notes are paid in full in cash, Holders of Notes will be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders of Notes have been applied to the payment of Senior Debt. A distribution made under this Article 10 to holders of Senior Debt that otherwise would have been made to Holders of Notes is not, as between the Company and Holders, a payment by the Company on the Notes. Section 10.09 Relative Rights. This Article 10 defines the relative rights of Holders of Notes and holders of Senior Debt. Nothing in this Indenture will: (1) impair, as between the Company and Holders of Notes, the obligation of the Company, which is absolute and unconditional, to pay principal of, premium and interest and Additional Interest, if any, on the Notes in accordance with their terms; (2) affect the relative rights of Holders of Notes and creditors of the Company other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Holder of Notes from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders of Notes. If the Company fails because of this Article 10 to pay principal of, premium or interest or Additional Interest, if any, on a Note on the due date, the failure is still a Default or Event of Default. Section 10.10 Subordination May Not Be Impaired by Company. No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Notes may be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. 78 Section 10.11 Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders of Notes will be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders of Notes for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. Section 10.12 Rights of Trustee and Paying Agent. Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee will not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Notes, unless the Trustee has received at its Corporate Trust Office at least five Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Notes to violate this Article 10. Only the Company or a Representative may give the notice. Nothing in this Article 10 will impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. Section 10.13 Authorization to Effect Subordination. Each Holder of Notes, by the Holder's acceptance thereof, authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as such Holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time to file such claim, the Representatives are hereby authorized to file an appropriate claim for and on behalf of the Holders of the Notes. Section 10.14 Amendments. The provisions of this Article 10 may not be amended or modified without the written consent of the holders of all Senior Debt. In addition, any amendment to, or waiver of, the provisions of this Article 10 that adversely affects the rights of the Holders of the Notes will require the consent of the Holders of at least 75% in aggregate principal amount of Notes then outstanding. ARTICLE 11. NOTE GUARANTEES Section 11.01 Guarantee. 79 (a) Subject to this Article 11, each of the Guarantors (other than the Quebec Guarantor) hereby, jointly and severally, unconditionally guarantees to each Holder of a Note 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 Notes or the obligations of the Company hereunder or thereunder, that: (1) the principal of, premium and Additional Interest, if any, and interest on the Notes 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 Notes, 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 (2) in case of any extension of time of payment or renewal of any Notes 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 Guarantors will be jointly and severally obligated to pay the same immediately. Each Guarantor agrees that this is a guarantee of payment and not a guarantee of collection. (b) Subject to this Article 11, the Quebec Guarantor hereby unconditionally guarantees to each Holder of a Note 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 Notes or the Subsidiary Guarantee of the New Brunswick Guarantor set forth in clause (a) of this Section 11.01 or the obligations of the Company or the New Brunswick Guarantor hereunder or thereunder, the prompt payment and performance when due of all obligations of the New Brunswick Guarantor under such Subsidiary Guarantee. Failing payment or performance when due of any obligation so guaranteed, the Quebec Guarantor will be obligated to pay or perform the same immediately. The Quebec Guarantor agrees that this is a guarantee of payment and not a guarantee of collection. (c) The Guarantors hereby agree that their obligations hereunder are unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes 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 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 will not be discharged except by complete performance of the obligations contained in the Notes and this Indenture. (d) If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantors or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Guarantors, any amount paid by either to the Trustee or such Holder, this Subsidiary Guarantee, to the extent theretofore discharged, will be reinstated in full force and effect. (e) Each Guarantor agrees that it will 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 Guarantor further agrees that, as between the Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (1) the maturity of the obligations guaranteed hereby may be 80 accelerated as provided in Article 6 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 (2) in the event of any declaration of acceleration of such obligations as provided in Article 6 hereof, such obligations (whether or not due and payable) will forthwith become due and payable by the Guarantors for the purpose of this Subsidiary Guarantee. The Guarantors will have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantee. Section 11.02 Limitation on Guarantor Liability. Each Guarantor, and by its acceptance of Notes, each Holder, hereby confirms that it is the intention of all such parties that the Subsidiary Guarantee of such 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 Guarantors hereby irrevocably agree that the obligations of such Guarantor will be limited to such maximum amount as will, after giving effect to all other contingent and fixed liabilities of such 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 Guarantor in respect of the obligations of such other Guarantor under this Article 11, result in the obligations of such Guarantor under its Subsidiary Guarantee not constituting a fraudulent transfer or conveyance. Section 11.03 Execution and Delivery of Subsidiary Guarantee. To evidence its Subsidiary Guarantee set forth in Section 11.01, each Guarantor hereby agrees that a notation of such Subsidiary Guarantee substantially in the form attached as Exhibit E hereto (or in the case of the Quebec Guarantor, in the form of Exhibit E1 hereto) will be endorsed by an Officer of such Guarantor on each Note authenticated and delivered by the Trustee and that this Indenture will be executed on behalf of such Guarantor by one of its Officers. Each Guarantor hereby agrees that its Subsidiary Guarantee set forth in Section 11.01 will remain in full force and effect notwithstanding any failure to endorse on each Note 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 Note on which a Subsidiary Guarantee is endorsed, the Subsidiary Guarantee will be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, will constitute due delivery of the Subsidiary Guarantee set forth in this Indenture on behalf of the Guarantors. In the event that the Company creates or acquires any Domestic Subsidiary after the date of this Indenture, if required by Section 4.18 hereof, the Company will cause such Domestic Subsidiary to comply with the provisions of Section 4.18 hereof and this Article 11, to the extent applicable. Section 11.04 Guarantors May Consolidate, etc., on Certain Terms. Except as otherwise provided in Section 11.05, no Guarantor may sell or otherwise dispose of all or substantially all of its assets to, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person) another Person, other than the Company or another Guarantor, unless: 81 (1) immediately after giving effect to such transaction, no Default or Event of Default exists; and (2) either: (a) subject to Section 11.05 hereof, the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger unconditionally assumes all the obligations of that Guarantor, pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Notes, this Indenture and the Subsidiary Guarantee on the terms set forth herein or therein; or (b) the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of this Indenture, including without limitation, Section 4.10 hereof. 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 Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Guarantor, such successor Person will succeed to and be substituted for the Guarantor with the same effect as if it had been named herein as a Guarantor. Such successor Person thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Subsidiary Guarantees so issued will 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. Except as set forth in Articles 4 and 5 hereof, and notwithstanding clauses (a) and (b) above, nothing contained in this Indenture or in any of the Notes will prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor, or will prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Company or another Guarantor. Section 11.05 Releases Following Sale of Assets. In the event of any sale or other disposition of all or substantially all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all to the Capital Stock of any Guarantor, in each case to a Person that is not (either before or after giving effect to such transactions) a Subsidiary of the Company, then such Guarantor (in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all of the capital stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor) will be released and relieved of any obligations under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of this Indenture, including without limitation Section 4.10 hereof. 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, merger or consolidation was made by the Company in accordance with the provisions of this Indenture, including without limitation Section 4.10 hereof, the Trustee will execute any documents reasonably required in order to evidence the release of any Guarantor from its obligations under its Subsidiary Guarantee. Any Guarantor not released from its obligations under its Subsidiary Guarantee will remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Guarantor under this Indenture as provided in this Article 11. 82 Section 11.06 Subordination of Subsidiary Guarantee. The Obligations of each Guarantor under its Subsidiary Guarantee pursuant to this Article 11 will be junior and subordinated to the Senior Debt of such Guarantor on the same basis as the Notes are junior and subordinated to Senior Debt of the Company. For the purposes of the foregoing sentence, the Trustee and the Holders will have the right to receive and/or retain payments by any of the Guarantors only at such times as they may receive and/or retain payments in respect of the Notes pursuant to this Indenture, including Article 10 hereof. Section 11.07 Release Following Designation as an Unrestricted Subsidiary. In the event the Company designates any Guarantor as an Unrestricted Subsidiary in accordance with Section 4.19, the Obligations of such Guarantor under its Subsidiary Guarantee pursuant to this Article 11 shall be released. ARTICLE 12. SATISFACTION AND DISCHARGE Section 12.01 Satisfaction and Discharge. This Indenture will be discharged and will cease to be of further effect as to all Notes issued hereunder, when: (1) either: (a) all Notes that have been authenticated (except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust and thereafter repaid to the Company) have been delivered to the Trustee for cancellation; or (b) all Notes that have not been delivered to the Trustee for cancellation have become due and payable by reason of the making of a notice of redemption or otherwise or will become due and payable within one year either upon Stated Maturity or by virtue of earlier redemption under arrangements reasonably satisfactory to the Trustee in accordance with the terms of this Indenture and the Company or any Guarantor has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust solely for the benefit of the Holders, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient without consideration of any reinvestment of interest, to pay and discharge the entire indebtedness on the Notes not previously delivered to the Trustee for cancellation for principal, premium and Additional Interest, if any, and accrued interest to the date of maturity or redemption; (2) no Default or Event of Default has occurred and is continuing on the date of such deposit or will occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company or any Guarantor is a party or by which the Company or any Guarantor is bound; (3) the Company or any Guarantor has paid or caused to be paid all other sums payable by it under this Indenture; and 83 (4) the Company has delivered irrevocable instructions to the Trustee under this Indenture to apply the deposited money toward the payment of the Notes at maturity or the redemption date, as the case may be. In addition, the Company must deliver an Officers' Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been satisfied. Notwithstanding the satisfaction and discharge of this Indenture, if money has been deposited with the Trustee pursuant to subclause (b) of clause (1) of this Section, the provisions of Section 12.02 and Section 8.06 will survive. In addition, nothing in this Section 12.01 will be deemed to discharge those provisions of Section 7.07 hereof, that, by their terms, survive the satisfaction and discharge of this Indenture. Section 12.02 Application of Trust Money. Subject to the provisions of Section 8.06, all money deposited with the Trustee pursuant to Section 12.01 shall be held in trust and applied by it, in accordance with the provisions of the Notes 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. If the Trustee or Paying Agent is unable to apply any money or Government Securities in accordance with Section 12.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's and any Guarantor's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 12.01; provided that if the Company has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or Government Securities held by the Trustee or Paying Agent. ARTICLE 13. MISCELLANEOUS Section 13.01 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA (S)318(c), the imposed duties will control. Section 13.02 Notices. Any notice or communication by the Company, any Guarantor or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the others' address: 84 If to the Company and/or any Guarantor: ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Telecopier No.: (435) 750 3679 Attention: Brad Bearnson, Esq. With a copy to: Hutchins, Wheeler & Dittmar, A Professional Corporation 101 Federal Street Boston, Massachusetts 02110 Telecopier No.: (617) 951 1295 Attention: Charles W. Robins, Esq. If to the Trustee: The Bank of New York Corporate Trust Department 101 Barclay Street, Floor 21W New York, New York 10286 Telecopier No.: (212) 896 7298/7299 The Company, any Guarantor or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) will be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder will be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication will also be so mailed to any Person described in TIA ss. 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it will not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it will mail a copy to the Trustee and each Agent at the same time. Section 13.03 Communication by Holders of Notes with Other Holders of Notes. 85 Holders may communicate pursuant to TIA (S) 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA (S) 312(c). Section 13.04 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which must include the statements set forth in Section 13.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which must include the statements set forth in Section 13.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. Section 13.05 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA (S) 314(a)(4)) must comply with the provisions of TIA (S) 314(e) and must include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. Section 13.06 Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 13.07 No Personal Liability of Directors, Officers, Employees and Stockholders. No past, present or future director, officer, employee, incorporator or stockholder of the Company or any Guarantor, as such, will have any liability for any obligations of the Company or the Guarantors under the Notes, this Indenture, the Subsidiary Guarantees, 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. The waiver may not be effective to waive liabilities under the federal securities laws. 86 Section 13.08 Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK WILL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES 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. Section 13.09 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.10 Successors. All agreements of the Company in this Indenture and the Notes will bind its successors. All agreements of the Trustee in this Indenture will bind its successors. All agreements of each Guarantor in this Indenture will bind its successors, except as otherwise provided in Section 11.05. Section 13.11 Severability. In case any provision in this Indenture or in the Notes is invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions will not in any way be affected or impaired thereby. Section 13.12 Counterpart Originals. The parties may sign any number of copies of this Indenture. Each signed copy will be an original, but all of them together represent the same agreement. Section 13.13 Table of Contents, Headings, etc. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and will in no way modify or restrict any of the terms or provisions hereof. [Signatures on following page] 87 SIGNATURES Dated as of April 9, 2002 ICON HEALTH & FITNESS COMPANY, INC. By: _______________________________ Name: Title: JUMPKING, INC. By: _______________________________ Name: Title: UNIVERSAL TECHNICAL SERVICES By: _______________________________ Name: Title: ICON INTERNATIONAL HOLDINGS, INC. By: _______________________________ Name: Title: ICON IP, Inc. By: _______________________________ Name: Title: 88 FREE MOTION FITNESS, INC. By: _______________________________ Name: Title: NORDICTRACK, INC. By: _______________________________ Name: Title: 510152 N.B. LTD. By: _______________________________ Name: Title: ICON DU CANADA INC. By: _______________________________ Name: Title: THE BANK OF NEW YORK By: _______________________________ Name: Title: 89 Schedule I SCHEDULE OF GUARANTORS The following schedule lists each Guarantor under this Indenture as of the date of this Indenture: Jumpking, Inc., a Utah corporation Universal Technical Services, a Utah corporation ICON International Holdings, Inc., a Delaware corporation ICON IP, Inc., a Delaware corporation Free Motion Fitness, a Utah corporation NordicTrack, Inc., a Utah corporation 510152 N.B. Ltd., a New Brunswick corporation ICON du Canada Inc., a Quebec corporation I-1 EXHIBIT A1 [Face of Note] ================================================================================ CUSIP/CINS ____________ 11.25% [Series A] [Series B] Senior Subordinated Notes due 2012 No. ___ $____________ ICON HEALTH & FITNESS, INC. promises to pay to CEDE & CO. ---------- or registered assigns, the principal sum of ___________________________________________________________ Dollars on _____________, 20___. Interest Payment Dates: ____________ and ____________ Record Dates: ____________ and ____________ Dated: _______________, 2002 ICON HEALTH & FITNESS, INC. By: ____________________________ Name: Title: By: ____________________________ Name: Title: (SEAL) This is one of the Notes referred to in the within-mentioned Indenture: THE BANK OF NEW YORK, as Trustee By: ________________________________ Authorized Signatory ================================================================================ A1-1 [Back of Note] 11.25% [Series A] [Series B] Senior Subordinated Notes due 2012 [Insert the Global Note Legend, if applicable pursuant to the provisions of the Indenture] [Insert the Private Placement Legend, if applicable pursuant to the provisions of the Indenture] Capitalized terms used herein have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. (1) Interest. ICON Health & Fitness, Inc., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at 11.25% per annum from April 9, 2002 until maturity and shall pay the Additional Interest, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Additional Interest, if any, semi-annually in arrears on January 1 and July 1 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be July 1, 2002. The Company will pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it will pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Additional Interest, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. (2) Method of Payment. The Company will pay interest on the Notes (except defaulted interest) and Additional Interest, if any, to the Persons who are registered Holders of Notes at the close of business on the December 15 or June 15 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be payable as to principal, premium and Additional Interest, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Additional Interest, if any, may be made by check mailed to the Holders at their addresses set forth in the register of Holders; provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest, premium and Additional Interest, if any, on, all Global Notes and all other Notes the Holders of which will have provided wire transfer instructions to the Company or the Paying Agent. Such payment will be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. (3) Paying Agent and Registrar. Initially, The Bank of New York, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. A1-2 (4) Indenture. The Company issued the Notes under an Indenture dated as of April 9, 2002 (the "Indenture") among the Company, the Guarantors and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. (5) Optional Redemption. (a) At any time prior to April 1, 2005, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of Notes issued under the Indenture at a redemption price of 111.25% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest to the redemption date, with the net cash proceeds of one or more Equity Offerings, provided that: (b) at least 65% of the aggregate principal amount of Notes issued under the Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its Subsidiaries); and (c) the redemption occurs within 90 days of the date of the closing of such Equity Offering. (d) Except pursuant to the preceding paragraph, the Notes may not be redeemed at the option of the Company prior to April 1, 2007. (e) After April 1, 2007, the Company may redeem all or a part of the Notes upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, and Additional Interest, if any, thereon, to the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below: Year Percentage ---- ---------- 2007 ................................................... 105.6 2008 ................................................... 103.7 2009 ................................................... 101.8 2010 and thereafter .................................... 100.000% (6) Mandatory Redemption. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. (7) Repurchase at Option of Holder. (a) If there is a Change of Control, the Company will be required to make an offer (a "Change of Control Offer") to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Additional Interest thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 30 days following any A1-3 Change of Control, the Company will mail a notice to each Holder setting forth the procedures governing the Change of Control Offer as required by the Indenture. (b) If the Company or a Subsidiary consummates any Asset Sales, within five days of each date on which the aggregate amount of Excess Proceeds exceeds $5 million, the Company will commence an offer to all Holders of Notes and all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in the Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets (an "Asset Sale Offer") pursuant to Section 3.09 of the Indenture to purchase the maximum principal amount of Notes and other pari passu Indebtedness that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Additional Interest thereon, if any, to the date fixed for the closing of such offer and other pari passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company (or such Subsidiary) may use such deficiency for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and other pari passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and other pari passu Indebtedness to be purchased on a pro rata basis. Holders of Notes that are the subject of an offer to purchase will receive an Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes. (8) Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. (9) Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, the Company need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. (10) Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. (11) Amendment, Supplement and Waiver. Subject to certain exceptions, the Indenture, the Subsidiary Guarantees or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes voting as a single class, and any existing default or compliance with any provision of the Indenture, the Subsidiary Guarantees or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes voting as a single class. Without the consent of any Holder of a Note, the Indenture, the Subsidiary Guarantees or the Notes may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for A1-4 uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's or any Guarantor's obligations to Holders of the Notes in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act to provide for the issuance of Additional Notes in accordance with the limitations set forth in the Indenture, or to allow any Guarantor to execute a supplemental indenture to the Indenture and/or a Subsidiary Guarantee with respect to the Notes. (12) Defaults and Remedies. Events of Default include: (i) default for 30 days in the payment when due of interest or Additional Interest on the Notes; (ii) default in payment when due of principal of or premium, if any, on the Notes when the same becomes due and payable at maturity, upon redemption (including in connection with an offer to purchase) or otherwise, (iii) failure by the Company to comply with Section 4.07, 4.15 or 5.01 of the Indenture; (iv) failure by the Company for 30 days after notice to comply with Sections 4.09 or 4.10 of the Indenture; (v) failure by the Company for 60 days after notice to the Company by the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding voting as a single class to comply with certain other agreements in the Indenture, the Notes; (vi) default under certain other agreements relating to Indebtedness of the Company which default (x) is caused by a failure to pay principal of, or interest or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default, or (y) results in the acceleration of such Indebtedness prior to its express maturity; (vii) certain final judgments for the payment of money that remain undischarged for a period of 60 days; (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries; and (ix) except as permitted by the 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 Guarantor or any Person acting on its behalf shall deny or disaffirm its obligations under such Guarantor's Subsidiary Guarantee. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Notes will become due and payable without further action or notice. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. (13) Subordination. Payment of principal, interest and premium and Additional Interest, if any, on the Notes is subordinated to the prior payment of Senior Debt on the terms provided in the Indenture. A1-5 (14) Trustee Dealings with Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. (15) No Recourse Against Others. A director, officer, employee, incorporator or stockholder, of the Company or any of the Guarantors, as such, will not have any liability for any obligations of the Company or such Guarantor under the Notes, the Subsidiary Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. (16) Authentication. This Note will not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. (17) 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). (18) Additional Rights of Holders of Restricted Global Notes and Restricted Definitive Notes. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Restricted Global Notes and Restricted Definitive Notes will have all the rights set forth in the A/B Exchange Registration Rights Agreement dated as of April 9, 2002, among the Company, the Guarantors and the other parties named on the signature pages thereof (the "Registration Rights Agreement"). (19) CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. (20) THE INTERNAL LAW OF THE STATE OF NEW YORK WILL GOVERN AND BE USED TO CONSTRUE THIS NOTE AND THE SUBSIDIARY GUARANTEES 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. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Attention: Brad Bearnson, Esq. A1-6 EXHIBIT A1 Assignment Form To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to: __________________________________ (Insert assignee's legal name) ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint ________________________________________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: _______________ Your Signature: ________________________________ (Sign exactly as your name appears on the face of this Note) Signature Guarantee*: _________________________ * Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A1-1 EXHIBIT A1 Option of Holder to Elect Purchase If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or 4.15 of the Indenture, check the appropriate box below: --- Section 4.10 --- Section 4.15 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $________________ Date: _______________ Your Signature:____________________________ (Sign exactly as your name appears on the face of this Note) Tax Identification No.:____________________ Signature Guarantee*: ______________________ * Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A1-1 EXHIBIT A1 SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE* The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global Note or Definitive Note for an interest in this Global Note, have been made:
Principal Amount at maturity of this Amount of decrease Amount of increase in Global Note Signature of in Principal Amount Principal Amount following such authorized signatory at maturity of at maturity of decrease of Trustee or Date of Exchange this Global Note this Global Note (or increase) Custodian ---------------- ---------------- ---------------- ------------- ---------
* This schedule should be included only if the Note is issued in global form. A1-1 EXHIBIT A2 [Face of Regulation S Temporary Global Note] ================================================================================ CUSIP/CINS __________ 11.25% [Series A] [Series B] Senior Subordinated Notes due 2012 No. ___ $__________ ICON HEALTH & FITNESS, INC. promises to pay to CEDE & CO. ---------- or registered assigns, the principal sum of ___________________________________________________________ Dollars on _______________, 20___. Interest Payment Dates: ____________ and ____________ Record Dates: ____________ and ____________ Dated: _______________, 2002 ICON HEALTH & FITNESS, INC. By: ______________________________ Name: Title: By: ______________________________ Name: Title: (SEAL) This is one of the Notes referred to in the within-mentioned Indenture: THE BANK OF NEW YORK, as Trustee By: _______________________________ Authorized Signatory ================================================================================ A2-1 [Back of Regulation S Temporary Global Note] 11.25% [Series A] [Series B] Senior Subordinated Notes due 2012 THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON. THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (1) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.06 OF THE INDENTURE, (2) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (3) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF ICON HEALTH & FITNESS, INC. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), 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 SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (III) A2-2 PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE. Capitalized terms used herein have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. (1) Interest. ICON Health & Fitness, Inc., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at 11.25% per annum from April 9, 2002 until maturity and shall pay the Additional Interest, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Additional Interest, if any, semi-annually in arrears on July 1 and January 1 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance; provided that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be July 1, 2002. The Company will pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it will pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Additional Interest, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Until this Regulation S Temporary Global Note is exchanged for one or more Regulation S Permanent Global Notes, the Holder hereof shall not be entitled to receive payments of interest hereon; until so exchanged in full, this Regulation S Temporary Global Note shall in all other respects be entitled to the same benefits as other Notes under the Indenture. (2) Method of Payment. The Company will pay interest on the Notes (except defaulted interest) and Additional Interest, if any, to the Persons who are registered Holders of Notes at the close of business on December 15 or June 15 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be payable as to principal, premium, interest and Additional Interest, if any, at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Additional Interest, if any, may be made by check mailed to the Holders at their addresses set forth in the register of Holders; provided that payment by wire transfer of immediately available funds will be required with respect to principal of and interest, premium and Additional Interest, if any, on, all Global Notes and all other Notes the Holders of which will have provided wire transfer instructions to the Company or the Paying Agent. Such payment will be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. A2-3 (3) Paying Agent and Registrar. Initially, The Bank of New York,the Trustee under the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. (4) Indenture. The Company issued the Notes under an Indenture dated as of April 9, 2002 (the "Indenture") among the Company, the Guarantors and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling. (5) Optional Redemption. (a) At any time prior to April 1, 2005, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of Notes issued under the Indenture at a redemption price of 111.25% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest to the redemption date, with the net cash proceeds of one or more Equity Offerings, provided that: (b) at least 65% of the aggregate principal amount of Notes issued under the Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its Subsidiaries); and (c) the redemption occurs within 90 days of the date of the closing of such Equity Offering. (d) Except pursuant to the preceding paragraph, the Notes may not be redeemed at the option of the Company prior to April 1, 2007. (e) After April 1, 2007, the Company may redeem all or a part of the Notes upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, and Additional Interest, if any, thereon, to the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below: Year Percentage ---- ---------- 2007 .............................................. 105.6% 2008 .............................................. 103.7% 2009 .............................................. 101.8% 2010 and thereafter ............................... 100.000% (6) Mandatory Redemption. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. (7) Repurchase At Option of Holder A2-4 (a) If there is a Change of Control, the Company will be required to make an offer (a "Change of Control Offer") to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Additional Interest, if any, thereon, if any, to the date of purchase ( the "Change of Control Payment"). Within 30 days following any Change of Control, the Company will mail a notice to each Holder setting forth the procedures governing the Change of Control Offer as required by the Indenture. (b) If the Company or a Subsidiary consummates any Asset Sales, within five days of each date on which the aggregate amount of Excess Proceeds exceeds $5 million, the Company will commence an offer to all Holders of Notes and all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in the Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets (an "Asset Sale Offer") pursuant to Section 3.09 of the Indenture to purchase the maximum principal amount of Notes and other pari passu Indebtedness that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Additional Interest thereon, if any, to the date fixed for the closing of such offer and other pari passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company (or such Subsidiary) may use such deficiency for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and other pari passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and other pari passu Indebtedness to be purchased on a pro rata basis. Holders of Notes that are the subject of an offer to purchase will receive an Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Notes purchased by completing the form entitled "Option of Holder to Elect Purchase" on the reverse of the Notes. (8) Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption. (9) Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, the Company need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. This Regulation S Temporary Global Note is exchangeable in whole or in part for one or more Global Notes only (i) on or after the termination of the 40-day restricted period (as defined in Regulation S) and (ii) upon presentation of certificates (accompanied by an Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon exchange of this Regulation S Temporary Global Note for one or more Global Notes, the Trustee shall cancel this Regulation S Temporary Global Note. A2-5 (10) Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. (11) Amendment, Supplement and Waiver. Subject to certain exceptions, the Indenture, the Subsidiary Guarantees or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes voting as a single class, and any existing default or compliance with any provision of the Indenture, the Subsidiary Guarantees or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes voting as a single class. Without the consent of any Holder of a Note, the Indenture, the Subsidiary Guarantees or the Notes may be amended or supplemented to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's or any Guarantor's obligations to Holders of the Notes in case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Notes or that does not adversely affect the legal rights under the Indenture of any such Holder, to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act to provide for the issuance of Additional Notes in accordance with the limitations set forth in the Indenture , or to allow any Guarantor to execute a supplemental indenture to the Indenture and/or a Subsidiary Guarantee with respect to the Notes. (12) Defaults and Remedies. Events of Default include: (i) default for 30 days in the payment when due of interest or Additional Interest on the Notes; (ii) default in payment when due of principal of or premium, if any, on the Notes when the same becomes due and payable at maturity, upon redemption (including in connection with an offer to purchase) or otherwise, (iii) failure by the Company to comply with Section 4.07, 4.15 or 5.01 of the Indenture; (iv) failure by the Company for 30 days after notice to comply with Sections 4.09 or 4.10 of the Indenture; (v) failure by the Company for 60 days after notice to the Company by the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding voting as a single class to comply with certain other agreements in the Indenture, the Notes; (vi) default under certain other agreements relating to Indebtedness of the Company which default (x) is caused by a failure to pay principal of, or interest or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default, or (y) results in the acceleration of such Indebtedness prior to its express maturity; (vii) certain final judgments for the payment of money that remain undischarged for a period of 60 days; (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries; and (ix) except as permitted by the 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 Guarantor or any Person acting on its behalf shall deny or disaffirm its obligations under such Guarantor's Subsidiary Guarantee. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Notes will become due and payable without further action or notice. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of A2-6 Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. (13) SUBORDINATION. Payment of principal, interest and premium and Additional Interest, if any, on the Notes is subordinated to the prior payment of Senior Debt on the terms provided in the Indenture. (14) TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not the Trustee. (15) NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or stockholder, of the Company or any of the Guarantors, as such, will not have any liability for any obligations of the Company or such Guarantor under the Notes, the Subsidiary Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. (16) AUTHENTICATION. This Note will not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. (17) 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). (18) ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Restricted Global Notes and Restricted Definitive Notes will have all the rights set forth in the A/B Exchange Registration Rights Agreement dated as of April 9, 2002, among the Company, the Guarantors and the other parties named on the signature pages thereof (the "Registration Rights Agreement"). (19) CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. (20) THE INTERNAL LAW OF THE STATE OF NEW YORK WILL GOVERN AND BE USED TO CONSTRUE THIS NOTE AND THE SUBSIDIARY GUARANTEES 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. A2-7 The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Attention: Brad A. Bearnson, Esq. A2-8 Assignment Form To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to: __________________________________ (Insert assignee's legal name) ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint ________________________________________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: _______________ Your Signature: _______________________________ (Sign exactly as your name appears on the face of this Note) Signature Guarantee*: _________________________ * Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A2-1 Option of Holder to Elect Purchase If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or 4.15 of the Indenture, check the appropriate box below: Section 4.10 Section 4.15 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the amount you elect to have purchased: $_________________ Date: _______________ Your Signature: _________________________ (Sign exactly as your name appears on the face of this Note) Tax Identification No.: _________________ Signature Guarantee*: _________________________ * Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor acceptable to the Trustee). A2-1 SCHEDULE OF EXCHANGES OF REGULATION S TEMPORARY GLOBAL NOTE The following exchanges of a part of this Regulation S Temporary Global Note for an interest in another Global Note, or of other Restricted Global Notes for an interest in this Regulation S Temporary Global Note, have been made:
Principal Amount at maturity of this Amount of decrease Amount of increase in Global Note Signature of in Principal Amount Principal Amount following such authorized signatory at maturity of at maturity of decrease of Trustee or Date of Exchange this Global Note this Global Note (or increase) Custodian ---------------- ---------------- ---------------- ------------- ---------
A2-1 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 [Registrar address block] Re: 11.25% Senior Subordinated Notes due 2012 Reference is hereby made to the Indenture, dated as of April 9, 2002 (the "Indenture"), among ICON Health & Fitness, Inc., as issuer (the "Company"), the Guarantors named on the signature pages thereto and The Bank of New York, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ___________________, (the "Transferor") owns and proposes to transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in the principal amount of $___________ in such Note[s] or interests (the "Transfer"), to ___________________________ (the "Transferee"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: [CHECK ALL THAT APPLY] 1. [_] Check if Transferee will take delivery of a beneficial interest --------------------------------------------------------------- in the 144A Global Note or a Definitive Note Pursuant to Rule 144A. The Transfer - ------------------------------------------------------------------ is being effected pursuant to and in accordance with Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Note is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Definitive Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the 144A Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 2. [_] Check if Transferee will take delivery of a beneficial interest --------------------------------------------------------------- in the Temporary Regulation S Global Note, the Regulation S Global Note or a - ---------------------------------------------------------------------------- Definitive Note pursuant to Regulation S. The Transfer is being effected - ---------------------------------------- pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a Person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Restricted Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchasers). Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred B-1 beneficial interest or Definitive Note will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Regulation S Global Note, the Temporary Regulation S Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 3. [_] Check and complete if Transferee will take delivery of a -------------------------------------------------------- beneficial interest in the IAI Global Note or a Definitive Note pursuant to any - ------------------------------------------------------------------------------- provision of the Securities Act other than Rule 144A or Regulation S. The - -------------------------------------------------------------------- Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Definitive Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) such Transfer is being effected to the Company or a subsidiary thereof; or (c) such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act; or (d) such Transfer is being effected to an Institutional Accredited Investor and pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor hereby further certifies that it has not engaged in any general solicitation within the meaning of Regulation D under the Securities Act and the Transfer complies with the transfer restrictions applicable to beneficial interests in a Restricted Global Note or Restricted Definitive Notes and the requirements of the exemption claimed, which certification is supported by (1) a certificate executed by the Transferee in the form of Exhibit D to the Indenture and (2) an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that such Transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the IAI Global Note and/or the Definitive Notes and in the Indenture and the Securities Act. 4. [_] Check if Transferee will take delivery of a beneficial interest --------------------------------------------------------------- in an Unrestricted Global Note or of an Unrestricted Definitive Note. - -------------------------------------------------------------------- (a) [_] Check if Transfer is pursuant to Rule 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private B-2 Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (b) [_] Check if Transfer is Pursuant to Regulation S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (c) [_] Check if Transfer is Pursuant to Other Exemption. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes or Restricted Definitive Notes and in the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. _____________________________________ [Insert Name of Transferor] By:__________________________________ Name: Title: Dated: ____________________ B-3 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (a) OR (b)] (a) [_] a beneficial interest in the: (i) [_] 144A Global Note (CUSIP _________), or (ii) [_] Regulation S Global Note (CUSIP _________), or (iii) [_] IAI Global Note (CUSIP _________); or (b) [_] a Restricted Definitive Note. 2. After the Transfer the Transferee will hold: [CHECK ONE] (a) [_] a beneficial interest in the: (i) [_] 144A Global Note (CUSIP _________), or (ii) [_] Regulation S Global Note (CUSIP _________), or (iii) [_] IAI Global Note (CUSIP _________); or (iv) [_] Unrestricted Global Note (CUSIP _________); or (b) [_] a Restricted Definitive Note; or (c) [_] an Unrestricted Definitive Note, in accordance with the terms of the Indenture. B-1 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 [Registrar address block] Re: 11.25% Senior Subordinated Notes due 2012 (CUSIP [44929HAE8] [U44931AA8]) Reference is hereby made to the Indenture, dated as of April 9, 2002 (the "Indenture"), among ICON Health & Fitness, Inc., as issuer (the "Company"), the Guarantors named on the signature pages thereto and The Bank of New York, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. __________________________, (the "Owner") owns and proposes to exchange the Note[s] or interest in such Note[s] specified herein, in the principal amount of $____________ in such Note[s] or interests (the "Exchange"). In connection with the Exchange, the Owner hereby certifies that: 1. Exchange of Restricted Definitive Notes or Beneficial Interests --------------------------------------------------------------- in a Restricted Global Note for Unrestricted Definitive Notes or Beneficial - --------------------------------------------------------------------------- Interests in an Unrestricted Global Note - ---------------------------------------- (a) [_] Check if Exchange is from beneficial interest in a Restricted Global Note to beneficial interest in an Unrestricted Global Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the Securities Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (b) [_] Check if Exchange is from beneficial interest in a Restricted Global Note to Unrestricted Definitive Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c) [_] Check if Exchange is from Restricted Definitive Note to beneficial interest in an Unrestricted Global Note. In connection with the Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in C-1 compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d) [_] Check if Exchange is from Restricted Definitive Note to Unrestricted Definitive Note. In connection with the Owner's Exchange of a Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. Exchange of Restricted Definitive Notes or Beneficial Interests --------------------------------------------------------------- in Restricted Global Notes for Restricted Definitive Notes or Beneficial - ------------------------------------------------------------------------ Interests in Restricted Global Notes - ------------------------------------ (a) [_] Check if Exchange is from beneficial interest in a Restricted Global Note to Restricted Definitive Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a Restricted Definitive Note with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Note is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Definitive Note issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Note and in the Indenture and the Securities Act. (b) [_] Check if Exchange is from Restricted Definitive Note to beneficial interest in a Restricted Global Note. In connection with the Exchange of the Owner's Restricted Definitive Note for a beneficial interest in the [CHECK ONE] [_] 144A Global Note, [_] Regulation S Global Note, [_] IAI Global Note with an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer and (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Note and in the Indenture and the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Company. ___________________________________ [Insert Name of Transferor] By:________________________________ Name: Title: C-2 Dated: ______________________ C-3 EXHIBIT D FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 [Registrar address block] Re: 11.25% Senior Subordinated Notes due 2012 Reference is hereby made to the Indenture, dated as of April 9, 2002 (the "Indenture"), among ICON Health & Fitness, Inc., as issuer (the "Company"), the guarantors named on the signature pages thereto and The Bank of New York, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with our proposed purchase of $____________ aggregate principal amount of: (a) [_] a beneficial interest in a Global Note, or (b) [_] a Definitive Note, we confirm that: 1. We understand that any subsequent transfer of the Notes or any interest therein is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes or any interest therein except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes and any interest therein may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell the Notes or any interest therein, we will do so only (A) to the Company or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to you and to the Company a signed letter substantially in the form of this letter and an Opinion of Counsel in form reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to the provisions of Rule 144(k) under the Securities Act or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any Person purchasing the Definitive Note or beneficial interest in a Global Note from us in a transaction meeting the requirements of clauses (A) through (E) of this paragraph a notice advising such purchaser that resales thereof are restricted as stated herein. D-1 3. We understand that, on any proposed resale of the Notes or beneficial interest therein, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and 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 Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes or beneficial interest therein purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. ________________________________________ [Insert Name of Accredited Investor] By:_____________________________________ Name: Title: Dated: _______________________ D-1 EXHIBIT E FORM OF NOTATION OF GUARANTEE For value received, each 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 April 9, 2002 (the "Indenture") among ICON Health & Fitness, Inc., (the "Company"), the Guarantors listed on Schedule I thereto and The Bank of New York, as trustee (the "Trustee"), (a) the due and punctual payment of the principal of, premium and Additional Interest, if any, and interest on the Notes (as defined in the Indenture), whether at maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on overdue principal of and interest on the Notes, if any, if lawful, 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 Notes 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 Guarantors to the Holders of Notes and to the Trustee pursuant to the Subsidiary Guarantee and the Indenture are expressly set forth in Article 11 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Subsidiary Guarantee. Each Holder of a Note, 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 Note in accordance with the provisions of the Indenture. [Name of Guarantor(s)] By:___________________________________________ Name: Title: E-1 EXHIBIT E1 FORM OF NOTATION OF GUARANTEE (QUEBEC GUARANTOR) For value received, the Quebec Guarantor (which term includes any successor Person under the Indenture) has unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture dated as of April 9, 2002 (the "Indenture") among ICON Health & Fitness, Inc. (the "Company"), the Guarantors (including the Quebec Guarantor) listed on Schedule I thereto and The Bank of New York, as trustee (the "Trustee") the prompt payment and performance when due of all obligations of the New Brunswick Guarantor under the Subsidiary Guarantee of the New Brunswick Guarantor set forth in Section 11.01(a) of the Indenture. The obligations of the Quebec Guarantor to the Holders of Notes and to the Trustee pursuant to the Subsidiary Guarantee of the Quebec Guarantor and pursuant to the Indenture are expressly set forth in Article 11 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Subsidiary Guarantee of the Quebec Guarantor. Each Holder of a Note, 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 Note in accordance with the provisions of this Indenture. ICON du Canada Inc. By: _______________________________ Name: Title: E1-1 EXHIBIT F FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED BY SUBSEQUENT GUARANTORS Supplemental Indenture (this "Supplemental Indenture"), dated as of ________________, 200__, among __________________ (the "Guaranteeing Subsidiary"), a subsidiary of ICON Health & Fitness, Inc. (or its permitted successor), a Delaware corporation (the "Company"), the Company, the other Guarantors (as defined in the Indenture referred to herein) and The Bank of New York, 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 April 9, 2002 providing for the issuance of an aggregate principal amount of up to $155,000,000 of 11.25% Senior Subordinated Notes due 2012 (the "Notes"); 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 Notes and the Indenture on the terms and conditions set forth herein (the "Subsidiary Guarantee"); and WHEREAS, pursuant to Section 9.01 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 Notes 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 Guarantors named in the Indenture, to jointly and severally Guarantee to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, the Notes or the obligations of the Company hereunder or thereunder, that: (i) the principal of, and premium and Additional Interest, if any, and interest on the Notes 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 Notes, 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 Notes 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 Guarantors shall be jointly and severally obligated to pay the same immediately. F-1 EXHIBIT F (b) The obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes 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 Notes and the Indenture, and the Guaranteeing Subsidiary accepts all obligations of a Guarantor under the Indenture. (e) If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantors, or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the 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 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 6 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 6 of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Subsidiary Guarantee. (h) The Guarantors shall have the right to seek contribution from any non-paying 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 11.02 of the Indenture, after giving effect to any maximum amount and all 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 Guarantor in respect of the obligations of such other Guarantor under Article 11 of the Indenture, this new Subsidiary Guarantee shall be limited to the maximum amount permissible such that the obligations of such Guarantor under this Subsidiary Guarantee will not constitute 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 any failure to endorse on each Note a notation of such Subsidiary Guarantee. F-2 EXHIBIT F 4. Guaranteeing Subsidiary May Consolidate, Etc. on Certain Terms. (a) The Guaranteeing Subsidiary may not sell or otherwise dispose of all substantially all of its assets to, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person) another Person, other than the Company or another Guarantor unless: (i) immediately after giving effect to such transaction, no Default or Event of Default exists; and (ii) either (A) subject to Sections 11.04 and 11.05 of the Indenture, the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger unconditionally assumes all the obligations of that Guarantor, pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Notes, the Indenture and the Subsidiary Guarantee on the terms set forth herein or therein; or (B) the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture, including without limitation, Section 4.10 thereof. (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 Notes and the due and punctual performance of all of the covenants and conditions of the Indenture to be performed by the Guarantor, such successor Person shall succeed to and be substituted for the Guarantor with the same effect as if it had been named herein as a Guarantor. Such successor Person thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Notes issuable under the Indenture 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 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. (c) Except as set forth in Articles 4 and 5 and Section 11.05 of Article 11 of the Indenture, and notwithstanding clauses (a) and (b) above, nothing contained in the Indenture or in any of the Notes shall prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor, or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Company or another Guarantor. 5. Releases. (a) In the event of any sale or other disposition of all or substantially all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, in each case to a Person that is not (either before or after giving effect to such transaction) a Restricted Subsidiary of the Company, then such Guarantor (in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all of the capital stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor) will be released and relieved of any F-3 EXHIBIT F obligations under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture, including without limitation Section 4.10 of the Indenture. 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 4.10 of the Indenture, the Trustee shall execute any documents reasonably required in order to evidence the release of any Guarantor from its obligations under its Subsidiary Guarantee. (b) Any Guarantor not released from its obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Guarantor under the Indenture as provided in Article 11 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 Notes, 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 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. 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. F-4 EXHIBIT F 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: _______________, 20___ [Guaranteeing Subsidiary] By: _______________________________ Name: Title: ICON HEALTH & FITNESS, INC. By: _______________________________ Name: Title: [Existing Guarantors] By: _______________________________ Name: Title: THE BANK OF NEW YORK, as Trustee By: _______________________________ Name: Title: F-5 EX-10.9 7 dex109.txt EXHIBIT 10.9 - PURCHASE AGREEMENT DTD 03/28/02 Exhibit 10.9 EXECUTION COPY $155,000,000 ICON HEALTH & FITNESS, INC. 11.25% Senior Subordinated Notes due 2012 PURCHASE AGREEMENT ------------------ March 28, 2002 CREDIT SUISSE FIRST BOSTON CORPORATION J. P. MORGAN SECURITIES INC. FLEET SECURITIES, INC. c/o Credit Suisse First Boston Corporation, As Representative of the Several Purchasers Eleven Madison Avenue, New York, New York 10010-3629 Dear Sirs: 1. Introductory. ICON Health & Fitness, Inc., a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several initial purchasers named in Schedule A hereto (the "Initial Purchasers") $155,000,000 principal amount of its 11.25% Senior Subordinated Notes due 2012 (the "Offered Securities") to be issued under an indenture, dated as of April 9, 2002 (the "Indenture"), between the Company, the Guarantors (as defined below) and The Bank of New York, as Trustee on a private placement basis pursuant to an exemption under Section 4(2) of the United States Securities Act of 1933, as amended (the "Securities Act"). The Company's obligations under the Offered Securities, including the due and punctual payment of interest on the Offered Securities, shall be unconditionally guaranteed (the "Guarantee") by Jumpking, Inc., a Utah corporation ("Jumpking"), Universal Technical Services, a Utah corporation ("UTS"), ICON International Holdings, Inc., a Delaware corporation ("ICON International"), ICON IP, Inc., a Delaware corporation ("ICON IP"), Free Motion Fitness, Inc., a Utah corporation ("Free Motion"), NordicTrack, Inc., a Utah corporation ("NordicTrack"), 510152 N.B. Ltd., a New Brunswick corporation ("N.B. Ltd.") and ICON du Canada Inc., a Quebec corporation ("ICON Canada", whose Guarantee shall consist of the guarantee of the obligations of N.B. Ltd., which in turn will undertake, pursuant to its Guarantee, to guarantee the Company's obligations under the Offered Securities), and each of the Company's future domestic subsidiaries (each, a "Guarantor"; ICON International and ICON IP, together, 1 the "Delaware Guarantors"; Jumpking, UTS, Free Motion and NordicTrack, together, the "Utah Guarantors"; N.B. Ltd. and ICON Canada, together, the "Canadian Guarantors"; the Delaware Guarantors, the Utah Guarantors and the Canadian Guarantors, together, the "Guarantors"). As used herein, the term "Offered Securities" shall include the Guarantees thereof by the Guarantors, unless the context otherwise requires. Holders (including subsequent transferees) of the Offered Securities will have the registration rights set forth in the registration rights agreement (the "Registration Rights Agreement"), to be dated the Closing Date, in substantially the form of Exhibit I hereto, for so long as such Offered Securities constitute "Transfer Restricted Securities" (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Company and the Guarantors will agree to file with the Securities and Exchange Commission (the "Commission") under the circumstances set forth therein, (i) a registration statement under the Securities Act (the "Exchange Offer Registration Statement") relating to the Company's 11.25% Senior Subordinated Notes in a like aggregate principal amount as the Offered Securities originally issued under the Indenture, identical in all material respects to the Offered Securities and the Guarantees and registered under the Securities Act (the "Exchange Notes" and the "Exchange Guarantees," together, the "Exchange Securities") to be offered in exchange for the Offered Securities (such offer to exchange being referred to as the "Exchange Offer") and the Guarantees thereof and (ii) a shelf registration statement pursuant to Rule 415 under the Securities Act (the "Shelf Registration Statement" and, together with the Exchange Offer Registration Statement, the "Registration Statements") relating to the resale by certain holders of the Offered Securities and to use its best efforts to cause such Registration Statements to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement and to consummate the Exchange Offer. The Offered Securities and the Exchange Securities are referred to collectively as the "Securities." 2. Representations and Warranties of the Company. The Company and each of the Guarantors, jointly and severally, represents and warrants to, and agrees with, the Initial Purchasers that: (a) A preliminary offering circular and an offering circular relating to the Offered Securities to be offered by the Company and the Guarantors have been prepared by the Company and the Guarantors. Such preliminary offering circular (the "Preliminary Offering Circular") and offering circular (the "Offering Circular"), as supplemented as of the date of this Agreement, are hereinafter collectively referred to as the "Offering Document." On the date of this Agreement, the Offering Document does not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from the Offering Document based upon written information furnished to the Company by any Initial Purchaser through Credit Suisse First Boston Corporation ("CSFBC") specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) hereof. (b) No order or decree preventing the use of the Offering Document, or any order asserting that the transactions contemplated by this Agreement are subject to the 2 registration requirements of the Securities Act, has been issued and no proceeding for that purpose has commenced or is pending or, to the knowledge of the Company or any of the Guarantors, is contemplated. (c) The market-related and customer-related data and estimates included under the captions "Summary" and "Business" in the Offering Document are based on or derived from sources which the Company and each of the Guarantors believe to be reliable. (d) The Offered Securities have been duly and validly authorized by the Company and when duly executed by the Company in accordance with the terms of the Indenture and, assuming due authentication of the Offered Securities by the Trustee, upon delivery to the Initial Purchasers against payment therefor in accordance with the terms hereof, will have been validly issued and delivered, and will constitute valid and legally binding obligations of the Company entitled to the benefits of the Indenture, enforceable against the Company in accordance with their terms, subject to the qualification that the enforceability of the Company's obligations thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). The Offered Securities will conform to the description thereof in the Offering Document. (e) The Exchange Notes have been duly and validly authorized by the Company and if and when duly issued and authenticated in accordance with the terms of the Indenture and delivered in accordance with the Registration Rights Agreement, will constitute valid and legally binding obligations of the Company entitled to the benefits of the Indenture, enforceable against the Company in accordance with their terms, subject to the qualification that the enforceability of the Company's obligations thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). (f) The Guarantees have been duly and validly authorized by the Guarantors and when duly executed and delivered by the Guarantors in accordance with the terms of the Indenture and upon the due execution, authentication and delivery of the Offered Securities in accordance with the Indenture and the issuance of the Offered Securities in the sale to the Initial Purchasers contemplated by this Agreement, will constitute valid and legally binding obligations of the Guarantors, enforceable against the Guarantors in accordance with their terms, subject to the qualification that the enforceability of the Guarantors' obligations thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). The Guarantees will conform to the description thereof in the Offering Document. (g) The Exchange Guarantees have been duly and validly authorized by the Guarantors and if and when duly executed and delivered by the Guarantors in accordance 3 with the terms of the Indenture and upon the due execution and authentication of the Exchange Notes in accordance with the Indenture and the issuance and delivery of the Exchange Notes contemplated by the Registration Rights Agreement, will constitute valid and legally binding obligations of the Guarantors, entitled to the benefits of the Indenture, enforceable against the Guarantors in accordance with their terms, subject to the qualification that the enforceability of the Guarantors' obligations thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). (h) The Company and each of the Guarantors has been duly incorporated and is an existing corporation in good standing under the laws of the state or jurisdiction in which such corporation is organized, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Document; and the Company and each of the Guarantors is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; except to the extent that any failure to so qualify would not individually or in the aggregate have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company, each of the Guarantors and any of their respective subsidiaries, taken as a whole ("Material Adverse Effect"). (i) Each subsidiary of the Company and the Guarantors has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Document; and each subsidiary of the Company and the Guarantors is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except to the extent that any failure to so qualify would not individually or in the aggregate have a Material Adverse Effect; all of the issued and outstanding capital stock of each subsidiary of the Company and the Guarantors has been duly authorized and validly issued and is fully paid and nonassessable; and, except as set forth in the Offering Document, the capital stock of each subsidiary owned by the Company and the Guarantors, directly or through subsidiaries, is owned free from liens, encumbrances and defects. (j) The entities listed on Schedule B hereto are the only subsidiaries, direct or indirect, of the Company. (k) The Indenture has been duly and validly authorized by the Company and the Guarantors, and upon its execution and delivery and, assuming due authorization, execution and delivery by the Trustee, will constitute the valid and legally binding agreement of the Company and the Guarantors, enforceable against the Company and the Guarantors in accordance with its terms, subject to the qualification that the enforceability of the Company's and the Guarantors' obligations thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, 4 and other laws relating to or affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). No qualification of the Indenture under the Trust Indenture Act of 1939, as amended (the "1939 Act") is required in connection with the offer and sale of the Offered Securities contemplated hereby. The Indenture will conform to the description thereof in the Offering Document. (l) On the Closing Date, the Indenture will conform in all material respects to the requirements of the 1939 Act and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (m) Except as disclosed in the Offering Document, there are no contracts, agreements or understandings between the Company or any of the Guarantors and any person that would give rise to a valid claim against the Company, any Guarantor or the Initial Purchasers for a brokerage commission, finder's fee or other like payment in connection with the Offered Securities. (n) The Company and each of the Guarantors have all requisite corporate power and authority to enter into the Registration Rights Agreement. The Registration Rights Agreement has been duly authorized by the Company and the Guarantors and, when executed by the Company and the Guarantors in accordance with the terms hereof and thereof, will be validly executed and delivered and (assuming the due execution and delivery thereof by you), will be the valid and legally binding obligation of the Company and the Guarantors in accordance with the terms thereof, enforceable against the Company and the Guarantors in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditor's rights generally, by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law), and, as to rights of indemnification and contribution, by federal or state securities laws and principles of public policy. (o) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement, the Indenture or the Registration Rights Agreement in connection with the issuance and sale of the Offered Securities by the Company or the Guarantors, except (i) for the order of the Commission declaring the Exchange Offer Registration Statement or the Shelf Registration Statement effective, (ii) as may be required under the 1939 Act and (iii) as may be required under the securities or blue sky laws of certain jurisdictions. (p) The execution, delivery and performance of the Indenture, this Agreement and the Registration Rights Agreement, and the issuance and sale of the Offered Securities and compliance with the terms and provisions thereof will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company, any of the Guarantors or any of their respective subsidiaries or any of their properties, or any material agreement or instrument to which the Company, any of the Guarantors or any of their respective subsidiaries is a party or by 5 which the Company, any of the Guarantors or any of their respective subsidiaries is bound or to which any of the properties of the Company, any of the Guarantors or any of their respective subsidiaries is subject, or the charter or by-laws of the Company, any of the Guarantors or any of their respective subsidiaries, and the Company and each of the Guarantors has full corporate power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (q) This Agreement has been duly authorized, executed and delivered by the Company and each of the Guarantors. (r) Except as disclosed in the Offering Document, the Company, each of the Guarantors or any of their respective subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Offering Document, the Company, each of the Guarantors or any of their respective subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (s) The Company, each of the Guarantors and any of their respective subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company, any of the Guarantors or any of their respective subsidiaries, would individually or in the aggregate have a Material Adverse Effect. (t) No labor dispute with the employees of the Company, any of the Guarantors or any of their respective subsidiaries exists or, to the knowledge of the Company or any of the Guarantors, is imminent that might have a Material Adverse Effect. (u) The Company, each of the Guarantors or any of their respective subsidiaries own or possess or have the right to use, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, licenses, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or presently employed by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company, any of the Guarantors or any of their respective subsidiaries, would individually or in the aggregate have a Material Adverse Effect. (v) Except as disclosed in the Offering Document, neither the Company, any of the Guarantors nor any of their respective subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to 6 hazardous or toxic substances (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and neither the Company nor any of the Guarantors is aware of any pending investigation which might lead to such a claim. (w) Except as disclosed in the Offering Document, there are no pending actions, suits or proceedings against or, to the Company's knowledge, affecting the Company, any of the Guarantors, any of their respective subsidiaries or any of their respective properties that, if determined adversely to the Company, any of the Guarantors or any of their respective subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company or any of the Guarantors to perform their respective obligations under the Indenture, this Agreement or the Registration Rights Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and to the Company's or any of the Guarantor's knowledge no such actions, suits or proceedings are threatened or contemplated. (x) The financial statements included in the Offering Document present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis; and the assumptions used in preparing the pro forma financial statements included in the Offering Document provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (y) Except as disclosed in the Offering Document, since the date of the latest audited financial statements included in the Offering Document, neither the Company, any Guarantor nor any of their respective subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree and there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company, any of the Guarantors or any of their respective subsidiaries, and, except as disclosed in or contemplated by the Offering Document, there has been no dividend or distribution of any kind declared, paid or made by the Company or any of the Guarantors on any class of its capital stock. (z) The Company is not an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940, as amended and the rules and regulations of the Commission thereunder (the "Investment Company Act"); and the 7 Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Offering Document, will not be an "investment company" as defined in the Investment Company Act. (aa) No securities of the same class (within the meaning of Rule 144A(d)(3) under the Securities Act) as the Offered Securities are listed on any national securities exchange registered under Section 6 of the United States Securities Exchange Act of 1934 (the "Exchange Act") or quoted in a U.S. automated inter-dealer quotation system. (bb) The offer and sale of the Offered Securities by the Company to the Initial Purchasers in the manner contemplated by this Agreement will be exempt from the registration requirements of the Securities Act by reason of Section 4(2) thereof and Regulation S thereunder ("Regulation S"); and it is not necessary to qualify an indenture in respect of the Offered Securities under the Trust Indenture Act. (cc) Neither the Company, any of the Guarantors nor any of their respective affiliates, nor any person acting on its or their behalf (i) has, within the six-month period immediately prior to the date hereof, offered or sold in the United States or to any U.S. person (as such terms are defined in Regulation S) the Offered Securities or any security of the same class or series as the Offered Securities or (ii) has offered or will offer or sell the Offered Securities (A) in the United States by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or (B) with respect to any securities sold in reliance on Rule 903 of Regulation S, by means of any directed selling efforts within the meaning of Rule 902(c) of Regulation S. The Company, each of the Guarantors and any of their respective affiliates and any person acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulation S. The Company and each of the Guarantors has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities except for this Agreement. (dd) The Offering Document contains all the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Securities Act. (ee) There are no contracts, agreements or understandings between the Company or any Guarantor and any person (other than the Registration Rights Agreement and the registration rights agreement entered into by the Company in connection with the issuance of the Company's 12% Senior Subordinated Notes due 2005) granting such person the right to require the Company or such Guarantor to file a registration statement under the Securities Act with respect to any securities of the Company or such Guarantor owned or to be owned by such person or to require the Company or such Guarantor to include such securities with the Offered Securities and Guarantees registered pursuant to the Registration Rights Agreement or with any securities being registered pursuant to any other registration statement filed by the Company or any Guarantor under the Securities Act. (ff) The Company, each of the Guarantors and each of their respective subsidiaries carry, or are covered by, insurance in such amounts and covering such risks 8 as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar businesses in similar industries. (gg) No relationship, direct or indirect, required to be described under Item 404 of Regulation S-K, exists between or among the Company on the one hand, and the directors, officers or stockholders of the Company on the other hand, which is not described in the Offering Document. (hh) The Company is in compliance in all material respects with all presently applicable provisions of ERISA; no "reportable event" (as defined in ERISA), has occurred with respect to any "pension plan" (as defined in ERISA), for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (ii) The Company and each of the Guarantors have filed all federal, state and local income and franchise tax returns required to be filed through the date hereof and have paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company, any of the Guarantors or any of their respective subsidiaries which has had (nor does the Company or any of the Guarantors have any knowledge of any tax deficiency which, if determined adversely to the Company, any of the Guarantors or any of their respective subsidiaries, might have) a Material Adverse Effect. (jj) Since the date as of which information is given in the Preliminary Offering Circular through the date hereof, and except as may otherwise be disclosed or contemplated in the Offering Document, neither the Company nor any of the Guarantors have (i) issued or granted any securities, (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock. (kk) The Company and each of the Guarantors (i) make and keep books and records which are accurate in all material respects and (ii) maintain internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to their respective assets is permitted only in accordance with management's authorization and (D) the reported accountability for their respective assets is compared with existing assets at reasonable intervals. (ll) Neither the Company, the Guarantors nor any of their respective subsidiaries (i) is in violation of its respective charter or by-laws (ii) is in default in any material 9 respect, and no event has occurred which, with notice or lapse of time or both would constitute such a material default, in the due performance or observance of any obligation, agreement, covenant or condition contained in any material indenture, loan agreement, mortgage, deed of trust, lease or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (iii) is in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business. (mm) Neither the Company nor any of the Guarantors nor any of their respective subsidiaries, nor, to the Company's or any Guarantor's knowledge, any director, officer, agent, employee or other person associated with or acting on behalf of the Company, any of the Guarantors or any of their respective subsidiaries, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (nn) None of the transactions contemplated by this Agreement (including, without limitation, the use of the proceeds from the sale of the Offering Securities), will violate or result in a violation of Section 7 of the Exchange Act, or any regulation promulgated thereunder, including, without limitation, Regulations T, U, and X of the Board of Governors of the Federal Reserve System. (oo) No "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act (i) has imposed (or has informed the Company or any Guarantor that it is considering imposing) any condition (financial or otherwise) on the Company's or any Guarantor's retaining any rating assigned to the Company or any Guarantor, any securities of the Company or any Guarantor or (ii) has indicated to the Company or any Guarantor that it is considering (a) the downgrading, suspension, or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating so assigned or (b) any unfavorable change in the outlook for any rating of the Company, any Guarantor or any securities of the Company or any Guarantor. (pp) No form of general solicitation or general advertising (as defined in Regulation D under the Securities Act) was used by the Company, the Guarantors or any of their respective representatives (other than the Initial Purchasers, as to whom the Company and the Guarantors make no representation) in connection with the offer and sale of the Offered Securities contemplated hereby, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 10 (qq) The Offered Securities offered and sold in reliance on Regulation S have been and will be offered and sold only in offshore transactions. (rr) None of the Company, the Guarantors nor any of their respective affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company and the Guarantors make no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S with respect to the Offered Securities or the Subsidiary Guarantees. (ss) The sale of the Offered Securities pursuant to Regulation S is not part of a plan or scheme to evade the registration provisions of the Securities Act. (tt) The Credit Agreement (as defined in the Indenture) has been duly and validly authorized by the Company and the Guarantors, and upon its execution and delivery and, assuming due authorization, execution and delivery by the lenders party thereto, will constitute the valid and legally binding agreement of the Company and the Guarantors, enforceable against the Company and the Guarantors in accordance with its terms, subject to the qualification that the enforceability of the Company's and the Guarantors' obligations thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Initial Purchasers and the Initial Purchasers agree, severally and not jointly, to purchase from the Company, at a purchase price of 95.964% of the principal amount thereof plus accrued interest from April 9, 2002 to the Closing Date (as hereinafter defined), the respective principal amounts of Securities set forth opposite the names of the several Initial Purchasers in Schedule A hereto. The Company will deliver against payment of the purchase price the Offered Securities to be offered and sold by the Initial Purchasers in reliance on Regulation S (the "Regulation S Securities") in the form of one or more temporary global Securities in registered form without interest coupons (the "Regulation S Temporary Global Securities") which will be deposited with the Trustee as custodian for The Depository Trust Company ("DTC") for the respective accounts of the DTC participants for Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear"), and Clearstream Banking, societe anonyme ("Clearstream, Luxembourg") and registered in the name of Cede & Co., as nominee for DTC. The Company will deliver against payment of the purchase price the Offered Securities to be purchased by the Initial Purchasers hereunder and to be offered and sold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "144A Securities") in the form of one permanent global security in definitive form without interest coupons (the "Restricted Global Securities") deposited with the Trustee as custodian for DTC and registered in the name of Cede & Co., as nominee for DTC. The Regulation S Temporary Global Securities and the Restricted Global Securities shall be assigned separate CUSIP numbers. The Restricted Global Securities shall include the legend regarding restrictions on transfer set forth under "Transfer Restrictions" in the Offering 11 Document. Until the termination of the restricted period (as defined in Regulation S) with respect to the offering of the Offered Securities, interests in the Regulation S Temporary Global Securities may only be held by the DTC participants for Euroclear and Clearstream, Luxembourg and may not be held in definitive form. Interests in any permanent global Securities will be held only in book-entry form through Euroclear, Clearstream, Luxembourg or DTC, as the case may be, except in the limited circumstances described in the Offering Document. Payment for the Regulation S Securities and the 144A Securities shall be made by the Initial Purchasers in Federal (same day) funds by wire transfer to an account at a bank acceptable to CSFBC drawn to the order of ICON Health & Fitness, Inc. at a closing to be conducted at the office of Latham & Watkins, 885 Third Avenue, New York, New York 10022 at 10:00 A.M., (New York time), on April 9, 2002, or at such other time not later than seven full business days thereafter as CSFBC and the Company determine, such time being herein referred to as the "Closing Date," against delivery to the Trustee as custodian for DTC of (i) the Regulation S Temporary Global Securities representing all of the Regulation S Securities for the respective accounts of the DTC participants for Euroclear and Clearstream, Luxembourg and (ii) the Restricted Global Securities representing all of the 144A Securities. The Regulation S Temporary Global Securities and the Restricted Global Securities will be made available for checking at the above office of Latham & Watkins at least 24 hours prior to the Closing Date. 4. Representations by Initial Purchasers; Resale by Initial Purchasers. (a) Each Initial Purchaser severally represents and warrants to the Company and each of the Guarantors that it is an "accredited investor" within the meaning of Regulation D under the Securities Act. (b) Each Initial Purchaser severally acknowledges that the Offered Securities have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S or pursuant to an exemption from the registration requirements of the Securities Act. Each Initial Purchaser severally represents and agrees that it has offered and sold the Offered Securities and will offer and sell the Offered Securities (i) as part of its distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 or Rule 144A under the Securities Act ("Rule 144A"). Accordingly, neither such Initial Purchaser nor its affiliates, nor any persons acting on its or their behalf, have engaged or will engage in any directed selling efforts with respect to the Offered Securities, and such Initial Purchaser, its affiliates and all persons acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulation S. Each Initial Purchaser severally agrees that, at or prior to confirmation of sale of the Offered Securities, other than a sale pursuant to Rule 144A, such Initial Purchaser will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases the Offered Securities from it during the restricted period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the "Securities Act") and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 12 days after the later of the date of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meanings given to them by Regulation S." Terms used in this subsection (b) have the meanings given to them by Regulation S. (c) Each Initial Purchaser severally agrees that it and each of its affiliates has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities except with the prior written consent of the Company. (d) Each Initial Purchaser severally agrees that it and each of its affiliates will not offer or sell the Offered Securities in the United States by means of any form of general solicitation or general advertising, within the meaning of Rule 502(c) under the Securities Act, including, but not limited to (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. Each Initial Purchaser severally agrees, with respect to initial resales made in reliance on Rule 144A of any of the Offered Securities, to deliver either with the confirmation of such resale or otherwise prior to settlement of such resale a notice to the effect that the resale of such Offered Securities has been made in reliance upon the exemption from the registration requirements of the Securities Act provided by Rule 144A. (e) Each Initial Purchaser severally represents and agrees that (i) it has not authorized the notes to be offered to the public in the United Kingdom, within the meaning of the Public Offers of Securities Regulations 1995, as amended, and (ii) no Offering Document may be passed on to any person in the United Kingdom unless that person is of a kind described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 or is a person to whom the document may otherwise lawfully be issued or passed on. The Offering Document is only directed at persons having professional experience in matters relating to investments and the offering described in the Offering Document is only available to such persons and only such persons will be permitted to participate in the offering. Persons who do not have professional experience in matters relating to investments should not rely on the Offering Document. All applicable provisions of the Financial Services and Markets Act 2000, as amended, must be complied with in respect of anything done in relation to the notes in, from or otherwise involving the United Kingdom. 5. Certain Agreements of the Company. The Company and each of the Guarantors, jointly and severally, agree with the Initial Purchasers that: (a) During such period as, in the opinion of Latham & Watkins, an Offering Document is required by law to be delivered in connection with Exempt Resales by the Initial Purchasers and in connection with market-making activities of the Initial Purchasers for so long as any Offered Securities are outstanding, the Company and each of the Guarantors will advise CSFBC promptly of any proposal to amend or supplement the Offering Document and will not effect such amendment or supplementation without CSFBC's consent (which consent shall not be unreasonably withheld). If, at any time 13 prior to the completion of the resale of the Offered Securities by the Initial Purchasers any event occurs as a result of which the Offering Document as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any such time to amend or supplement the Offering Document to comply with any applicable law, the Company and each of the Guarantors promptly will notify CSFBC of such event and promptly will prepare, at its own expense, an amendment or supplement which will correct such statement or omission or effect such compliance. Neither CSFBC's consent to, nor the Initial Purchasers' delivery to offerees or investors of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (b) The Company will furnish to CSFBC copies of the Offering Document and all amendments and supplements to such documents, in each case as soon as available and in such quantities as CSFBC requests. Subject to the Initial Purchasers' compliance with its representations and warranties and agreements set forth in Section 4 hereof, the Company and the Guarantors consent to the use of the Offering Document, and any amendments and supplements thereto required pursuant hereto, by the Initial Purchasers in connection with Exempt Resales. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish or cause to be furnished to CSFBC (and, upon request, to each of the other Initial Purchasers) and, upon request of holders and prospective purchasers of the Offered Securities, to such holders and purchasers, copies of the information required to be delivered to holders and prospective purchasers of the Offered Securities pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) in order to permit compliance with Rule 144A in connection with resales by such holders of the Offered Securities. The Company will pay the expenses of printing and distributing to the Initial Purchasers all such documents. (c) The Company and each of the Guarantors will use its best efforts to arrange for the qualification of the Offered Securities for sale and the determination of their eligibility for investment under the laws of such jurisdictions in the United States as CSFBC reasonably designates and will continue such qualifications in effect so long as required for the resale of the Offered Securities by the Initial Purchasers provided that neither the Company nor any of the Guarantors will be required to qualify as a foreign corporation or otherwise subject itself to taxation in any state in which it is not otherwise so qualified or subject, nor shall any of them be required to file a general consent to service of process in any such state. (d) During the period of ten years hereafter (or until the date of payment in full of the Offered Securities, if earlier), the Company and each of the Guarantors will furnish to CSFBC and, upon request, to each of the other Initial Purchasers as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company and each of the Guarantors will furnish to CSFBC and, upon request, to each of the other Initial Purchasers (i) as soon as available, a copy of each report and any definitive proxy statement of the Company and the Guarantors mailed to 14 stockholders and (ii) from time to time, such other information concerning the Company or any of the Guarantors as CSFBC may reasonably request. (e) During the period of two years after the Closing Date, the Company will, upon request, furnish to CSFBC, each of the other Initial Purchasers and any holder of Offered Securities a copy of the restrictions on transfer applicable to the Offered Securities. (f) During the period of two years after the Closing Date, the Company and each of the Guarantors will not, and will not permit any of its affiliates (as defined in Rule 144 under the Securities Act) to, resell any of the Offered Securities that have been reacquired by any of them. (g) During the period of two years after the Closing Date, the Company and each of the Guarantors will not be or become, an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act. (h) The Company and each of the Guarantors, jointly and severally, agree to pay all expenses incidental to the performance of their obligations under this Agreement, the Indenture and the Registration Rights Agreement including (i) the fees and expenses of the Trustee and its professional advisors; (ii) all expenses in connection with the execution, issue, authentication, packaging and initial delivery of the Offered Securities and, as applicable, the Exchange Securities, the preparation and printing of this Agreement, the Registration Rights Agreement, the Offered Securities, the Indenture, the Offering Document and amendments and supplements thereto, and any other document relating to the issuance, offer, sale and delivery of the Offered Securities and as applicable the Exchange Securities; (iii) the cost of qualifying the Offered Securities for trading in The PortalSM Market ("PORTAL") of The Nasdaq National Market Inc. and any expenses incidental thereto, (iv) the cost of any advertising approved by the Company in connection with the issue of the Offered Securities; (v) for any expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities or the Exchange Securities for sale under the laws of such jurisdictions in the United States as CSFBC designates and the printing of memoranda relating thereto; (vi) for any fees charged by investment rating agencies for the rating of the Securities or the Exchange Securities; and (vii) for expenses incurred in distributing the Offering Document (including any amendments and supplements thereto) to the Initial Purchasers. The Company and each of the Guarantors will also pay or reimburse the Initial Purchasers for all travel expenses of the Initial Purchasers (to the extent incurred by them) and the Company's officers and employees and any other expenses of the Initial Purchasers and the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities (i) In connection with the offering, until CSFBC shall have notified the Company and the other Initial Purchasers of the completion of the resale of the Offered Securities, neither the Company nor any of its affiliates has or will, either alone or with one or more other persons, bid for or purchase for any account in which it or any of its affiliates has a beneficial interest any Offered Securities or attempt to induce any person to purchase any 15 Offered Securities; and neither it nor any of its affiliates will make bids or purchases for the purpose of creating actual, or apparent, active trading in, or of raising the price of, the Offered Securities. (j) For a period of 180 days after the date of the initial offering of the Offered Securities by the Initial Purchasers, the Company and each of the Guarantors, without the prior written consent of CSFBC, will not offer, sell, contract to sell, pledge, or otherwise dispose of, directly or indirectly, any United States dollar-denominated debt securities issued or guaranteed by the Company or any Guarantor and having a maturity of more than one year from the date of issue. Neither the Company nor any Guarantor will at any time offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any securities under circumstances where such offer, sale, pledge, contract or disposition would cause the exemption afforded by Section 4(2) of the Securities Act or the safe harbor of Regulation S thereunder to cease to be applicable to the offer and sale of the Offered Securities. (k) The Company and each of the Guarantors will apply the net proceeds from the sale of the Offered Securities to be sold by it hereunder substantially in accordance with the description set forth in the Offering Document under the caption "Use of Proceeds." (l) Except as stated in this Agreement and in the Offering Document, neither the Company, any of the Guarantors nor any of their respective affiliates have taken, nor will any of them take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company or any of the Guarantors to facilitate the sale or resale of the Offered Securities. Except as permitted by the Securities Act, the Company and each of the Guarantors will not distribute any offering material in connection with resales of the Offered Securities. (m) The Company and each of the Guarantors will use their best efforts to permit the Offered Securities to be designated PORTAL securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. relating to trading in PORTAL and to permit the Offered Securities to be eligible for clearance and settlement through DTC. (n) The Company and the Guarantors have complied and will comply with all provisions of Florida Statutes Section 517.075 relating to issuers doing business with Cuba. (o) The Company and the Guarantors agree not to sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act), that would be integrated with the sale of the Offered Securities in a manner that would require the registration under the Securities Act of the sale to the Initial Purchasers or the resale of the Offered Securities. 16 (p) The Company and each of the Guarantors agree to comply with all the terms and conditions of the Registration Rights Agreement and all agreements set forth in the representation letters of the Company and each of the Guarantors to DTC relating to the approval of the Offered Securities by DTC for "book entry" transfer. (q) The Company and each of the Guarantors agree that prior to any registration of the Offered Securities pursuant to the Registration Rights Agreement, or at such earlier time as may be required, the Indenture shall be qualified under the 1939 Act and any necessary supplemental indentures will be entered into in connection therewith. (r) The Company and each of the Guarantors will not voluntarily claim, and will resist actively all attempts to claim, the benefit of any usury laws against holders of the Offered Securities. (s) For so long as any of the Offered Securities are outstanding and if, in the reasonable judgment of the Initial Purchasers or Latham & Watkins, the Initial Purchasers or any of their affiliates (as defined in the rules and regulations under the Securities Act) are required to deliver a prospectus (any such prospectus, a "Market Making Prospectus") in connection with sales of the Offered Securities, to (i) provide the Initial Purchasers and their affiliates, without charge, as many copies of the Market Making Prospectus as they may reasonably request, (ii) periodically amend the Offering Document and the Exchange Offer Registration Statement so that the information contained therein complies with the requirements of Section 10(a) of the Securities Act, (iii) amend the Exchange Offer Registration Statement or amend or supplement the Market Making Prospectus when necessary to reflect any material changes in the information provided therein and promptly file such amendment or supplement with the Commission, (iv) provide the Initial Purchasers and their affiliates with copies of each amendment or supplement so filed and such other documents, including opinions of counsel and "comfort" letters, as they may reasonably request and (v) indemnify the Initial Purchasers and their affiliates with respect to the Market Making Prospectus and, if applicable, contribute to any amount paid or payable by the Initial Purchasers and their affiliates in a manner substantially identical to that specified in Section 7 hereof (with appropriate modifications). The Company and each of the Guarantors consent to the use, subject to the provisions of the Securities Act and the state securities or Blue Sky laws of the jurisdictions in which the Offered Securities are offered by the Initial Purchasers, of each Market Making Prospectus. (t) The Company and each of the Guarantors will do and perform all things required or necessary to be done and performed under this Agreement by them prior to the Closing Date, and to satisfy all conditions precedent to the Initial Purchasers' obligations hereunder to purchase the Offered Securities. 6. Conditions of the Obligations of the Initial Purchasers. The obligations of the several Initial Purchasers to purchase and pay for the Offered Securities on the Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company and each of the Guarantors herein, to the accuracy of the statements of officers of the Company and each of the Guarantors made pursuant to the provisions hereof, to the performance by the Company and each of 17 the Guarantors of their respective obligations hereunder and to the following additional conditions precedent: (a) The Initial Purchasers shall have received a letter, dated the date of this Agreement, of PricewaterhouseCoopers LLP in form and substance satisfactory to the Initial Purchasers concerning the financial information set forth in the Offering Document. (b) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) a change in U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the judgment of CSFBC, be likely to prejudice materially the success of the proposed issue, sale or distribution of the Offered Securities, whether in the primary market or in respect of dealings in the secondary market, or (ii) (A) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company, any of the Guarantors and their respective subsidiaries which, in the judgment of a majority in interest of the Initial Purchasers including CSFBC, is so material and adverse as to make it impractical or inadvisable to proceed with completion of the offering or the sale of and payment for the Offered Securities; (B) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Securities Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating) or any announcement that the Company has been placed on negative outlook; (C) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (D) any banking moratorium declared by U.S. Federal or New York authorities; (E) any major disruption of settlements of securities; or (F) any attack on, any outbreak or escalation of hostilities or acts of terrorism involving the United States, any declaration of war by Congress or any other national or international calamity or emergency if, in the judgment of a majority in interest of the Purchasers including CSFBC, the effect of any such attack, outbreak, escalation, act, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the offering or the sale of and payment for the Offered Securities. (c) The Initial Purchasers shall have received an opinion, dated the Closing Date, of Hutchins, Wheeler & Dittmar, a Professional Corporation counsel for the Company, in form and substance satisfactory to the Initial Purchasers, to the effect that: (i) The Company and each of the Delaware Guarantors is a validly existing corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own its properties and conduct its business as described in the Offering Document; and, based solely on certificates of public officials, the Company and each of the Delaware Guarantors are duly qualified to do business as a foreign corporation in good standing in all other jurisdictions 18 identified by the Company (x) in which its ownership or lease of property or the conduct of its business requires such qualification, and (y) where the failure to so qualify could reasonably be anticipated to result in a Material Adverse Effect. (ii) The Offered Securities have been duly authorized, executed, authenticated and delivered by the Company and conform in all material respects to the description thereof contained in the Offering Document. (iii) The Indenture has been duly authorized, executed and delivered by the Company and each of the Delaware Guarantors. (iv) The Indenture conforms in all material respects to the requirements of the Trust Indenture Act, and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (v) The Exchange Notes have been duly authorized by the Company. (vi) The Guarantee to be endorsed on the Offered Securities by each of the Delaware Guarantors has been duly authorized by each such Delaware Guarantor, and has been duly executed and delivered by each such Delaware Guarantor and conforms to the description thereof contained in the Offering Document. (vii) The Exchange Guarantee to be endorsed on the Exchange Notes by each Delaware Guarantor has been duly authorized by each such Delaware Guarantor. (viii) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Offering Circular, will not be an "investment company" as defined in the Investment Company Act of 1940. (ix) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company or any Delaware Guarantor for the consummation of the transactions contemplated by this Agreement or the Registration Rights Agreement in connection with the issuance or sale of the Offered Securities by the Company or any Delaware Guarantor, except such as may be required under state securities laws and except for the order of the Commission declaring the Exchange Offer Registration Statement or the Shelf Registration Statement effective. (x) The execution, delivery and performance of the Indenture, this Agreement and the Registration Rights Agreement and the issuance and sale of the Offered Securities and compliance with the terms and provisions thereof will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, rule, regulation or, to such counsel's knowledge, order of any governmental agency or body or any court having jurisdiction over the Company 19 or any of the Delaware Guarantors or any of their respective properties, or any agreement identified to such counsel by the Company as material and listed on a Schedule attached to such counsel's opinion to which the Company or any of the Delaware Guarantors is a party or by which the Company or any of the Delaware Guarantors is bound or to which any of the properties of the Company or any of the Delaware Guarantors is subject, or the charter or by-laws of the Company or any of the Delaware Guarantors, and the Company and each of the Delaware Guarantors has full corporate power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (xi) Such counsel have no reason to believe that the Offering Circular, or any amendment or supplement thereto, as of the date hereof and as of the Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no opinion as to the financial statements or other financial or accounting information contained in the Offering Circular. (xii) This Agreement and the Registration Rights Agreement have each been duly authorized, executed and delivered by the Company and each of the Delaware Guarantors. (xiii) When the Offered Securities are issued and delivered pursuant to this Agreement, such Offered Securities will not be of the same class (within the meaning of Rule 144A under the Securities Act), as any securities of the Company or any Guarantor that are listed on a national securities exchange registered under Section 6 of the Exchange Act or that are quoted in a United States automated inter-dealer quotation system. (xiv) The Offering Document complied with the requirements of Rule 144A of the Securities Act (except for the financial statements and the notes thereto and schedules included therein, as to which no opinion need be expressed). (xv) There are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any securities pursuant to the Company's charter or by-laws or any agreement or other instrument known to such counsel. (xvi) It is not necessary in connection with (i) the offer, sale and delivery of the Offered Securities by the Company and each of the Guarantors to the Initial Purchasers pursuant to this Agreement or (ii) the initial resales of the Offered Securities by the Initial Purchasers in the manner contemplated by this Agreement to register the Offered Securities under the Securities Act or to qualify an indenture in respect thereof under the Trust Indenture Act. (xvii) The statements contained in the Offering Document under the caption "Description of the Notes" in so far as they purport to constitute a summary of 20 the terms of the Offered Securities and under the captions "Certain Relationships and Related Party Transactions," "Certain United States Federal Income Tax Considerations" and "Plan of Distribution," insofar as they describe the laws and documents referred therein, are accurate in all material respects. (xiii) The Credit Agreement has been duly authorized, executed and delivered by the Company and each of the Guarantors; and the Credit Agreement constitutes a valid and legally binding obligation of the Company and each of the Guarantors enforceable against the Company and each of the Guarantors in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (whether considered in a proceeding in equity or at law), or an implied covenant of good faith and fair dealing and except with respect to the rights of indemnification and contribution thereunder, where enforcement thereof may be limited by state or federal securities laws or the policies underlying such laws. (d) The Initial Purchasers shall have received an opinion, dated the Closing Date, of Orrick, Herrington & Sutcliffe LLP, New York counsel for the Company, that: (i) The Offered Securities constitute valid and legally binding obligations of the Company entitled to the benefits of the Indenture, enforceable against the Company in accordance with their terms, subject to the qualification that the enforceability of the Company's obligations thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (ii) The Indenture constitutes a valid and legally binding obligation of the Company and each of the Guarantors enforceable against the Company and each of the Guarantors in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (iii) At such time as the Exchange Notes are issued, executed, authenticated and delivered in accordance with the terms of the Exchange Offer and the Indenture, the Exchange Notes will be entitled to the benefits of the Indenture and will be the valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 21 (iv) When the Offered Securities have been issued, executed and authenticated in accordance with the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, the Guarantee of each Guarantor endorsed thereon will constitute the valid and legally binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (v) At such time as the Exchange Notes have been issued, executed, authenticated and delivered in accordance with the terms of the Exchange Offer and the Indenture, and upon the due execution and delivery of the Exchange Guarantee by each such Guarantor in a form substantially identical to the Guarantee, the Exchange Guarantee of each Guarantor so endorsed thereon will constitute the valid and legally binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (vi) This Agreement and the Registration Rights Agreement each constitutes a valid and binding agreement of the Company and each of the Guarantors enforceable against the Company and each of the Guarantors in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law), or an implied covenant of good faith and fair dealing and except with respect to the rights of indemnification and contribution thereunder, where enforcement thereof may be limited by state or federal securities laws or the policies underlying such laws. ... (e) The Initial Purchasers shall have received an opinion, dated the Closing Date, of Bearnson & Peck, L.C., Utah counsel for the Company, that: (i) Each of the Utah Guarantors has been duly incorporated and is a validly existing corporation under the laws of the State of Utah, with corporate power and authority to own its properties and conduct its business as described in the Offering Document; and each such Utah Guarantor is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions identified by the Company (x) in which its ownership or lease of property or the conduct of its business requires such qualification, and (y) where the failure to so qualify could reasonably be anticipated to result in a Material Adverse Effect. 22 (ii) The Indenture has been duly authorized, executed and delivered by each of the Utah Guarantors. (iii) The Guarantee to be endorsed on the Offered Securities by each of the Utah Guarantors has been duly authorized by each such Utah Guarantor, and has been duly executed and delivered by each such Utah Guarantor, and conforms to the description thereof contained in the Offering Document. (iv) The Exchange Guarantee to be endorsed on the Exchange Notes by each Utah Guarantor has been duly authorized by each such Utah Guarantor. (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by any of the Utah Guarantors for the consummation of the transactions contemplated by this Agreement or the Registration Rights Agreement in connection with the issuance or sale of the Offered Securities by the Utah Guarantors, except such as may be required under state securities laws and except for the order of the Commission declaring the Exchange Offer Registration Statement or the Shelf Registration Statement effective. (vi) The execution, delivery and performance of the Indenture, this Agreement and the Registration Rights Agreement and the issuance and sale of the Offered Securities and compliance with the terms and provisions thereof will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, rule, regulation or, to such counsel's knowledge, order of any governmental agency or body or any court having jurisdiction over any of the Utah Guarantors, or any of their respective properties, or any agreement identified to such counsel by the Company as material and listed on a Schedule attached to such counsel's opinion to which any of the Utah Guarantors is a party or by which any of the Utah Guarantors is bound or to which any of the properties of the Utah Guarantors is subject, or the charter or by-laws of any of the Utah Guarantors, and each of the Utah Guarantors has full corporate power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (vii) This Agreement and the Registration Rights Agreement have each been duly authorized, executed and delivered by each of the Utah Guarantors. (f) The Initial Purchasers shall have received an opinion, dated the Closing Date, Brad Bearnson, Esq., general counsel to the Company, that: (i) None of the Utah Guarantors (i) is in violation of its respective charter or by-laws; or (ii) to such counsel's knowledge, is in default, and no event has occurred which, with notice or lapse of time or both would constitute such default, in the due performance or observance of any obligation, agreement, covenant or condition contained in any material indenture, loan agreement, mortgage, deed of trust, lease or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject, 23 and which such agreements are set forth on a Schedule attached to such counsel's opinion. (ii) Except as described or referred to in the Offering Document, there are no pending actions, suits or proceedings against or, to the Company's knowledge, affecting the Company, any of the Guarantors, any of their respective subsidiaries or any of their respective properties that, if determined adversely to the Company, any of the Guarantors or any of their respective subsidiaries, would individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, or would reasonably be expected to materially and adversely affect the ability of the Company or any of the Guarantors to perform their obligations under the Indenture, this Agreement or the Registration Rights Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and to such counsel's knowledge, no such actions, suits or proceedings are threatened or contemplated. (iii) There are no contracts, agreements or understandings between the Company or any Guarantor and any person (other than the Registration Rights Agreement and the registration rights agreement entered into by the Company in connection with the issuance of the Company's 12% Senior Subordinated Notes due 2005) granting such person the right to require the Company or such Guarantor to file a registration statement under the Securities Act with respect to any securities of the Company or such Guarantor owned or to be owned by such person or to require the Company or such Guarantor to include such securities with the Offered Securities and the Guarantees registered pursuant to the Registration Rights Agreement or in any securities being registered pursuant to any other registration statement filed by the Company or any Guarantor under the Securities Act. (g) The Initial Purchasers shall have received an opinion, dated the Closing Date, of Holmested & Associes, special Quebec counsel for the Company, that: (i) ICON Canada has been duly incorporated and is a validly existing corporation in good standing under the laws of the province of Quebec, with corporate power and authority to own its properties and conduct its business as described in the Offering Document; and such subsidiary is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions identified by the Company (x) in which its ownership or lease of property or the conduct of its business requires such qualification, and (y) where the failure to so qualify could reasonably be anticipated to result in a Material Adverse Effect. (ii) The Indenture has been duly authorized, executed and delivered by ICON Canada. (iii) The Guarantee to be endorsed on the Offered Securities by ICON Canada has been duly authorized by ICON Canada, and has been duly executed 24 and delivered by ICON Canada, and conforms to the description thereof contained in the Offering Document. (iv) The Exchange Guarantee to be endorsed on the Exchange Notes by ICON Canada has been duly authorized by ICON Canada. (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by ICON Canada for the consummation of the transactions contemplated by this Agreement or the Registration Rights Agreement in connection with the issuance or sale of the Offered Securities by ICON Canada, except such as may be required under state securities laws and except for the order of the Commission declaring the Exchange Offer Registration Statement or the Shelf Registration Statement effective. (vi) The execution, delivery and performance of the Indenture, this Agreement and the Registration Rights Agreement and the issuance and sale of the Offered Securities and compliance with the terms and provisions thereof will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, rule, regulation or order of any governmental agency or body or any court having jurisdiction over ICON Canada, or any of its properties, or any agreement identified to such counsel by the Company and listed on a Schedule to such counsel's opinion to which ICON Canada is a party or by which ICON Canada is bound or to which any of the properties of ICON Canada is subject, or the charter or by-laws of ICON Canada, and ICON Canada has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (vii) This Agreement and the Registration Rights Agreement have each been duly authorized, executed and delivered by ICON Canada. (h) The Initial Purchasers shall have received an opinion, dated the Closing Date, of McInnes, Cooper & Robertson, special New Brunswick counsel for the Company, that: (i) N.B. Ltd. has been duly incorporated and is a validly existing corporation in good standing under the laws of the province of New Brunswick, with corporate power and authority to own its properties and conduct its business as described in the Offering Document; and N.B. Ltd. is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions identified by the Company (x) in which its ownership or lease of property or the conduct of its business requires such qualification, and (y) where the failure to so qualify could reasonably be anticipated to result in a Material Adverse Effect. (ii) The Indenture has been duly authorized, executed and delivered by N.B. Ltd. 25 (iii) The Guarantee to be endorsed on the Offered Securities by N.B. Ltd. has been duly authorized by N.B. Ltd., and has been duly executed and delivered by N.B. Ltd., and conforms to the description thereof contained in the Offering Document. (iv) The Exchange Guarantee to be endorsed on the Exchange Notes by N.B. Ltd. has been duly authorized by N.B. Ltd. (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by N.B. Ltd. for the consummation of the transactions contemplated by this Agreement or the Registration Rights Agreement in connection with the issuance or sale of the Offered Securities by N.B. Ltd., except such as may be required under state securities laws and except for the order of the Commission declaring the Exchange Offer Registration Statement or the Shelf Registration Statement effective. (vi) The execution, delivery and performance of the Indenture, this Agreement and the Registration Rights Agreement and the issuance and sale of the Offered Securities and compliance with the terms and provisions thereof will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, rule, regulation or order of any governmental agency or body or any court having jurisdiction over N.B. Ltd., or any of its properties, or any agreement identified to such counsel by the Company and listed on a Schedule to such counsel's opinion to which N.B. Ltd. is a party or by which N.B. Ltd. is bound or to which any of the properties of N.B. Ltd. is subject, or the charter or by-laws of N.B. Ltd., and N.B. Ltd. has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (vii) This Agreement and the Registration Rights Agreement have each been duly authorized, executed and delivered by N.B. Ltd. (i) The Initial Purchasers shall have received from Latham & Watkins, counsel for the Initial Purchasers, such opinion or opinions, dated the Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities, the Offering Document, the exemption from registration for the offer and sale of the Offered Securities by the Company to the Initial Purchasers and the resales by the several Initial Purchasers as contemplated hereby and other related matters as CSFBC may require, and the Company and each of the Guarantors shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (j) The Initial Purchasers shall have received a certificate, dated the Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company and each of the Guarantors in which such officers, to the best of their knowledge after reasonable investigation, shall state that the representations and warranties of the Company and each of the Guarantors in this Agreement are true and correct, that the Company and each of the Guarantors has complied with all agreements and satisfied all 26 conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date, and that, subsequent to the respective dates of the most recent financial statements in the Offering Document there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company, any of the Guarantors or any of their respective subsidiaries taken as a whole except as set forth in or contemplated by the Offering Document or as described in such certificate and such other matters as CSFBC may require. (k) The Initial Purchasers shall have received a letter, dated the Closing Date, of PricewaterhouseCoopers LLP which meets the requirements of subsection (a) of this Section 6, except that the specified date referred to in such subsection will be a date not more than three days prior to the Closing Date for the purposes of this subsection. (l) The Company shall have given notice of redemption to each holder of the Company's 12% Senior Subordinated Notes due 2005 prior to, or simultaneously with, the Closing Date, or made such other arrangements with respect to the redemption of such notes, as shall be reasonably satisfactory to the Initial Purchasers. (m) The Company shall have consummated the Credit Agreement prior to, or simultaneously with, the Closing Date on substantially the same terms described in the Offering Document and the Initial Purchasers shall have received counterparts, conformed as executed, of the Credit Agreement and such other documentation as they deem necessary to evidence the consummation thereof. The Company and each of the Guarantors will furnish the Initial Purchasers with such conformed copies of such opinions, certificates, letters and documents as the Initial Purchasers reasonably requests. CSFBC may in its sole discretion waive on behalf of the Initial Purchasers compliance with any conditions to the obligations of the Initial Purchasers hereunder 7. Indemnification and Contribution. (a) The Company and each of the Guarantors, jointly and severally, shall indemnify and hold harmless the Initial Purchasers, its partners, directors and officers and each person, if any, who controls the Initial Purchasers within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Initial Purchasers may become subject, under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any breach of any of the representations and warranties of the Company or any of the Guarantors contained herein or any untrue statement or alleged untrue statement of any material fact contained in the Offering Document, or any amendment or supplement thereto, or any related preliminary offering circular, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, including any losses, claims, damages or liabilities arising out of or based upon the Company's or any of the Guarantor's failure to perform its obligations under Section 5(a) of this Agreement, and will reimburse the Initial Purchasers for any legal or other expenses reasonably incurred by the Initial Purchasers in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, 27 that (i) neither the Company nor any Guarantor shall be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company or any of the Guarantors by any Initial Purchaser through CSFBC specifically for use therein, it being understood and agreed that the only such information consists of the information described as such in subsection (b) below and (ii) with respect to any untrue statement or alleged untrue statement in or omission or alleged omission from the Preliminary Offering Circular, the indemnity agreement contained in this Section 7(a) shall not inure to the benefit of any Initial Purchaser (or any partner, director or officer of such Initial Purchaser or any person who controls such Initial Purchaser) from whom the person asserting any such loss, claim, damage or liability purchased the Offered Securities concerned in any initial resale of the Offered Securities by such Initial Purchaser, to the extent that any such loss, claim, damage or liability occurs under the circumstance where it shall have be determined by a court of competent jurisdiction that (A) the untrue statement or alleged untrue statement in or omission or alleged omission from the Preliminary Offering Circular was corrected in the Offering Circular, (B) the Company had previously furnished copies of the Offering Circular to the Initial Purchasers and (C) the person asserting such loss, claim, damage or liability was not sent or given a copy of the Offering Circular at or prior to the written confirmation of the sale of such Offered Securities. (b) Each Initial Purchaser shall severally and not jointly indemnify and hold harmless the Company and each of the Guarantors, their respective directors and officers and each person, if any, who controls the Company or any of the Guarantors within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities to which the Company or any of the Guarantors may become subject, under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Offering Document, or any amendment or supplement thereto, or any related preliminary offering circular, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or any of the Guarantors by such Initial Purchaser through CSFBC specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company and any Guarantor in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Initial Purchaser consist of the following information in the Offering Document furnished by the Initial Purchasers: the third, fifth, tenth and fourteenth paragraphs under the caption "Plan of Distribution;" provided however, that the Initial Purchasers shall not be liable for any losses, claims, damages or liabilities arising out of or based upon the Company's or any of the Guarantor's failure to perform their respective obligations under Section 5(a) of this Agreement. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not 28 relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above except to the extent that it has been materially prejudiced by such failure. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes (i) an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or failure to act by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors on the one hand and the Initial Purchasers on the other from the offering of the Offered Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Guarantors on the one hand and the Initial Purchasers on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantors on the one hand and the Initial Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Guarantors bear to the total discounts and commissions received by the Initial Purchasers from the Company and each of the Guarantors under this Agreement. 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 the Company, any Guarantor or the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act or any comparable provision of any other securities law) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Initial Purchasers shall not be required to contribute any amount in excess of the amount by which the total discounts, fees and 29 commissions received by such Initial Purchaser exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The Initial Purchasers' obligations in this subsection (d) to contribute are several in proportion to their respective purchase obligations and not joint. (e) The obligations of the Company and each Guarantor under this Section 7 shall be in addition to any liability which the Company and each Guarantor may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Initial Purchasers within the meaning of the Securities Act or the Exchange Act; and the obligations of the Initial Purchasers under this Section 7 shall be in addition to any liability which the Initial Purchasers may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Company and the Guarantors within the meaning of the Securities Act or the Exchange Act. 8. Default of Initial Purchasers. If any Initial Purchaser or Initial Purchasers default in their obligations to purchase Offered Securities hereunder and the aggregate principal amount of Offered Securities that such defaulting Initial Purchaser or Initial Purchasers agreed but failed to purchase does not exceed 10% of the total principal amount of Offered Securities, CSFBC may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Initial Purchasers, but if no such arrangements are made by the Closing Date, the non-defaulting Initial Purchasers shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Initial Purchasers agreed but failed to purchase. If any Initial Purchaser or Initial Purchasers so default and the aggregate principal amount of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total principal amount of Offered Securities and arrangements satisfactory to CSFBC and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Initial Purchaser, the Company or any Guarantor, except as provided in Section 9. As used in this Agreement, the term "Initial Purchaser" includes any person substituted for an Initial Purchaser under this Section. Nothing herein will relieve a defaulting Initial Purchaser from liability for its default. 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Company, each of the Guarantors or their respective officers and of the Initial Purchasers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of the Initial Purchasers, the Company, any of the Guarantors or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Purchasers is not consummated, the Company and the Guarantors shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5(h) and the respective obligations of the Company, the Guarantors and the Initial Purchasers pursuant to Section 7 shall remain in effect. If the purchase of the Offered Securities by the Initial Purchasers is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in Section 6(b)(i) or clause (C), (D), (E) or (F) of Section 6(b)(ii), 30 the Company and the Guarantors will reimburse the Initial Purchasers for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Initial Purchasers will be mailed, delivered or telegraphed and confirmed to the Initial Purchasers, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, New York 10010-3629, Attention: Transactions Advisory Group, or, if sent to the Company or any of the Guarantors, will be mailed, delivered or telegraphed and confirmed to it at Icon Health & Fitness, Inc., 1500 South 1000, Logan, Utah 84321, Attention: Brad Bearnson, Esq.; provided, however, that any notice to an Initial Purchaser pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Initial Purchaser. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder, except that holders of Offered Securities shall be entitled to enforce the agreements for their benefit contained in the second and third sentences of Section 5(b) hereof against the Company and each of the Guarantors as if such holders were parties thereto. 12. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 13. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to principles of conflicts of laws. The Company and each of the Guarantors hereby submit to the non-exclusive jurisdiction of the Federal and State courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. 31 If the foregoing is in accordance with the Initial Purchasers' understanding of our agreement, kindly sign and return to us one of the counterparts hereof, whereupon it will become a binding agreement between the Company, each of the Guarantors and the several Initial Purchasers in accordance with its terms. Very truly yours, 32 ICON HEALTH & FITNESS, INC. By: _____________________________ Name: Title: GUARANTORS: JUMPKING, INC. By: _____________________________ Name: Title: UNIVERSAL TECHNICAL SERVICES By: _____________________________ Name: Title: ICON INTERNATIONAL HOLDINGS, INC. By: _____________________________ Name: Title: ICON IP, INC. By: _____________________________ Name: Title: 33 FREE MOTION FITNESS, INC. By: _____________________________ Name: Title: NORDICTRACK, INC. By: _____________________________ Name: Title: 510152 N.B. LTD. By: _____________________________ Name: Title: ICON DU CANADA INC. By: _____________________________ Name: Title: 34 The foregoing Purchase Agreement is hereby confirmed and accepted as of the date first above written. Credit Suisse First Boston Corporation, By: _________________________ Name: Title: Acting on behalf of itself and as the Representative of the several Initial Purchasers 35 SCHEDULE A Principal Amount of Offered Securities ------------------- Manager ------- Credit Suisse First Boston Corporation ............ $124,000,000 J.P. Morgan Securities Inc. ....................... $ 19,375,000 Fleet Securities, Inc. ............................ $ 11,625,000 ------------ Total ................... $155,000,000 ============ 36 SCHEDULE B Subsidiaries of the Company Jumpking, Inc. Universal Technical Services ICON International Holdings, Inc. ICON IP, Inc. Free Motion Fitness, Inc. NordicTrack, Inc. 510152 N.B. Ltd. ICON du Canada Inc., ICON Health & Fitness (Holdings) Ltd. ICON OS, Inc. ICON Health & Fitness Italia SRL ICON Fitness Lifestyle ICON Health & Fitness France SA AICON Health & Fitness GmbH Weider Health & Fitness France SA 37 EXHIBIT I [Form of Registration Rights Agreement] 38 EX-10.10 8 dex1010.txt EXHIBIT 10.10 - REG. RIGHTS AGREE. DTD 04/09/02 Exhibit 10.10 $155,000,000 ICON HEALTH & FITNESS, INC. 11.25% SENIOR SUBORDINATED NOTES DUE 2012 REGISTRATION RIGHTS AGREEMENT ----------------------------- April 9, 2002 Credit Suisse First Boston Corporation J.P. Morgan Securities Inc. Fleet Securities, Inc. c/o Credit Suisse First Boston Corporation Eleven Madison Avenue New York, New York 10010-3629 Ladies and Gentlemen: ICON Health & Fitness, Inc., a Delaware corporation (the "Issuer"), proposes to issue and sell to Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., and Fleet Securities, Inc. (the "Initial Purchasers"), upon the terms set forth in a purchase agreement dated March 28, 2002 (the "Purchase Agreement"), $155,000,000 aggregate principal amount of its 11.25% Senior Subordinated Notes due 2012 (the "Notes") to be guaranteed (the "Guarantees," and together with the Notes, the "Offered Securities") by JumpKing, Inc., a Utah corporation , Universal Technical Services, a Utah corporation, ICON International Holdings, Inc., a Delaware corporation, ICON IP, Inc., a Delaware corporation, Free Motion Fitness, a Utah corporation, NordicTrack, Inc., a Utah corporation, 510152 N.B. Ltd., a New Brunswick corporation and ICON du Canada Inc., a Quebec corporation (each a "Guarantor" and together, the "Guarantors"; and the Guarantors collectively with the Issuer, the "Company"). The Offered Securities will be issued pursuant to an Indenture, dated as of April 9, 2002 (the "Indenture"), among the Issuer, the Guarantors and The Bank of New York, as trustee (the "Trustee"). As an inducement to the Initial Purchasers to enter into the Purchase Agreement, the Company agrees with the Initial Purchasers, for the benefit of the Initial Purchasers and the holders of the Securities (as defined below) (collectively, the "Holders"), as follows: 1. Exchange Offer. Unless not permitted by applicable law (after the Company has complied with the ultimate paragraph of this Section 1), the Company shall prepare and, on or prior to 90 days (such 90th day being a "Filing Deadline") after the date on which the Initial Purchasers purchase the Offered Securities pursuant to the Purchase Agreement (the "Closing Date"), file with the Securities and Exchange Commission (the "Commission") a registration statement (the "Exchange Offer Registration Statement") on an appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), with respect to a proposed offer (the "Exchange Offer") to the Holders of Transfer Restricted Securities (as defined in Section 6 hereof), who are not prohibited by any law or policy of the Commission from participating in the Exchange Offer, to issue and deliver to such Holders, in exchange for the Offered Securities, a like aggregate principal amount of debt securities of the Issuer and Guarantees of the Guarantors issued under the Indenture, identical in all material respects to the Offered Securities and registered under the Securities Act (the "Exchange Notes"). The Company shall (i) use its best efforts to have such Exchange Offer Registration Statement declared effective by the Commission under the Securities Act on or prior to 180 days after the Closing Date and (ii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will, following the declaration of the effectiveness of the Exchange Offer Registration Statement (a) commence the Exchange Offer and (b) use its best efforts to issue on or prior to 30 business days after the date on which the Exchange Offer Registration Statement was declared effective by the Commission, Exchange Notes, in exchange for all Offered Securities tendered prior thereto in the Exchange Offer (such period being called the "Exchange Offer Registration Period"). Following the declaration of the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder of Transfer Restricted Securities electing to exchange the Offered Securities for Exchange Notes (assuming that such Holder is not an affiliate of the Company within the meaning of the Securities Act, acquires the Exchange Notes in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the Exchange Notes and is not prohibited by any law or policy of the Commission from participating in the Exchange Offer), to trade such Exchange Notes from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. The Company acknowledges that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, in the absence of an applicable exemption therefrom, (i) each Holder which is a broker-dealer electing to exchange Offered Securities, acquired for its own account as a result of market making activities or other trading activities, for Exchange Notes (an "Exchanging Dealer"), is required to deliver a prospectus containing the information set forth in (a) Annex A hereto on the cover, (b) Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section, and (c) Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Notes received by such Exchanging Dealer pursuant to the Exchange Offer and (ii) an Initial Purchaser that elects to sell Securities (as defined below) acquired in exchange for Offered Securities constituting any portion of an unsold allotment, is required to deliver a prospectus containing the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in connection with such sale. Subject to the next paragraph, for so long as any of the Securities (as defined below) are outstanding (but in no event later than 180 days after the Exchange Offer Registration Statement is declared effective). and if, in the reasonable judgment of the Initial Purchasers or their counsel, the Initial Purchasers or any of their affiliates (as defined in the rules and regulations under the Securities Act) are required to deliver a prospectus (any such prospectus, a "Market Making Prospectus") in connection with sales of the Securities, to (i) provide the Initial Purchasers and their affiliates, without charge, as many copies of the Market Making Prospectus as they may reasonably request, (ii) periodically amend the Offering Document (as defined in the Purchase Agreement) and the Exchange Offer Registration Statement so that the information contained therein complies with the requirements of Section 10(a) of the Securities Act, (iii) amend the Exchange Offer Registration Statement or amend or supplement the Market Making Prospectus when necessary to reflect any material changes in the information provided therein and promptly file such amendment or supplement with the Commission, (iv) provide the Initial Purchasers and their affiliates with copies of each amendment or supplement so filed and such other documents, including opinions of counsel and "comfort" letters, as they may reasonably request and (v) indemnify the Initial Purchasers and their affiliates with respect to the Market Making Prospectus and, if applicable, contribute to any amount paid or payable by the Purchasers and their affiliates in a manner substantially identical to that specified in [Section 7] of the Purchase Agreement (with appropriate modifications). The Company consents to the use, subject to the provisions of the Securities Act and the state securities or Blue Sky laws of the jurisdictions in which the Offered Securities are offered by the Purchasers, of each Market Making Prospectus. The Company shall use its best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein, in order to permit such prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange 2 Notes; provided, however, that (i) in the case where such prospectus and any -------- ------- amendment or supplement thereto must be delivered by an Exchanging Dealer or the Initial Purchasers, such period shall be the lesser of 180 days and the date on which all Exchanging Dealers and the Initial Purchasers have sold all Exchange Notes held by them (unless such period is extended pursuant to Section 3(j) below) and (ii) the Company shall make such prospectus and any amendment or supplement thereto available to any broker-dealer for use in connection with any resale of any Exchange Notes for a period of not less than 180 days after the consummation of the Exchange Offer. If, upon consummation of the Exchange Offer, the Initial Purchasers hold Offered Securities acquired by them as part of their initial distribution, the Company, simultaneously with the delivery of the Exchange Notes pursuant to the Exchange Offer, shall issue and deliver to the Initial Purchasers upon the written request of the Initial Purchasers, in exchange (the "Private Exchange") for the Offered Securities held by the Initial Purchasers, a like principal amount of debt securities of the Issuer and Guarantees of the Guarantors issued under the Indenture and identical in all material respects to the Offered Securities (the "Private Exchange Notes"). The Offered Securities, the Exchange Notes and the Private Exchange Notes are herein collectively called the "Securities". In connection with the Exchange Offer, the Company shall: (a) mail to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Exchange Offer open for not less than 25 days (or longer, if required by applicable law) after the date notice thereof is mailed to the Holders; (c) utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York, which may be the Trustee or an affiliate of the Trustee; (d) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York time, on the last business day on which the Exchange Offer shall remain open; and (e) otherwise comply with all applicable laws. As soon as practicable after the close of the Exchange Offer or the Private Exchange, as the case may be, the Company shall: (x) accept for exchange all the Securities validly tendered and not withdrawn pursuant to the Exchange Offer and the Private Exchange; (y) deliver to the Trustee for cancellation all the Offered Securities so accepted for exchange; and (z) cause the Trustee to authenticate and deliver promptly to each Holder of the Offered Securities, Exchange Notes or Private Exchange Notes, as the case may be, equal in principal amount to the Offered Securities of such Holder so accepted for exchange. The Indenture will provide that the Exchange Notes will not be subject to the transfer restrictions set forth in the Indenture and that all the Securities will vote and consent together on all matters as one class and that none of the Securities will have the right to vote or consent as a class separate from one another on any matter. 3 Interest on each Exchange Note and Private Exchange Note issued pursuant to the Exchange Offer and in the Private Exchange will accrue from the last interest payment date on which interest was paid on the Offered Securities surrendered in exchange therefor or, if no interest has been paid on the Offered Securities, from the date of original issue of the Offered Securities. Each Holder participating in the Exchange Offer shall be required to represent to the Company that at the time of the consummation of the Exchange Offer (i) any Exchange Notes received by such Holder will be acquired in the ordinary course of business, (ii) such Holder will have no arrangements or understanding with any person to participate in the distribution of the Securities or the Exchange Notes within the meaning of the Securities Act, (iii) such Holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company or if it is an affiliate, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such Holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of the Exchange Notes, (v) if such Holder is a broker-dealer, that it will receive Exchange Notes for its own account in exchange for Offered Securities that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes, and (vi) that it is not acting on behalf of any person who could not truthfully make the forgoing statement. Notwithstanding any other provisions hereof, the Company will ensure that (i) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations thereunder, (ii) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If following the date hereof there has been announced a change in Commission policy with respect to exchange offers that in the reasonable opinion of counsel to the Company raises a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company will seek a no-action letter or other favorable decision from the Commission allowing the Company to consummate the Exchange Offer. The Company will pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company will take all such other actions as may be requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (i) participating in telephonic conferences with the Commission, (ii) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that the Exchange Offer should be permitted and (iii) diligently pursuing a resolution (which need not be favorable) by the Commission staff. 2. Shelf Registration. If, (i) the Company is not: (a) required to file the Exchange Offer Registration Statement; or (b) permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy; or (ii) any holder of Transfer Restricted Securities notifies the Issuer prior to the 20th day following consummation of the Exchange Offer that: (a) it is prohibited by law or Commission policy from participating in the Exchange Offer; or (b) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales; or (c) that it is a broker-dealer and owns Securities acquired directly from the Company or an affiliate of the Company, the Company shall take the following actions (the date on which any of the conditions described in the foregoing clauses (i) and (ii) occur, being a "Trigger Date"): 4 (a) The Company will file a registration statement (the "Shelf Registration Statement") with the Commission and use its best efforts to cause such filing to be made on or prior to 90 days after such filing obligation arises and to cause the Shelf Registration Statement to be declared effective by the Commission under the Securities Act, on or prior to 180 days after such filing. The Shelf Registration Statement shall be filed on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Securities by the Holders thereof from time to time in accordance with the methods of distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act (hereinafter, the "Shelf Registration"); provided, however, that no Holder -------- ------- (other than an Initial Purchaser) shall be entitled to have the Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder. (b) The Company shall use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus included therein to be lawfully delivered by the Holders of the relevant Securities, for a period of two years (or for such longer period if extended pursuant to Section 3(j) below) from the date of its effectiveness or such shorter period that will terminate when all the Securities covered by the Shelf Registration Statement (i) have been sold pursuant thereto or (ii) are no longer restricted securities (as defined in Rule 144 under the Securities Act, or any successor rule thereof). The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Securities covered thereby not being able to offer and sell such Securities during that period, unless such action in the judgment of counsel for the Company is required by applicable law. (c) Notwithstanding any other provisions of this Agreement to the contrary, the Company shall cause the Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3. Registration Procedures. In connection with any Shelf Registration contemplated by Section 2 hereof and, to the extent applicable, any Exchange Offer contemplated by Section 1 hereof, the following provisions shall apply: (a) The Company shall (i) furnish to the Initial Purchasers, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and, in the event that the Initial Purchasers (with respect to any portion of an unsold allotment from the original offering) are participating in the Exchange Offer or the Shelf Registration Statement, the Company shall use its best efforts to reflect in each such document, when so filed with the Commission, such comments as the Initial Purchasers reasonably may propose; (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Exchange Offer; (iii) if requested by the Initial Purchasers, include the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement; (iv) include within the prospectus contained in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," reasonably acceptable to the Initial Purchasers, which shall contain a summary statement of the positions taken or policies made by the staff of the Commission with respect to the potential 5 "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (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 Commission or such positions or policies, in the reasonable judgment of the Initial Purchasers based upon advice of counsel (which may be in-house counsel), represent the prevailing views of the staff of the Commission; and (v) in the case of a Shelf Registration Statement, include the names of the Holders who propose to sell Securities pursuant to the Shelf Registration Statement as selling securityholders. (b) The Company shall give written notice to the Initial Purchasers, the Holders of the Securities and any Participating Broker-Dealer from whom the Company has received prior written notice that it will be a Participating Broker-Dealer in the Exchange Offer (which notice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when the Registration Statement or any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the Company to make changes in the Registration Statement or the prospectus in order that the Registration Statement or the prospectus does not contain an untrue statement of a material fact nor omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in light of the circumstances under which they were made) not misleading. (c) The Company shall make every reasonable effort to obtain the withdrawal at the earliest possible time, of any order suspending the effectiveness of the Registration Statement. (d) The Company shall furnish to each Holder of Securities included within the coverage of the Shelf Registration, without charge, at least one copy of the Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (e) The Company shall deliver to each Exchanging Dealer and the Initial Purchasers, and to any other Holder who so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Initial Purchasers or any such Holder requests, all exhibits thereto (including those incorporated by reference). 6 (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of Securities included within the coverage of the Shelf Registration, without charge, as many copies of the prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such person may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by each of the selling Holders of the Securities in connection with the offering and sale of the Securities covered by the prospectus, or any amendment or supplement thereto, included in the Shelf Registration Statement. (g) The Company shall deliver to the Initial Purchasers, any Exchanging Dealer, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Exchange Offer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as such persons may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by the Initial Purchasers, if necessary, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Exchange Offer in connection with the offering and sale of the Exchange Notes covered by the prospectus, or any amendment or supplement thereto, included in such Exchange Offer Registration Statement. (h) Prior to any public offering of the Securities pursuant to any Registration Statement, the Company shall register or qualify or cooperate with the Holders of the Securities included therein and their respective counsel in connection with the registration or qualification of the Securities for offer and sale under the securities or "blue sky" laws of such states of the United States as any Holder of the Securities reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities covered by such Registration Statement; provided, -------- however, that the Company shall not be required to (i) qualify generally to ------- do business in any jurisdiction where it is not then so qualified or (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction where it is not then so subject. (i) The Company shall cooperate with the Holders of the Securities to facilitate the timely preparation and delivery of certificates representing the Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders may request a reasonable period of time prior to sales of the Securities pursuant to such Registration Statement. (j) Upon the occurrence of any event contemplated by paragraphs (ii) through (v) of Section 3(b) above during the period for which the Company is required to maintain an effective Registration Statement, the Company shall promptly prepare and file a post-effective amendment to the Registration Statement or a supplement to the related prospectus and any other required document so that, as thereafter delivered to Holders of the Securities or purchasers of Securities, the prospectus will not contain an 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. If the Company notifies the Initial Purchasers, the Holders of the Securities and any known Participating Broker-Dealer in accordance with paragraphs (ii) through (v) of Section 3(b) above to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Initial Purchasers, the Holders of the Securities and any such Participating Broker-Dealers shall suspend use of such prospectus, and the period of effectiveness of the Shelf Registration Statement provided for in Section 2(b) above and the Exchange Offer Registration Statement provided for in Section 1 above shall each be extended by the number of days from and including the date of the giving of such notice to and including the date when the Initial Purchasers, the Holders of the 7 Securities and any known Participating Broker-Dealer shall have received such amended or supplemented prospectus pursuant to this Section 3(j). (k) Not later than the effective date of the applicable Registration Statement, the Company will provide a CUSIP number for the Notes, the Exchange Notes or the Private Exchange Notes, as the case may be, and provide the applicable trustee with printed certificates for the Offered Securities, the Exchange Notes or the Private Exchange Notes, as the case may be, in a form eligible for deposit with The Depository Trust Company. (l) The Company will comply with all rules and regulations of the Commission to the extent and so long as they are applicable to the Exchange Offer or the Shelf Registration and will make generally available to its security holders (or otherwise provide in accordance with Section 11(a) of the Securities Act) an earnings statement satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statement shall cover such 12-month period. (m) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner and containing such changes, if any, as shall be necessary for such qualification. In the event that such qualification would require the appointment of a new trustee under the Indenture, the Company shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (n) The Company may require each Holder of Securities to be sold pursuant to the Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of the Securities as the Company may from time to time reasonably require for inclusion in the Shelf Registration Statement, and the Company may exclude from such registration the Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request. (o) The Company shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as any Holder of the Securities shall reasonably request in order to facilitate the disposition of the Securities pursuant to any Shelf Registration. (p) In the case of any Shelf Registration, the Company shall (i) make reasonably available for inspection by the Holders of the Securities, any underwriter participating in any disposition pursuant to the Shelf Registration Statement and any attorney, accountant or other agent retained by the Holders of the Securities or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and (ii) cause the Company's officers, directors, employees, accountants and auditors to supply all relevant information reasonably requested by the Holders of the Securities or any such underwriter, attorney, accountant or agent in connection with the Shelf Registration Statement, in each case as shall be reasonably necessary to enable such persons, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that the foregoing -------- ------- inspection and information gathering shall be coordinated on behalf of the Initial Purchasers by you and on behalf of the other parties, by one counsel designated by and on behalf of such other parties as described in Section 4 hereof and shall take place at the offices where such records are normally kept during normal business hours. (q) In the case of any Shelf Registration, the Company, if requested by any Holder of Securities covered thereby, shall cause (i) its counsel to deliver an opinion and updates thereof relating to the Securities in customary form addressed to such Holders and the managing 8 underwriters, if any, thereof and dated, in the case of the initial opinion, the effective date of such Shelf Registration Statement (it being agreed that the matters to be covered by such opinion shall include, without limitation, the due incorporation and good corporate standing of the Company and its subsidiaries; the qualification of the Company and its subsidiaries to transact business as foreign corporations; the due authorization, execution and delivery of the relevant agreement of the type referred to in Section 3(o) hereof; the due authorization, execution, authentication and issuance, and the validity and enforceability, of the applicable Securities; the absence of material legal or governmental proceedings involving the Company and its subsidiaries; the absence of governmental approvals required to be obtained in connection with the Shelf Registration Statement, the offering and sale of the applicable Securities, or any agreement of the type referred to in Section 3(o) hereof; the compliance as to form of such Shelf Registration Statement and any documents incorporated by reference therein and of the Indenture with the requirements of the Securities Act and the Trust Indenture Act, respectively; and, as of the date of the opinion and as of the effective date of the Shelf Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from such Shelf Registration Statement and the prospectus included therein, as then amended or supplemented, and from any documents incorporated by reference therein of an untrue statement of a material fact or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of any such documents, in the light of the circumstances existing at the time that such documents were filed with the Commission under the Exchange Act); (ii) its officers to execute and deliver all customary documents and certificates and updates thereof requested by any underwriters of the applicable Securities and (iii) its independent public accountants to provide to the selling Holders of the applicable Securities and any underwriter therefor a comfort letter in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. (r) In the case of the Exchange Offer, if requested by the Initial Purchasers or any known Participating Broker-Dealer, the Company shall cause (i) its counsel to deliver to the Initial Purchasers or such Participating Broker-Dealer a signed opinion in the form set forth in Section 6(c), (e), (f), (g) and (h) of the Purchase Agreement with such changes as are customary in connection with the preparation of a Registration Statement and (ii) its independent public accountants to deliver to such Initial Purchaser or such Participating Broker-Dealer a comfort letter, in customary form, meeting the requirements as to the substance thereof as set forth in Section 6(a) and (k) of the Purchase Agreement, with appropriate date changes. (s) If an Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Offered Securities by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be, the Company shall mark, or cause to be marked, on the Offered Securities so exchanged that such Offered Securities are being canceled in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be; in no event shall the Offered Securities be marked as paid or otherwise satisfied. (t) The Company will use its best efforts to (a) if the Offered Securities have been rated prior to the initial sale of such Offered Securities, confirm such ratings will apply to the Securities covered by a Registration Statement, or (b) if the Offered Securities were not previously rated, cause the Securities covered by a Registration Statement to be rated with the appropriate rating agencies, if so requested by Holders of a majority in aggregate principal amount of Securities covered by such Registration Statement, or by the managing underwriters, if any. (u) In the event that any broker-dealer registered under the Exchange Act shall underwrite any Securities or participate as a member of an underwriting syndicate or selling group 9 or "assist in the distribution" (within the meaning of the Conduct Rules (the "Rules") of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a Holder of such Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company will assist such broker-dealer in complying with the requirements of such Rules, including, without limitation, by (i) if such Rules, including Rule 2720, shall so require, engaging a "qualified independent underwriter" (as defined in Rule 2720) to participate in the preparation of the Registration Statement relating to such Securities, to exercise usual standards of due diligence in respect thereto and, if any portion of the offering contemplated by such Registration Statement is an underwritten offering or is made through a placement or sales agent, to recommend the yield of such Securities, (ii) indemnifying any such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof and (iii) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules. (v) The Company shall use its best efforts to take all other steps necessary to effect the registration of the Securities covered by a Registration Statement contemplated hereby. 4. Registration Expenses. (a) All expenses incident to the Company's performance of and compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement is ever filed or becomes effective, including without limitation; (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal securities and state "blue sky" or securities laws; (iii) all expenses of printing (including printing certificates for the Securities to be issued in the Exchange Offer and the Private Exchange and printing of prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company; (v) all application and filing fees in connection with listing the Exchange Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any person, including special experts, retained by the Company. (b) In connection with any Registration Statement required by this Agreement, the Company will reimburse the Initial Purchasers and the Holders of Transfer Restricted Securities who are tendering Offered Securities in the Exchange Offer and/or selling or reselling Securities pursuant to the "Plan of Distribution" contained in the Exchange Offer Registration Statement or the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel, who shall be Latham & Watkins unless another firm shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared. 5. Indemnification. (a) The Company agrees to indemnify and hold harmless each Holder of the Securities, any Participating Broker-Dealer and each person, if any, who controls such Holder or such 10 Participating Broker-Dealer within the meaning of the Securities Act or the Exchange Act (each Holder, any Participating Broker-Dealer and such controlling persons are referred to collectively as the "Indemnified Parties") from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof (including, but not limited to, any losses, claims, damages, liabilities or actions relating to purchases and sales of the Securities) to which each Indemnified Party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse, as incurred, the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; provided, however, that (i) the Company -------- ------- shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus relating to a Shelf Registration Statement, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Holder or Participating Broker-Dealer from whom the person asserting any such losses, claims, damages or liabilities purchased the Securities concerned, to the extent that a prospectus relating to such Securities was required to be delivered by such Holder or Participating Broker-Dealer under the Securities Act in connection with such purchase and any such loss, claim, damage or liability of such Holder or Participating Broker-Dealer results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Securities to such person, a copy of the final prospectus if the Company had previously furnished copies thereof to such Holder or Participating Broker-Dealer; provided -------- further, that this indemnity agreement will be in addition to any liability - ------- which the Company may otherwise have to such Indemnified Party. The Company shall also indemnify underwriters, their officers and directors and each person who controls such underwriters within the meaning of the Securities Act or the Exchange Act to the same extent as provided above with respect to the indemnification of the Holders of the Securities if requested by such Holders. (b) Each Holder of the Securities, severally and not jointly, will indemnify and hold harmless the Company and each of the officers, directors and employees and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act from and against any losses, claims, damages or liabilities or any actions in respect thereof, to which the Company or any such controlling person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or (ii) arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein; and, subject to the limitation set forth immediately preceding this clause, shall reimburse, as incurred, the Company for any legal or other expenses reasonably incurred by the Company or any such officer, director or employee or controlling person in connection with investigating or defending any loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability which such Holder may otherwise have to the Company or any of its controlling persons. (c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action or proceeding (including a governmental investigation), such indemnified 11 party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, which consent cannot be unreasonably withheld, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof the indemnifying party will not be liable to such indemnified party under this Section 5 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party, in connection with the defense thereof. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action, and does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 5 is unavailable or insufficient to hold harmless an indemnified party under subsections (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the sale of the Transfer Restricted Securities, or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. 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 on the one hand or such Holder or such other indemnified party, as the case may be, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding any other provision of this Section 5, the Holders of the Securities shall not be required to contribute any amount in excess of the amount by which the net proceeds received by such Holders from the sale of the Securities pursuant to a Registration Statement exceeds the amount of damages which such Holders have otherwise been required to pay 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. For purposes of this subsection (d), each person, if any, who controls such indemnified party within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such indemnified party and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as the Company. (e) The agreements contained in this Section 5 shall survive the sale of the Securities pursuant to a Registration Statement and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any indemnified party. 12 6. Additional Interest Under Certain Circumstances. (a) Additional interest (the "Additional Interest") with respect to the Securities shall be assessed as follows if any of the following events occur (each such event in clauses (i) through (iv) below being herein called a "Registration Default"): (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the date specified for filing; (ii) any Registration Statement required by this Agreement is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"); (iii) the Exchange Offer has not been consummated within 30 business days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement; or (iv) any Registration Statement required by this Agreement has been declared effective by the Commission but (A) such Registration Statement thereafter ceases to be effective or (B) such Registration Statement or the related prospectus ceases to be usable in connection with resales of Transfer Restricted Securities during the periods specified herein. Each of the foregoing will constitute a Registration Default whatever the reason for any such event and whether it is voluntary or involuntary or is beyond the control of the Company or pursuant to operation of law or as a result of any action or inaction by the Commission. The Company shall pay Additional Interest to each Holder in the event of a Registration Default. Additional Interest shall accrue from the first day of such Registration Default in an amount equal to $.05 per week per $1,000 principal amount of Notes for the first 90-day period immediately following the occurrence of such Registration Default and shall increase by an additional $.05 per week per $1,000 principal amount of Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of $.50 per week per $1,000 principal amount of Notes. (b) A Registration Default referred to in Section 6(a)(iv) hereof shall be deemed not to have occurred and be continuing in relation to a Shelf Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to such Shelf Registration Statement to incorporate annual audited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events, with respect to the Company that would need to be described in such Shelf Registration Statement or the related prospectus and (ii) in the case of clause (y), the Company is proceeding promptly and in good faith to amend or supplement such Shelf Registration Statement and related prospectus to describe such events; provided, however, that in any case if such Registration Default occurs for a - -------- ------- continuous period in excess of 30 days, Additional Interest shall be payable in accordance with the above paragraph from the day such Registration Default occurs until such Registration Default is cured. (c) Any amounts of Additional Interest due pursuant to Section 6(a) will be payable in cash on the regular interest payment dates with respect to the Securities. (d) "Transfer Restricted Securities" means each Security until (i) the date on which such Security has been exchanged by a person other than a broker-dealer for a freely transferable Exchange Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of an Initial Security for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the 13 date on which such Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 7. Rules 144 and 144A. The Company shall use its best efforts upon the request of any Holder of Securities, to make publicly available any information so long as necessary to permit sales of their securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder of Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). The Company will provide a copy of this Agreement to prospective purchasers of Offered Securities identified to the Company by the Initial Purchasers upon request. Upon the request of any Holder of Offered Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. 8. Underwritten Registrations. If any of the Transfer Restricted Securities covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("Managing Underwriters") will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities to be included in such offering. No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 9. Miscellaneous. (a) Remedies. The Company acknowledges and agrees that any failure by the Company to comply with its obligations under Section 1 and 2 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Sections 1 and 2 hereof. The Company further agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement (other than the registration rights agreement entered into by the Company in connection with the issuance of the Company's 12% senior subordinated notes due 2025) in effect on the date hereof. (c) 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, except by the Company and the written consent of the Holders of a majority in principal amount of the Securities affected by such amendment, modification, supplement, waiver or consents. 14 (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, first-class mail, facsimile transmission, or air courier which guarantees overnight delivery: (1) if to a Holder of the Securities, at the most current address given by such Holder to the Company. (2) if to the Initial Purchasers; Credit Suisse First Boston Corporation Eleven Madison Avenue New York, NY 10010-3629 Fax No.: (212) 325-8278 Attention: Transactions Advisory Group with a copy to: Latham & Watkins 885 Third Avenue, Suite 1000 New York, NY 10022 Fax No.: (212) 751-4864 Attention: Marc D. Jaffe, Esq. (3) if to the Company, at its address as follows: Icon Health & Fitness, Inc. 1500 South 1000 West, Logan, UT 84321 Fax No.: (435) 750-3679 Attention: Brad Bearnson, Esq. with a copy to: Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02110 Fax No.: (617) 951-1295 Attention: David T. Dinwoodey, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by recipient's facsimile machine operator, if sent by facsimile transmission; and on the day delivered, if sent by overnight air courier guaranteeing next day delivery. 15 (e) Third Party Beneficiaries. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. (f) Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns. (g) 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. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. (j) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Securities Held by the Company. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Company or its affiliates (other than subsequent Holders of Securities if such subsequent Holders are deemed to be affiliates solely by reason of their holdings of such Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Issuer a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the several Initial Purchasers, the Issuer and the Guarantors in accordance with its terms. [Remainder of page intentionally left blank.] 16 Very truly yours, ICON HEALTH & FITNESS, INC. By: _________________________________________ Name: Title: GUARANTORS: JUMPKING, INC. By: _________________________________________ Name: Title: UNIVERSAL TECHNICAL SERVICES By: _________________________________________ Name: Title: ICON INTERNATIONAL HOLDINGS, INC. By: _________________________________________ Name: Title: ICON IP, INC. By: _________________________________________ Name: Title: 17 FREE MOTION FITNESS, INC. By: _________________________________________ Name: Title: NORDICTRACK, INC. By: _________________________________________ Name: Title: 510152 N.B. LTD. By: _________________________________________ Name: Title: ICON DU CANADA INC. By: _________________________________________ Name: Title: 18 The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written. Credit Suisse First Boston Corporation, By: _________________________________________ Name: Title: Acting on behalf of itself and as the Representative of the several Initial Purchasers 19 ANNEX A Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Offered Securities where such Offered Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date (as defined herein), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." ANNEX B Each broker-dealer that receives Exchange Notes for its own account in exchange for Offered Securities, where such Offered Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." ANNEX C Plan of Distribution Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus (the "Prospectus") in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Offered Securities where such Offered Securities were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until [ ], 200[ ], all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus./(1)/ The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the Holders of the Securities) other than commissions or concessions of any brokers or dealers and will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. ________________________ /(1)/ In addition, the legend required by item 502(e) of Regulation S-K will appear on the back cover page of the Exchange Offer prospectus. ANNEX D [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: ______________________________________________ Address: ______________________________________________ If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Offered Securities that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-10.11 9 dex1011.txt EXHIBIT 10.11 - CREDIT AGREEMENT DTD 04/09/02 Exhibit 10.11 ================================================================================ CREDIT AGREEMENT Dated as of April 9, 2002 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, GECC CAPITAL MARKETS GROUP, INC., as Lead Arranger, and JP MORGAN CHASE BANK, as Documentation Agent TABLE OF CONTENTS
Page ---- 1. AMOUNT AND TERMS OF CREDIT.......................................................... 1 1.1 Credit Facilities............................................................ 1 1.2 Letters of Credit............................................................ 5 1.3 Prepayments.................................................................. 6 1.4 Use of Proceeds.............................................................. 8 1.5 Interest and Applicable Margins.............................................. 8 1.6 Eligible Accounts............................................................ 10 1.7 Eligible Inventory........................................................... 13 1.8 Cash Management Systems...................................................... 15 1.9 Fees......................................................................... 15 1.10 Receipt of Payments.......................................................... 15 1.11 Application and Allocation of Payments....................................... 16 1.12 Loan Account and Accounting.................................................. 16 1.13 Indemnity.................................................................... 17 1.14 Access....................................................................... 18 1.15 Taxes........................................................................ 18 1.16 Capital Adequacy; Increased Costs; Illegality................................ 19 1.17 Single Loan.................................................................. 21 2. CONDITIONS PRECEDENT................................................................ 21 2.1 Conditions to the Initial Loans.............................................. 21 2.2 Further Conditions to Each Loan.............................................. 22 2.3 Conditions to Permitted Acquisitions......................................... 23 3. REPRESENTATIONS AND WARRANTIES...................................................... 25 3.1 Corporate Existence; Compliance with Law..................................... 26 3.2 Executive Offices, Collateral Locations, FEIN................................ 26 3.3 Corporate Power, Authorization, Enforceable Obligations...................... 26 3.4 Financial Statements and Projections......................................... 26 3.5 Material Adverse Effect...................................................... 27 3.6 Ownership of Property; Liens................................................. 28 3.7 Labor Matters................................................................ 28 3.8 Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness.... 28 3.9 Government Regulation........................................................ 29 3.10 Margin Regulations........................................................... 29 3.11 Taxes........................................................................ 29 3.12 ERISA and Canadian Pension and Benefit Plans................................. 30 3.13 No Litigation................................................................ 31 3.14 Brokers...................................................................... 31 3.15 Intellectual Property........................................................ 31 3.16 Full Disclosure.............................................................. 31 3.17 Environmental Matters........................................................ 32 3.18 Insurance.................................................................... 32
i 3.19 Deposit and Disbursement Accounts.................................... 32 3.20 Government Contracts................................................. 33 3.21 Customer and Trade Relations......................................... 33 3.22 Agreements and Other Documents....................................... 33 3.23 Solvency............................................................. 33 3.24 Status of Holdings................................................... 33 3.25 Subordinated Debt.................................................... 33 3.26 Old Holdcos.......................................................... 34 4. FINANCIAL STATEMENTS AND INFORMATION........................................ 34 4.1 Reports and Notices.................................................. 34 4.2 Communication with Accountants....................................... 34 5. AFFIRMATIVE COVENANTS....................................................... 34 5.1 Maintenance of Existence and Conduct of Business..................... 34 5.2 Payment of Charges................................................... 35 5.3 Books and Records.................................................... 35 5.4 Insurance; Damage to or Destruction of Collateral.................... 35 5.5 Compliance with Laws................................................. 37 5.6 Canadian Pension and Benefit Plans................................... 37 5.7 Supplemental Disclosure.............................................. 38 5.8 Intellectual Property................................................ 38 5.9 Environmental Matters................................................ 38 5.10 Landlords' Agreements, Mortgagee Agreements and Bailee Letters....... 39 5.11 Further Assurances................................................... 39 6. NEGATIVE COVENANTS.......................................................... 40 6.1 Mergers, Subsidiaries, Etc........................................... 40 6.2 Investments; Loans and Advances...................................... 40 6.3 Indebtedness......................................................... 40 6.4 Employee Loans and Affiliate Transactions............................ 41 6.5 Capital Structure and Business....................................... 42 6.6 Guaranteed Indebtedness.............................................. 42 6.7 Liens................................................................ 42 6.8 Sale of Stock and Assets............................................. 43 6.9 ERISA................................................................ 43 6.10 Financial Covenants.................................................. 43 6.11 Hazardous Materials.................................................. 44 6.12 Sale-Leasebacks...................................................... 44 6.13 Cancellation of Indebtedness......................................... 44 6.14 Restricted Payments.................................................. 44 6.15 Change of Corporate Name or Location; Change of Fiscal Year.......... 45 6.16 No Impairment of Intercompany Transfers.............................. 45 6.17 No Speculative Transactions.......................................... 45 6.18 Leases; Real Estate Purchases........................................ 45 6.19 Changes Relating to Subordinated Debt and Other Agreements........... 45 6.20 Credit Parties other than Borrower................................... 46
ii 7. TERM................................................................................ 46 7.1 Termination.................................................................. 46 7.2 Survival of Obligations Upon Termination of Financing Arrangements........... 46 8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES.............................................. 46 8.1 Events of Default............................................................ 46 8.2 Remedies..................................................................... 48 8.3 Waivers by Credit Parties.................................................... 49 8.4 Receivership................................................................. 49 9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT................................. 50 9.1 Assignment and Participations................................................ 50 9.2 Appointment of Agent......................................................... 52 9.3 Agent's Reliance, Etc........................................................ 53 9.4 Agent and Affiliates......................................................... 53 9.5 Lender Credit Decision....................................................... 53 9.6 Indemnification.............................................................. 54 9.7 Successor Agent.............................................................. 54 9.8 Setoff and Sharing of Payments............................................... 54 9.9 Advances; Payments; Non-Funding Lenders; Information; Actions in Concert..... 55 10. SUCCESSORS AND ASSIGNS.............................................................. 58 10.1 Successors and Assigns........................................................ 58 11. MISCELLANEOUS....................................................................... 58 11.1 Complete Agreement; Modification of Agreement................................ 58 11.2 Amendments and Waivers....................................................... 58 11.3 Fees and Expenses............................................................ 60 11.4 No Waiver.................................................................... 61 11.5 Remedies..................................................................... 62 11.6 Severability................................................................. 62 11.7 Conflict of Terms............................................................ 62 11.8 Confidentiality.............................................................. 62 11.9 GOVERNING LAW................................................................ 63 11.10 Notices...................................................................... 63 11.11 Section Titles............................................................... 64 11.12 Counterparts................................................................. 64 11.13 WAIVER OF JURY TRIAL......................................................... 64 11.14 Press Releases; Etc.......................................................... 64 11.15 Reinstatement................................................................ 65 11.16 Advice of Counsel............................................................ 65 11.17 No Drafting Presumptions..................................................... 65 11.18 License...................................................................... 65
iii 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 Addresses ------------- Annex J (from Annex A) - Commitments as of Closing Date 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 1.5(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 1.4 - 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 3.5 Material Adverse Changes 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 Disclosure Schedule 5.10 Landlord Waivers Disclosure Schedule 6.3 - Indebtedness Disclosure Schedule 6.4 - Transactions with Affiliates Disclosure Schedule 6.7 - Existing Liens
1v This CREDIT AGREEMENT (this "Agreement"), dated as of April 9, --------- 2002 among ICON HEALTH & FITNESS, INC., a Delaware corporation ("Borrower"); the -------- other Credit Parties signatory hereto; GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GE Capital"), for itself, as ---------- Lender, and as 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 Two Hundred Thirty Five Million Dollars ($235,000,000) in the aggregate for the purpose of Refinancing and to provide (a) working capital financing for Borrower, (b) financing for Capital Expenditures otherwise permitted hereunder, (c) financing for Permitted Acquisitions and (d) funds for other general corporate purposes of Borrower; 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 ("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. (b) Term Loans. ---------- (i) Subject to the terms and conditions hereof, each Term Lender agrees to make a term loan (the "Term Loan") on the Closing Date --------- to Borrower in the original principal amount of its Term Loan Commitment. The obligations of each Term Lender hereunder shall be several and not joint with respect to the Term Loan. The Term Loan 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 ------------ 2 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 Commitment, together with interest thereon as prescribed in Section 1.5. ----------- (ii) Borrower shall repay the principal amount of the Term Loan in twenty (20) consecutive quarterly installments on the last day of February, May, August and November of each year, commencing May 31, 2002, as follows: Payment Installment Dates Amounts ------- ----------- May 31, 2002 $1,250,000 August 3, 2002 $1,250,000 November 30, 2002 $1,250,000 February 28, 2003 $1,250,000 May 31, 2003 $1,250,000 August 31, 2003 $1,250,000 November 30, 2003 $1,250,000 February 28, 2004 $1,250,000 May 31, 2004 $1,250,000 August 31, 2004 $1,250,000 November 30, 2004 $1,250,000 February 28, 2005 $1,250,000 May 31, 2005 $1,250,000 August 31, 2005 $1,250,000 November 30, 2005 $1,250,000 February 28, 2006 $1,250,000 May 31, 2006 $1,250,000 August 31, 2006 $1,250,000 November 30, 2006 $1,250,000 The final installment due on February 28, 2007 shall be in the amount of $1,250,000 or, if different, the remaining principal balance of the Term Loan. If the Revolving Loan Commitment is terminated for any reason, the entire principal balance of the Term Loan shall be immediately due and payable. 3 (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(c). 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 (1) 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. (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 4 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) 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 5 Lenders agree to incur, or purchase participations in, Letter of Credit Obligations in respect of Borrower. 1.3 Prepayments. ----------- (a) Voluntary Prepayments; Reductions in Revolving Loan Commitments. --------------------------------------------------------------- Borrower may at any time on at least 5 days' prior written notice to Agent (i) voluntarily prepay all or part of the Term Loan and/or (ii) permanently reduce (but not terminate) the Revolving Loan Commitment, in each case, in increments of $5,000,000; provided that (A) the Revolving Loan Commitment shall not be -------- reduced to an amount less than $190,000,000, and (B) after giving effect to such reductions, Borrower shall comply with Section 1.3(b)(i). Borrower may at any ----------------- time on at least ten 10 days' prior written notice to Agent terminate the Revolving Loan Commitment, provided that upon such termination all Loans and -------- 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 and any reduction or ------- termination of the Revolving Loan Commitment must be accompanied by the payment of any LIBOR funding breakage costs in accordance with Section 1.13(b). Upon any --------------- such reduction or 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 permanently reduced or terminated, as the case may be; provided that a permanent reduction of the Revolving Loan Commitment shall not - -------- require a corresponding pro rata reduction in the L/C Sublimit. Each notice of partial prepayment shall designate the Loan or other Obligations to which such prepayment is to be applied; provided that any partial prepayments of the Term -------- Loan shall be applied to prepay the scheduled installments of the Term Loan in inverse order of maturity. (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 results in proceeds in excess of $400,000 in the aggregate during such Fiscal Year, (excluding proceeds of asset dispositions permitted by Sections 6.8(a), 6.8(c) and 6.8(d)), but including proceeds of ---------------------------------- or any sale of Stock of any Subsidiary of any Credit Party), Borrower shall prepay the Obligations in an amount equal to such proceeds, 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 6 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. Notwithstanding the foregoing, the proceeds of asset dispositions which are reinvested in Capital Expenditures within 180 days after the date of receipt thereof need not be used to prepay the Obligations. Borrower shall report to Agent in writing its' intention to reinvest such proceeds concurrently with each asset disposition and shall also report the dates and amounts of such reinvestments concurrently therewith. All prepayments made hereunder shall be applied in accordance with Section 1.3(c). -------------- (iii) If Holdings or Borrower or any other Credit Party issues Stock (other than issuances of Stock (i) to employees of Holdings and its Subsidiaries and (ii) to stockholders of Holdings as of the Closing Date, the proceeds of which are used to fund all or part of the purchase price of a Permitted Acquisition), 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). -------------- (iv) So long as the Term Loan is outstanding, Borrower shall prepay the Obligations on the date that is 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, commencing with the Fiscal Year ending on or about March 31, ------- 2003, 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 twenty-five percent (25%) 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. Any prepayments made by ---------------------------------- Borrower pursuant to clauses (a)(i), (b)(ii), (b)(iii) and (b)(iv) above shall --------------------------------------------- be applied as follows: first, to Fees and reimbursable expenses of Agent then ----- due and payable pursuant to any of the Loan Documents; second, to interest then ------ due and payable on the Term Loan; third, to prepay the principal installments of ----- the Term Loan in inverse order of maturity, until the Term Loan shall have been repaid 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; and 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 7 manner set forth in Annex B. Neither the Revolving Loan Commitment nor the Swing ------- Line Commitment shall be permanently reduced by the amount of any such prepayments, except to the extent that the failure to reduce such Commitments would result in a contractual requirement that any portion of that prepayment amount be applied to repurchase or prepay Subordinated Debt. (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; and insurance proceeds from casualties or losses to Equipment, Fixtures and Real Estate shall be applied to scheduled principal installments of the Term Loan, 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, except to the extent that the failure to reduce such Commitment would result in a contractual requirement that any portion of that prepayment amount be applied to repurchase or prepay Subordinated Debt. 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 as reasonably determined by Agent. (e) 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. (f) Ratable Reductions. Any reduction in the Revolving Loan ------------------ Commitments in accordance with this Section 1.3 or otherwise shall result in a ----------- ratable reduction of each Lender's Revolving Loan Commitment. 1.4 Use of Proceeds. Borrower shall utilize the proceeds of the Term --------------- Loan, the Revolving Loan and the Swing Line Loan solely for the Refinancing (and to pay any related transaction expenses), and for the financing of Borrower's ordinary working capital, financing of Capital Expenditures otherwise permitted hereunder, financing of Permitted Acquisitions and general corporate purposes. 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) 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 Loan, the Index Rate plus the Applicable Term Loan Index Margin, or, at the election of Borrower, the applicable LIBOR Rate plus the Applicable Term Loan 8 LIBOR Margin, per annum; and (C) with respect to the Swing Line Loan, the Index Rate plus the Applicable Revolver Index Margin per annum. The Applicable Margins are as follows: Applicable Revolver Index Margin 1.250% Applicable Revolver LIBOR Margin 2.625% Applicable Term Loan Index Margin 1.750% Applicable Term Loan LIBOR Margin 3.125% Applicable L/C Margin 2.000% Applicable Unused Line Fee Margin (subject to adjustment in accordance with Section 1.9(b)) 0.500% (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 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) 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 9 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, 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 Agent. (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 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 10 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; (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 CS 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; 11 (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 by Regency in Australia and New Zealand, RFE International in the United Kingdom and Sears Mexico in Mexico, if payable in Dollars, in an amount not to exceed $2,000,000 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); (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 K-Mart Accounts; provided, that, Agent may, in its reasonable discretion -------- ---- consent to the inclusion in Eligible Accounts of Accounts owing by additional Account Debtors that are debtors-in-possession in Chapter 11 bankruptcy cases and that arise post-petition; (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; 12 (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; 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; (iv) a dilution Reserve and (v) a credit memo accrual Reserve and (vi) without duplication, a reserve for Prior Claims. 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 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 or a domestic or Canadian Subsidiary 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 13 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 (unless Agent's Liens are fully perfected in its sole and absolute discretion) or is in transit except, in Agent's discretion, Eligible In-Transit Inventory that has been shipped to the United States that is "on the water"; (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 or its domestic or Canadian Subsidiaries, as applicable, with satisfactory results and returned to finished goods; (h) is not of a type held for sale in the ordinary course of Borrower's or its domestic or Canadian Subsidiaries' 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; (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 14 (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, goods and services and harmonized sales taxes payable upon the sale of such Inventory, a Reserve in the amount of intercompany profit attributable to sales of Inventory among Borrower and its Subsidiaries, a Reserve in the amount of warranty repair costs and, without duplication, a Reserve in the amount of Prior Claims are reasonable exercises of Agent's credit judgment. 1.8 Cash Management Systems. Borrower will maintain until the Termination ----------------------- Date, the cash management systems described in Annex C (the "Cash Management ------- --------------- Systems") with respect to itself and its domestic and Canadian Subsidiaries. - ------- 1.9 Fees. ---- (a) Borrower shall pay to GE Capital, individually, the Fees specified in that certain fee letter dated as of April 9, 2002 between Borrower and GE Capital (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. If the Average Unused Daily Balance for the eleven month period ending on March 31, 2003 or the twelve month period ending on March 31st in any year thereafter is less than $105,000,000, then the Applicable Unused Line Fee payable shall be increased retroactively to three quarters of one percent (0.75%) per annum and the amount of that increased Applicable Unused Line Fee Margin shall be payable in a single installment on or before April 13th of each year. (c) 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 15 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 or other Collateral 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 payments; (iii) voluntary prepayments shall be applied as determined by Borrower, subject to the provisions of Section 1.3(a); 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. 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 Agent's 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 and Term Loan, ratably in proportion to the interest accrued as to each such Loan; (5) to principal payments on the Revolving Loan and Term Loan (to scheduled installments in inverse order of maturity) 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; and (6) to all other Obligations, including expenses of Lenders to the extent reimbursable under Section 11.3. ------------ (b) 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 and the Term Loan, 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 16 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 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 17 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 Agent reasonably determines to be appropriate: (a) provide Agent and any of its officers, employees and agents access to its properties, facilities, advisors and employees (including officers) of each Credit Party and to the Collateral, (b) permit Agent, and any of its officers, employees and agents, to inspect, audit and make extracts from any Credit Party's books and records, and (c) permit Agent, and its officers, employees and agents, to inspect, review, evaluate and make test verifications and counts of the Accounts, Inventory and other Collateral 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 Agent, each such Credit Party shall provide such access to 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 Agent and each Lender with access to its suppliers and customers. Each Credit Party shall make available to 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 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. Agent will give Lenders at least ten (10) days' prior written notice of regularly scheduled audits. Representatives of other Lenders may accompany Agent's representatives on regularly scheduled audits at no charge to Borrower. 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 18 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. (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 19 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 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 20 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 as to that Affected Lender 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. 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. 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 Agent 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, Agent 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 Original Obligations; Satisfaction of Outstanding -------------------------------------------------------------- L/C's. (i) Agents shall have received a fully executed original of a pay-off - ----- letter satisfactory to Agent confirming that all of the Original Obligations will be repaid in full from the proceeds of the Term Loan, the initial Revolving Credit Advance and the Subordinated Notes and all Liens upon any of the property of Borrower or any of its Subsidiaries in favor of the Original Lenders shall be terminated by Original Lenders, acting through Agent as their agent under the Original Credit Agreement immediately upon such payment; and (ii) all letters of credit issued or guaranteed by Original 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 Original Lenders. (c) Approvals. Agent 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 21 (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 Sixty Five Million Dollars ($65,000,000). 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 in the Fee Letter), and shall have reimbursed Agent 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 terms and conditions of all Indebtedness shall be acceptable to Agent in its sole discretion. (g) Related Transactions Documents. Agent shall have received fully ------------------------------ executed copies of the Subordinated Debt Documents and each of the other Related Transactions Documents, each of which shall be in form and substance satisfactory to Agent and its counsel. The other Related Transactions shall have been consummated in accordance with the terms of the Subordinated Debt Documents and the other Related Transactions Documents. Borrower shall not have waived or amended any provision of any Subordinated Debt Document delivered to Agent without the consent of Agent and Requisite Lenders. (h) Consummation of Related Transactions on Closing Date. Borrower ---------------------------------------------------- shall have received at least $152,812,950 in net cash proceeds from the issuance of the Subordinated Debt (before deduction, among other things, of an amount not in excess of $4,500,000 which was applied in payment of CS First Boston's closing fees and expenses in respect of the Subordinated Notes). 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 22 LIBOR Loan or incur such Letter of Credit Obligation as a result of the fact that such warranty or representation is untrue or incorrect; (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. 2.3 Conditions to Permitted Acquisitions. Borrower may not directly or ------------------------------------ indirectly use any proceeds of any Advance to acquire all or substantially all of the assets or the Stock (by Stock purchase or merger) of any Person (the "Target") (in each case an "Acquisition") until the following conditions have ------ been satisfied or provided for in a manner satisfactory to Agent, or waived in writing by Agent and Requisite Lenders: (a) Agent shall receive at least thirty (30) Business Days' prior written notice of such proposed Acquisition, which notice shall include a reasonably detailed description of such proposed Acquisition; (b) such Acquisition shall involve assets at least 50% of which are located in the United States or Canada and comprising a business, or those assets of a business, of the type, or reasonably similar or related to the type, engaged in by Borrower as of the Closing Date, and which business would not subject Agent or any Lender to regulatory or third party approvals in connection with the exercise of its rights and remedies under this Agreement or any other Loan Documents other than approvals applicable to the exercise of such rights and remedies with respect to Borrower prior to such Acquisition; (c) such Acquisition shall be consensual and shall have been approved by the Target's board of directors; 23 (d) no additional Indebtedness, Guaranteed Indebtedness or contingent obligations or other liabilities shall be incurred, assumed or otherwise be reflected on a consolidated balance sheet of Borrower and Target after giving effect to such Acquisition, except (A) Loans made hereunder, (B) ordinary course trade payables, accrued expenses and unsecured Indebtedness of the Target to the extent no Default or Event of Default has occurred and is continuing or would result after giving effect to such Acquisition, (C) industrial revenue bonds or other similar Indebtedness of the Target not incurred in anticipation of such Acquisition and otherwise in amounts, and subject to terms, acceptable to Agent, (D) contingent liabilities, including Environmental Liabilities, acceptable to Agent, and (E) Indebtedness of the type permitted in Section 6.7(c) subject to the limitations set forth therein; -------------- (e) the sum of Revolving Credit Advances incurred hereunder in connection with all Acquisitions shall not exceed $25,000,000 in the aggregate; (f) the business and assets acquired in such Permitted Acquisition shall be free and clear of all Liens (other than Permitted Encumbrances) and other Liens acceptable to Agent; (g) at or prior to the closing of any Permitted Acquisition, Agent will be granted a first priority perfected Lien (subject to Permitted Encumbrances) in all assets acquired pursuant thereto or in the assets and Stock of the Target, and Holdings, Borrower, Target and the other Credit Parties shall have executed such documents and taken such actions as may be required by Agent in connection therewith; (h) concurrently with delivery of the notice referred to in clause ------ (a) above, Borrower shall have delivered to Agent, in form and substance - --- reasonably satisfactory to Agent: (i) a pro forma consolidated balance sheet, income statement and cash flow statement of Holdings and its Subsidiaries (the "Acquisition ----------- Pro Forma"), based on recent financial statements, which shall be complete --------- and shall fairly present in all material respects the assets, liabilities, financial condition and results of operations of Holdings and its Subsidiaries in accordance with GAAP consistently applied, but taking into account such Permitted Acquisition and the funding of all Loans in connection therewith, and such Acquisition Pro Forma shall reflect that, on a pro forma basis, Holdings and its Subsidiaries would have had an (x) average daily Borrowing Availability for the 90-day period preceding the consummation of such Permitted Acquisition would have exceeded $20,000,000 (without deterioration of working capital) on a pro forma basis (after giving effect to such Permitted Acquisition and all Loans funded in connection therewith as if made on the first day of such period) and the Acquisition Projections (as hereinafter defined) shall reflect that such Borrowing Availability of $20,000,000 or greater (without deterioration of working capital) shall continue for at least 90 days after the consummation of such Permitted Acquisition; and (y) on a pro forma basis, no Event of Default has occurred and is continuing or would result after giving effect to such Permitted Acquisition and Borrower would have been in compliance with the financial covenants set forth in Annex G for the ------- four quarter period reflected in the Compliance Certificate most recently 24 delivered to Agent pursuant to Annex E prior to the consummation of such ------- Permitted Acquisition (after giving effect to such Permitted Acquisition and all Loans funded in connection therewith as if made on the first day of such period); (ii) updated versions of the most recently delivered Projections covering the one (1) year period commencing on the date of such Permitted Acquisition and otherwise prepared in accordance with the Projections (the "Acquisition Projections") and based upon ----------------------- historical financial data of a recent date reasonably satisfactory to Agent, taking into account such Permitted Acquisition; and (iii) a certificate of the chief financial officer of Holdings and Borrower to the effect that: (w) Borrower (after taking into consideration all rights of contribution and indemnity Borrower has against Holdings and each other Subsidiary of Holdings) will be Solvent upon the consummation of the Permitted Acquisition; (x) the Acquisition Pro Forma fairly presents the financial condition of Holdings and Borrower (on a consolidated basis) as of the date thereof after giving effect to the Permitted Acquisition; (y) the Acquisition Projections are reasonable estimates, based upon knowledge then available to Borrower, of the future financial performance of Holdings and Borrower subsequent to the date thereof based upon the historical performance of Holdings, Borrower and the Target and show that Holdings and Borrower shall continue to be in compliance with the financial covenants set forth in Annex G for the one (1) year period thereafter; and (z) ------- Holdings and Borrower have completed their due diligence investigation with respect to the Target and such Permitted Acquisition; (iv) on or prior to the date of such Permitted Acquisition, Agent shall have received, in form and substance reasonably satisfactory to Agent, copies of the acquisition agreement and related agreements and instruments, and all opinions, certificates, lien search results and other documents reasonably requested by Agent, including those specified in the second to last sentence of Section 5.10; and ------------ (v) at the time of such Permitted Acquisition and after giving effect thereto, no Default or Event of Default has occurred and is continuing. Notwithstanding the foregoing, the Accounts and Inventory of the Target shall not be included in Eligible Accounts and Eligible Inventory without the prior written consent of Agent following completion of a collateral audit. 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 Agent 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: 25 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, 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 26 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, 2001 and the related statements of income and cash flows of Borrower and its Subsidiaries for the Fiscal Year then ended, certified by PriceWaterhouseCoopers, LLP. (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 up to and including March 2, 2002. (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 March 2, 2002 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 December 30, 2001 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 May 31, 2001 and the Closing Date, ----------------------- 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 K-Mart, Inc. between May 31, 2001 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, except for matters set forth on Disclosure Schedule (3.5). - ------------------------- 27 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 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 28 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 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 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)). Holdings has no assets (except Stock of Borrower) and no Indebtedness or - ------ Guaranteed Indebtedness (except the Obligations). 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 29 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 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 30 contribute by statute) and Canadian Pension Plans adopted by each Credit Party. The Canadian 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 31 fully perfected first priority Liens in and to the Collateral 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 $100,000; (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 $100,000; (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 $100,000, 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 $100,000, 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 $100,000 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 accounts as of the Closing Date, including any Disbursement Accounts, and such Schedule correctly 32 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 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. 3.24 Status of Holdings. Prior to the Closing Date, Holdings will not ------------------ have engaged in any business or incurred any Indebtedness or any other liabilities (except in connection with its corporate formation, the CS First Boston Debt, the Related Transactions Documents and this Agreement). 3.25 Subordinated Debt. As of the Closing Date, Borrower has delivered ----------------- to Agent a complete and correct copy of the Subordinated Debt 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 33 authority to incur the Indebtedness evidenced by the Subordinated Notes. The subordination provisions of the Subordinated Debt 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 Debt 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 fifth anniversary of the Closing Date. 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 Debt Documents and this Section ------- 3.25. - ---- 3.26 Old Holdcos. As of the Closing Date, the Old Holdcos shall have ----------- repaid in full all Indebtedness incurred by the Old Holdcos prior to September 24, 1999 and Intermediate Holdings shall have repaid in full the $7,000,000 of its 14% Senior Discount Notes due 2006. 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 Agent or to Agent 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 Agent or to Agent 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 Agent 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 Agent's request shall instruct those accountants and advisors to disclose and make available to Agent 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 34 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 (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 35 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 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, at its election, either 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, such insurance proceeds do not exceed $10,000,000 in the aggregate and no Default or Event of Default has occurred and is continuing, 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 may elect to apply such insurance proceeds to prepay the Obligations in accordance with Section 1.3(d). All insurance proceeds ------------- 36 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 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 37 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 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 $100,000; 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 $100,000, 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 38 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. 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. Attached as Disclosure Schedule ------------------- (5.10) is a list of all of Borrower's and its domestic and Canadian - ------ Subsidiaries' leased locations as to which landlord waivers have been obtained and Reserves imposed as to leased locations for which all waivers have not been obtained as of the Closing Date. 5.11 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. 39 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, except for Permitted Acquisitions, and except that any Subsidiary of Borrower (other than Jumpking and International Holdings) may merge with Borrower. 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) Credit Parties may hold investments comprised of notes payable, or stock or other securities issued by Account Debtors to such Credit Parties 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 any Subsidiary Guarantor (provided, however, that in the case of ICON New -------- ------- Brunswick, such intercompany loans may only be reloaned to ICON of Canada) in accordance with Section 6.3; (d) after the Closing Date, Borrower may invest up ----------- to $25,000 per year in International Holdings; and (e) 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 described in clauses (i) through (iv) above; (f) investments in ------------------------ European Subsidiaries permitted under Section 6.3; (g) Borrower may make loans ----------- expressly permitted in this Section 6, and (h) loans or investments to Versalite --------- not to exceed $200,000 in the aggregate. 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 ------------------------- 40 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) loans by third parties to ------------ Borrower's European Subsidiaries after the Closing Date in an amount not to exceed $20,000,000 outstanding in the aggregate at any time; provided, that the -------- proceeds of such loans are used solely to permanently repay loans made by Borrower to such European Subsidiaries pursuant to clause (vi) of this Section ------- 6.3(a) and/or for such European Subsidiaries' working capital purposes, (vi) - ------ loans by Borrower to Borrower's European Subsidiaries (including the transfer of Inventory for which Borrower is not paid) in an aggregate amount not to exceed $25,000,000 at any time outstanding and accrued interest on such (including such advances in the amount of $21,000,000 outstanding on the Closing Date), (vii) the Subordinated Notes, (viii) other unsecured Indebtedness not to exceed $100,000 in the aggregate; (ix) Indebtedness consisting of intercompany loans and advances made by Borrower to Subsidiary Guarantors (provided, however, that -------- ------- in the case of ICON New Brunswick, such intercompany loans are for the sole purpose of reloaning the proceeds thereof to ICON of Canada)in an amount not to exceed $20,000,000 in the aggregate; provided, that: such Subsidiary Guarantor -------- shall have executed and delivered to Borrower, on the Closing Date, demand notes (the "Intercompany Notes") to evidence any such intercompany Indebtedness owing ------------------ by such Subsidiary Guarantor 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; and (C) the obligations of such Subsidiary Guarantor under such Intercompany Notes shall be subordinated to the Obligations of such Subsidiary Guarantor as a Guarantor in a manner satisfactory to Agent; and (D) with the exception of an amount not to exceed $50,000 in each Fiscal Year, the amount of any royalty or license fee received by ICON IP from Borrower or any Subsidiary of Borrower shall promptly be loaned back to Borrower or such Subsidiary of Borrower, which intercompany loan shall be evidenced by Intercompany Notes and shall be subordinated to the Obligations of Borrower or such Subsidiary of Borrower as a Guarantor in a manner satisfactory to Agent and (x) the CS First Boston Debt incurred by 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, (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) the ------------- Subordinated Notes. 6.4 Employee Loans and Affiliate Transactions. ----------------------------------------- (a) Except as otherwise expressly permitted in this Section 6 with --------- respect to Affiliates, 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 41 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. ----------------------- (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 (ii) loans to management employees described in Disclosure ---------- Schedule 6.4. - ------------ (c) The Credit Parties shall not pay compensation as salaries or otherwise in excess of $1,200,000 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 such bonuses as may be approved by a disinterested majority of Borrower's Board of Directors in its reasonable discretion, 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 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 or items of payment for deposit to the general account of any Credit Party, (b) for Guaranteed Indebtedness incurred by any Credit Party if the primary obligation is expressly permitted to be incurred by Borrower or any of its domestic or Canadian Subsidiaries by this Agreement, (c) a guaranty by Borrower of the obligations of F.G. Aviation, Inc. in an amount not to exceed $4,500,000, (d) an unsecured guaranty of Indebtedness advanced to Borrower's European Subsidiaries in an aggregate amount not to exceed $20,000,000 and (e) a guarantee of the Subordinated Notes (directly or indirectly) by the Borrower's domestic and Canadian Subsidiaries. 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 42 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 $250,000 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 Agent , (d) non-recourse sales (or limited recourse sales on terms satisfactory to Agent) not to exceed $10,000,000 in any 12-month period 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 Agent and (e) sale-leasebacks permitted under Section 6.12. ------------ 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. 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. 43 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, except sale-leaseback transactions with respect to items of Equipment (other than computer equipment and software) on terms reasonably satisfactory to Agent in amounts not to exceed $2,000,000 in the aggregate in any Fiscal Year. 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) the making of intercompany loans and advances between Borrower and Jumpking, ICON New Brunswick, ICON of Canada, NordicTrack, Free Motion or ICON IP, 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, provided, that no Event of Default under Sections 8.1(a), ---------------- 8.1(h) or 8.1(i) 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; (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., CS First Boston, Scott Watterson, Gary Stevenson and the Affiliates of any of the foregoing and any expenses associated therewith; 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) management fees shall be payable in four equal quarterly installments sixty (60) days after the end of each Fiscal Quarter (g) payments to Holdings necessary to enable 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 Holdings; (2) to pay the fees and expenses necessary to maintain Holdings' corporate existence and good standing; (3) to pay accounting fees attributable to Borrower and its Subsidiaries; and (4) payments to buy back the 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, and (h) bonuses and other payments (including the forgiveness of Indebtedness) to Affiliates of Borrower as set forth on Disclosure Schedule (6.4) hereto. ------------------------- 44 6.15 Change of Corporate Name or Location; Change of Fiscal Year. No Credit ----------------------------------------------------------- Party shall (a) change its name as it appears in official filings in the jurisdiction of its incorporation or other organization (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, (c) change the type of entity that it is, (d) change its organization identification number, if any, issued by its jurisdiction of incorporation or other organization, or (e) change its jurisdiction of incorporation or organization, 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 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 as such term is defined in and/or used in 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. 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 $6,000,000. 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 Debt Documents or any other Subordinated Debt (or any indenture or agreement in connection therewith), 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 Agent in advance in writing. 45 6.20 Credit Parties other than Borrower. 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 and the Subordinated Notes). International Holdings shall not engage in any trade or business or incur any Indebtedness or Guaranteed Indebtedness (other than a guaranty of the Obligations and the Subordinated Notes) or own any assets (other than the Stock of ICON Health & Fitness, Ltd., ICON OS, Inc., ICON of Canada and ICON New Brunswick). 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 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 Agent 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), 5.4(c), 5.6 or 6, or ------------------------------------------------- any of the provisions set forth in Annexes C or G, respectively. -------------- 46 (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 $750,000 in the aggregate in any Borrowing Base Certificate and errors that have the effect of understating the Borrowing Base), 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 $250,000 or more are attached, seized, levied upon or subjected to a writ or distress warrant, or come within the 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 47 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 (which are not covered by insurance policies as to which coverage has been accepted) 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 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) from time to time reduce the Revolving Loan Commitments; (iii) 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 (iv) 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 48 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 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. 8.4 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 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 49 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; 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. 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. 50 (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). - ------ (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). - ------- --------------- 51 9.2 Appointment of Agent. GE Capital is hereby appointed to act on behalf -------------------- of all Lenders as Agent under this Agreement and the other Loan Documents. The provisions of this Section 9.2 are solely for the benefit of Agent 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, 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. Agent shall have no duties or responsibilities except for those expressly set forth in this Agreement and the other Loan Documents. The duties of Agent shall be mechanical and administrative in nature and Agent 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. Except as expressly set forth in this Agreement and the other Loan Documents, Agent shall not have any duty to disclose, and shall not be liable for failure to disclose, any information relating to any Credit Party or any of their respective Subsidiaries or any Account Debtor that is communicated to or obtained by GE Capital or any of its Affiliates in any capacity. Neither Agent nor any of its 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. Agent shall not be deemed to have knowledge of any Default or Event of Default unless and until written notice thereof is given to Agent by the Borrower or a Lender, and Agent shall not 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 Agent. If Agent shall request 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 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. 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 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 Agent, expose Agent to Environmental Liabilities or (c) if 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 Agent as a result of 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. 52 9.3 Agent's Reliance, Etc. Neither Agent nor any of its 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, 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 reasonably 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 Agent and Affiliates. With respect to its Commitments hereunder, GE -------------------- Capital 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 in its individual capacity. GE Capital 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 were not Agent and without any duty to account therefor to Lenders. GE Capital 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 the same to Lenders. Each Lender acknowledges the potential conflict of interest between GE Capital as a Lender holding disproportionate interests in the Loans and GE Capital as Agent. No Lender designated as documentation agent, syndication agent or co-agent shall have any duties or liabilities hereunder whatsoever, except solely in its capacity as a Lender. 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 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. 53 9.6 Indemnification. Lenders agree to indemnify 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 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 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 Agent's gross negligence or willful misconduct. Without limiting the foregoing, each Lender agrees to reimburse Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by 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 Agent is not reimbursed for such expenses by Credit Parties. 9.7 Successor Agent. Agent may resign at any time by giving not less than --------------- 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 thirty (30) days after the date 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 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 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 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 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 54 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. 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. 55 (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 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 56 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 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. 9.10 Power of Attorney in Quebec. Without limiting any of the ----------------------------------- foregoing provisions in favor of Agent, for the purposes of holding any security granted by any Credit Party pursuant to the laws of the Province of Quebec, including any deed of hypothec, debenture, bond or other 57 title of indebtedness and debenture or bond pledge agreements, Agent is hereby appointed to act as the Person holding the power of attorney (fonde de pouvoir) pursuant to article 2692 of the Civil Code of Quebec to act on behalf of each present and future Lender. Each party hereto agrees that, notwithstanding Section 32 of an Act respecting the Special Powers of Legal Persons (Quebec), Agent may, as the Person holding the power of attorney of the Lenders, acquire and/or be the pledgee of any debentures, bonds or other titles of indebtedness secured by any hypothec granted by any Credit Party to Agent pursuant to the laws of the Province of Quebec. 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 and the syndication provisions of the Commitment 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 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 criteria for exclusion 58 from Eligible Accounts and Eligible Inventory set forth in Sections 1.6 and 1.7, -------------------- shall be effective (except to the extent reserved to Agent's discretion) 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) No amendment, modification, termination or waiver shall, unless in writing and signed by Agent and each Lender directly affected thereby: (i) increase the aggregate principal amount of the Commitments or increase the principal amount of any Lender's Term Loan Commitment or Revolving Loan Commitment (which action shall be deemed to directly affect all Lenders); (ii) 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; (iii) extend or waive any payment date or final maturity date of the principal amount of any Loan of any affected Lender; (iv) waive, forgive, defer, extend or postpone any payment of interest or Fees as to any affected Lender; (v) 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); (vi) 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; (vii) 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 (viii) amend or waive Sections 1.3(b), ------------ --------------- 1.3(c), 1.11 or 8.3. Furthermore, no amendment, modification, termination or - ------------ --- waiver affecting the rights or duties of Agent under this Agreement or any other Loan Document shall be effective unless in writing and signed by Agent, 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. 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. (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 59 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 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, Agent specifically reserves its rights as to amendments related to syndication as provided in the Commitment Letter. (g) 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) Agent for all ----------------- fees, costs and expenses (including the reasonable fees and expenses of all of its special counsel, advisors, consultants and auditors) and (ii) Agent (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 Agent of the proceeds of the Loans; 60 (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; (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 Agent. 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. Agent's 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 61 Document shall not waive, affect or diminish any right of Agent 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. 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. 62 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 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 63 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. 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 64 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 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. 65 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 THE CIT GROUP/BUSINESS CREDIT, INC., as a Lender __________________________________________ By: ______________________________________ Duly Authorized Signatory JPMORGAN CHASE BANK, as a Lender __________________________________________ By: ______________________________________ Duly Authorized Signatory FLEET CAPITAL CORPORATION, as a Lender __________________________________________ By: ______________________________________ Duly Authorized Signatory S-1 COMERICA BUSINESS CREDIT, as a Lender __________________________________________ By: ______________________________________ Duly Authorized Signatory S-2 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: ___________________________________ ICON DU CANADA INC./ICON OF CANADA INC. By: ______________________________________ Name: ____________________________________ Title: ___________________________________ S-3 510152 N.B. LTD. By: ______________________________________ Name: ____________________________________ Title: ___________________________________ NORDICTRACK, INC. By: ______________________________________ Name: ____________________________________ Title: ___________________________________ ICON IP., INC. By: ______________________________________ Name: ____________________________________ Title: ___________________________________ FREE MOTION FITNESS, INC. By: ______________________________________ Name: ____________________________________ Title: ___________________________________ S-4 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: "A Rated Bank" has the meaning ascribed to it in Section 6.2. ------------ ----------- "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. "Acquisition Pro Forma" has the meaning ascribed to it in Section --------------------- ------- 2.3(i). - ------- "Advance" means any Revolving Credit Advance or Swing Line Advance, as ------- the context may require. "Affected Lender" has the meaning ascribed to it in Section 1.16(d). --------------- ---------------- "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 A-1 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 otherwise; provided, however, that the term "Affiliate" shall specifically -------- ------- --------- exclude Agent and each Lender. "Agent" means GE Capital in its capacity as Agent for Lenders or its ----- successor appointed pursuant to Section 9.7. ----------- "Agreement" means the Credit Agreement by and among Borrower, the --------- other Credit Parties party thereto, GE Capital, as 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 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 and the Applicable Revolver LIBOR Margin. "Applicable Percentage" has the meaning ascribed to it in Section --------------------- ------- 1.9(c). - ------ "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 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 Term Loan, as determined by reference to Section 1.5(a). ------------- "Applicable Term Loan 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 Term Loan, 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). - ------ A-2 "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). - ------ "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) up to 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; (b) up to the lesser of (i) 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 or (ii) eighty-five percent (85%) (ninety-five percent (95%) during the period of July 1 to November 30 of each year) of the appraised net orderly liquidation value (less liquidation costs in an amount determined by Agent in its reasonable discretion) of Inventory based on an appraisal, such appraisal to be conducted by an appraiser acceptable to Agent and in form and substance satisfactory to Agent; and (c) in the sole and absolute discretion of Agent, up to 50% of the book value of Eligible In-Transit Inventory valued at the lower of cost (determined on a first-in, first-out basis) or market, excluding individual shipments (per vessel) with an aggregate book value of less than $250,000; For the purpose of valuing the Collateral of each of Borrower's Canadian Subsidiaries that is denominated in Canadian Dollars or Borrower's Accounts that are denominated in pounds sterling or Australian dollars, such Collateral shall be converted into the Equivalent Amount thereof in Dollars, in each case, as determined as of the last day of each Fiscal Month unless Agent has notified Borrower that, in light of recent or expected currency fluctuations, the conversion shall be made on a more current basis. A-3 "Borrowing Base Certificate" means a certificate to be executed and -------------------------- delivered from time to time by Borrower in the form attached to the Agreement as Exhibit 4.1(b). - -------------- "Business Day" means any day that is not a Saturday, a Sunday or a day ------------ on which banks are required or permitted to be closed in the States of Illinois or New York and in reference to LIBOR Loans shall mean any such day that is also a LIBOR Business Day. "Canadian Benefit Plans" means all material employee benefit plans of ---------------------- any nature or kind whatsoever that are not Canadian Pension Plans and are maintained or contributed to by any Credit Party having employees in Canada. "Canadian Dollars" and "C$" 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. "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. "Carry Over Amount" has the meaning ascribed to it in Annex G. ----------------- ------- "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. - --- "Certificate of Exemption" has the meaning ascribed to it in Section ------------------------ ------- 1.15(c). - ------- A-4 "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 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 Holdings, (c) the Bain Entities and CS First Boston 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 Holdings on a fully diluted basis, (d) 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. "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 April 9, 2002. ------------ "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; and, provided further, that if such foreign personal -------- ------- property security laws do not contain a definition that is used in another Loan Document, the definition that is used in such other Loan Document shall have the meaning given to it in the Uniform Commercial Code as the same may, from time to time, be enacted and in effect in the State of Illinois. A-5 "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 Holdings Guaranty, 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 Letter" means that certain commitment letter dated as of ----------------- April __, 2002 between Borrower and GE Capital. "Commitment Termination Date" means the earliest of (a) the fifth --------------------------- anniversary of the Closing Date, (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 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) 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) and Term Loan Commitment, which aggregate commitment shall be Two Hundred Thirty-Five Million Dollars ($235,000,000) 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. --------------------- A-6 "Concentration Account Bank" 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. "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 Holdings, Borrower and each of their respective -------------- Subsidiaries. "CS First Boston" means Credit Suisse First Boston Corporation, a --------------- Delaware corporation. "CS First Boston Debt" means Indebtedness of Holdings issued to CS -------------------- First Boston in the amount of $7,500,000 pursuant to a Note Agreement dated as of September 27, 1999. A-7 "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 or within one year from any date of determination without any option on the part of the obligor to extend or renew beyond such year, all accruals for federal or other taxes based on or measured by income and payable within such year, but excluding long term deferred taxes and the current portion of long-term debt required to be paid within one year and the aggregate outstanding principal balances of the Revolving Loan and the Swing Line Loan. "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). ------------ -------------- "Deposit Accounts" means all "deposit accounts" as such term is ---------------- defined in the "Code", now or hereafter held in the name of any Credit Party. "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. "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 A-8 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; and (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. "Eligible Accounts" has the meaning ascribed to it in Section 1.6 of ----------------- ----------- the Agreement. "Eligible Inventory" has the meaning ascribed to it in Section 1.7 of ------------------ ----------- the Agreement. "Eligible In-Transit Inventory" means all finished goods inventory ----------------------------- owned by Borrower and not covered by Letters of Credit, and which finished goods Inventory is in transit from China, Hong Kong or Taiwan to Borrower's facilities in North America with a freight carrier or shipping company which is not an Affiliate of either the Borrower or the supplier and which finished goods Inventory (a) has been the subject of a transfer of title to Borrower, (b) is fully insured, (c) is subject to a first priority security interest in and lien upon such goods in favor of Agent (except for any possessory lien upon such goods in the possession of a freight carrier or shipping company securing only the freight charges for the transportation of such goods to Borrower), (d) is evidenced or deliverable pursuant to documents, notices, instruments, statements and bills of lading that have been delivered to Agent or an agent acting on its behalf, (e) with respect to which Agent has been designated as consignee on any bill of lading or document of title and (f) is otherwise deemed to be "Eligible Inventory" hereunder. A-9 "Eligible K-Mart Accounts" means post-petition Accounts owing by ------------------------ K-Mart, Inc., as debtor-in-possession, with an aggregate book value not to exceed $5,000,000 in the aggregate; provided that (i) no such Account shall -------- remain unpaid more than thirty (30) days after the receipt of goods by the Account Debtor, (ii) the debtor-in-possession credit facility provided to K-Mart, Inc. shall not have been terminated or suspended or credit availability thereunder restricted and (iii) the Chapter 11 proceeding in which K-Mart, 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 --------------------- September 24, 1999 among Holdings, Borrower and Scott Watterson and the Employment Agreement dated as of September 24, 1999 among 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). Environmental Laws include the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. (S)(S)9601 et seq.) ("CERCLA"); the Hazardous Materials ------ ------ Transportation Authorization Act of 1994 (49 U.S.C( S)(S) 5101 et seq.); the ------ Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C (S)(S) 136 et seq.); the Solid Waste Disposal Act (42 U.S.C. (S)(S) 6901 et seq.); the - ------ ------ Toxic Substance Control Act (15 U.S.C (S)(S) 2601 et seq.); the Clean Air Act ------- (42 U.S.C (S)(S)7401 et seq.); the Federal Water Pollution Control Act (33 ------ U.S.C (S)(S)1251 et seq.); the Occupational Safety and Health Act (29 ------ U.S.C(S)(S)651 et seq.); and the Safe Drinking Water Act (42 U.S.C (S)(S) 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. A-10 "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 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. A-11 "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 (Holdings) --------------------- Ltd., ICON Health & Fitness Italia SRL, ICON Fitness Lifestyle Limited, ICON Health & Fitness France SA, Weider Health & Fitness France SA. "Event of Default" has the meaning ascribed to it in Section 8.1. ---------------- ----------- "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 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)(ii), 1.3(b)(iv) or 1.3(d), minus (g) voluntary prepayments made pursuant - -------------------------------- ----- to Section 1.3(a), plus (h) taxes paid in cash during such period and not -------------- ---- deducted in determining consolidated net income for that period. "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" has the meaning ascribed to it in Section 1.9. ---------- ----------- "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-12 "Fiscal Quarter" means any of the quarterly accounting periods of -------------- Borrower, ending on or about 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. "Fixed Charges" means, with respect to Borrower on a consolidated ------------- basis for any fiscal period, (a) the aggregate of all Interest Expense paid or accrued during such period, plus (b) scheduled payments of principal with respect to Indebtedness during such period. "Fixed Charge Coverage Ratio" means, with respect to Borrower on --------------------------- a consolidated basis for any fiscal period, the ratio of (x) EBITDA minus the ----- sum of Capital Expenditures during such period (excluding Capital Expenditures financed by third parties) and income taxes with respect to such period paid or payable in cash to (y) Fixed Charges. For purposes of calculating the Fixed Charge Coverage Ratio, EBITDA and Capital Expenditures shall be measured on a trailing four (4) quarters basis in all instances, and Fixed Charges for the first Fiscal Quarter ending after the Closing Date shall be multiplied by four (4), for the two (2) Fiscal Quarters ending on the last day of the second Fiscal Quarter following the Closing Date, multiplied by two (2) and for the three (3) Fiscal Quarters ending on the last day of the third Fiscal Quarter following the Closing Date, multiplied by 1.333. For the four (4) Fiscal Quarters ending on the last day of the fourth Fiscal Quarter following the Closing Date and the last day of each Fiscal Quarter thereafter, Fixed Charges shall be measured on a trailing four (4) quarters basis. "Fixtures" means all "fixtures" as such term is defined in the -------- Code, now owned or hereafter acquired by any Credit Party. "Foreign Lender" has the meaning ascribed to it in Section 1.15. -------------- ------------ "Free Motion" means Free Motion Fitness, Inc., a Utah ----------- corporation. "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. ------- A-13 "GE Capital" means General Electric Capital Corporation, a ---------- Delaware 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 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. A-14 "Guaranties" means, collectively, the Holdings Guaranty, the ---------- Subsidiary Guaranty and any other guaranty executed by any Guarantor in favor of Agent and Lenders in respect of the Obligations. "Guarantors" means Holdings, ICON of Canada, ICON New Brunswick, ---------- International Holdings, Universal, Free Motion, ICON IP, NordicTrack 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. "Holdings" has the meaning ascribed to it in the recitals to the -------- Agreement. "Holdings Guaranty" means the guaranty of even date herewith ----------------- executed by Holdings in favor of Agent and Lenders. "Holdings Pledge Agreement" means the Pledge Agreement of even ------------------------- date herewith executed by Holdings in favor of Agent, on behalf of itself and Lenders, pledging all of the Stock of Borrower. "ICON IP" means ICON IP, 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 between Agent 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 A-15 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. - ---- "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. A-16 "Intellectual Property" means any and all Licenses, Patents, --------------------- Designs, Copyrights, Trademarks, and the goodwill associated with such Trademarks. "Intercompany Notes" has the meaning ascribed to it in Section ------------------ ------- 6.3. - --- "International Holdings" means ICON International Holdings, Inc., ---------------------- a Delaware corporation. "International 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 the --------------------- first Business Day of each month to occur while such Loan is outstanding, and (b) 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 A-17 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. "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 and 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. "Letter-of-Credit Rights" means letter-of-credit rights as such ----------------------- term is defined in the Code, now owned or hereafter acquired by any Credit Party, including rights to payment or performance under a letter of credit, whether or not such Credit Party, as beneficiary, has demanded or is entitled to demand payment or performance. "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. "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-18 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 seven (7) 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. "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. A-19 "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, and the ----- Term Loan. "Lock Boxes" has the meaning ascribed to it in Annex C. ---------- ------- "Management Agreements" means each of the Management Agreements --------------------- dated as of the September 24, 1999 among Borrower, Holdings, and each of Scott Watterson and Gary Stevenson, the Management Agreement dated as of the September 24, 1999 among Borrower, Holdings and Bain Capital, Inc. and Section 7.1(b) of Securities Purchase Agreement dated as of the September 24, 1999 between Holdings and CS 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 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. A-20 "Maximum Amount" means, as of any date of determination, an -------------- amount equal to the Revolving Loan Commitment of all Lenders as of that date. "Maximum Lawful Rate" has the meaning ascribed to it in Section ------------------- ------- 1.5(f). - ------ "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. "Non-Consenting Lender" has the meaning ascribed to it in Section --------------------- ------- 11.2(d). - ------- "Non-Funding Lender" has the meaning ascribed to it in Section ----------------- ------- 9.9(a). - ------ "NordicTrack" means NordicTrack, Inc., a Utah corporation. ----------- "Notes" means the Revolving Notes and the Swing Line Note. ----- "Notice of Conversion/Continuation" has the meaning ascribed to --------------------------------- it in Section 1.5(e). -------------- "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, hedging obligations, cash management account obligations (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. A-21 "Old Holdcos" shall mean collectively IHF Capital, Inc., IHF Holdings, ----------- Inc. and ICON Fitness Corporation, a Delaware corporation "Original Credit Agreement" means that certain Credit Agreement dated ------------------------- as of September 24, 1999 among Borrower, the other Credit Parties signatory thereto, Agent, Fleet National Bank as a Lender and as Syndication Agent and the other Lenders signatory thereto. "Original Lenders" means collectively GE Capital and the lenders under ---------------- the Original Credit Agreement. "Original Obligations" means the "Obligations" as defined in the -------------------- Original Credit Agreement. "Other Lender" has the meaning ascribed to it in Section 9.9(d). ------------ -------------- "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 Acquisition" means each Acquisition which satisfies the --------------------- conditions set forth in Section 2.3. ----------- "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 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, A-22 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. "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). "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. "Pledge Agreements" means the Borrower Pledge Agreement, the Holdings ----------------- Pledge Agreement, International 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. "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. A-23 "Pro Forma" means the unaudited consolidated and consolidating balance --------- sheet of Borrower and its Subsidiaries as of March 2, 2002 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 Commitments of all Lenders, (b) with respect to the Term Loan, the percentage obtained by dividing (i) the Term Loan Commitment of each Term Lender by (ii) the aggregate Term Loan Commitment of all Term Lenders, as any such percentages may be adjusted by assignments permitted by Section 9.1. ----------- "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. "Proposed Change" has the meaning ascribed to it in Section 11.2(d). --------------- --------------- "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. A-24 "Real Estate" has the meaning ascribed to it in Section 3.6. ----------- "Refinancing" means the repayment in full of the Original Obligations. ----------- "Refunded Swing Line Loan" has the meaning ascribed to it in Section ------------------------v ------- 1.1(c). - ------ "Related Person" has the meaning ascribed to it in Annex C. -------------- ------- "Related Transactions" means the initial borrowing under the Revolving -------------------- Loan and the Term Loan on the Closing Date, the Refinancing, the issuance of the Subordinated Debt and 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 ------------------------------ Subordinated Debt Documents. "Relationship Bank" has the meaning ascribed to it in Annex C. ----------------- ------- "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. "Replacement Lender" has the meaning ascribed to it in Section ------------------ ------- 1.16(d). - ------- "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 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. "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 A-25 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). "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. "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 Two Hundred Ten Million Dollars ($210,000,000) 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). -------------- -------------- A-26 "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. "Settlement Date" has the meaning ascribed to it in Section 9.9(a). --------------- -------------- "Software" means all "software" as such term is defined in the Code, -------- now owned or hereafter acquired by any Credit Party, other than software embedded in any category of goods, including all computer programs and all supporting information provided in connection with a transaction related to any program. "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 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 the certain Stockholders Agreement ---------------------- among the stockholders of Holdings dated as of September 24, 1999. "Subordinated Debt" means the Indebtedness of Borrower evidenced by ----------------- the Subordinated Notes and any other Indebtedness of any Credit Party subordinated to the A-27 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 Debt Documents" means the Subordinated Notes and the --------------------------- Indenture between Borrower and The Bank of New York dated as of April 9, 2002, as from time to time amended. "Subordinated Notes" means those certain 11.25% unsecured Subordinated ------------------ Notes due 2012 issued by Borrower in an aggregate original principal amount of $155,000,000. "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. "Subsidiary Guarantor" means a domestic or Canadian Subsidiary of -------------------- Borrower (a) that is a Guarantor under this Agreement, (b) that has granted Agent for the benefit of Lenders a security interest in all or substantially all of its assets and (c) 100% of the issued and outstanding Stock of which has been pledged to Agent for the benefit of Lenders. "Subsidiary Guaranty" the guaranty of even date herewith executed by ------------------- International Holdings, Universal, Free Motion, ICON IP, NordicTrack and Jumpking in favor of Agent and Lenders. "Supporting Obligations" means all supporting obligations as such term ---------------------- is defined in the Code, including letters of credit and guaranties issued in support of Accounts, Chattel Paper, Documents, General Intangibles, Instruments, or Investment Property. "Swing Line Advance" has the meaning ascribed to it in Section 1.1(c). ------------------ -------------- "Swing Line Availability" has the meaning ascribed to it in Section ----------------------- ------- 1.1(c). - ------ "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-28 "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). --------------- -------------- "Target" has the meaning ascribed to it in Section 2.3. ------ ----------- "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. "Term Lenders" means those Lenders having a Term Loan Commitment. ------------ "Term Loan" shall have the meaning assigned to it in Section --------- ------- 1.1(b)(i). - --------- "Term Loan Commitment" means (a) as to any Lender with a Term Loan -------------------- Commitment, the commitment of such Lender to make its Pro Rata Share of the Term Loan 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 Commitment, the aggregate commitment of all Lenders to make the Term Loan, which aggregate commitment shall be Twenty-Five Million Dollars ($25,000,000) on the Closing Date. After advancing the Term Loan, each reference to a Lender's Term Loan Commitment shall refer to that Lender's Pro Rata Share of the outstanding Term Loan. "Term Note" has the meaning assigned to it in Section 1.1(b)(i). --------- ----------------- "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. "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 A-29 (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. "Uniform Commercial Code jurisdiction" means any jurisdiction that had ------------------------------------ adopted all or substantially all of Article 9 as contained in the 2000 Official Text of the Uniform Commercial Code, as recommended by the National Conference of Commissioners on Uniform State Laws and the American Law Institute, together with any subsequent amendments or modifications to the Official Text. "Universal" means Universal Technical Services, a Utah corporation. --------- "Versalite" means Versalite Systems Co., Ltd., a British Virgin --------- Islands company. "Welfare Plan" means a Plan described in Section 3(i) of ERISA. ------------ "Working Capital" means the average of Borrower's Current Assets less --------------- Current Liabilities for the first three months of each Fiscal Year compared to the average of Borrower's Current Assets less Current Liabilities for the last ---- three months of such Fiscal Year. 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 A-30 "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-31 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 be) an undivided interest and participation equal to such Revolving Lender's Pro Rata Share B-1 (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. 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 B-2 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; (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 B-3 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 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 B-4 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 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 garnishment binding on such bank or any other applicable law binding on such bank, and (iii) C-1 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 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 C-2 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 Note. Duly executed ---------------------------------------------- originals of the Revolving Notes, Swing Line Note and Term Note for each applicable Lender, dated the Closing Date. C. Security Agreement. 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. (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 Original Lenders loan documents evidencing repayment in full of all the Original Lenders' Obligations, together with (a) UCC-3 or other appropriate termination statements, in form and substance satisfactory to Agents, manually signed by the Original Lenders releasing all liens of Original 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 the Original Lenders or relating to the Original 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. Holdings Guaranty. Duly executed originals of the 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 April 9, 2002, 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 ------------------- Hutchins, Wheeler & Dittmar, 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. ---------- 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, D-3 except as set forth in the Credit Agreement, since May 31, 2002 (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. Audited Financials; Financial Condition. Agent shall have --------------------------------------- received Borrower's final Financial Statements for its Fiscal Year ended May 31, 2001, 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 D-4 statements with respect to the solvency of Borrower and matters related thereto as Agent shall request. Z. Subsidiary Guaranties. Guaranties executed by the domestic and --------------------- Canadian Subsidiaries of Borrower. AA. Canadian Security Documents. --------------------------- (i) 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. (ii) 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. BB. Subordinated Debt. Certificate from Borrower certifying as of the ----------------- Closing Date that the issuance of the Subordinated Notes has been completed and that Borrower has received not less than $152,812,950 (before deduction, among other things, of an amount not in excess of $4,500,000 which was applied in payment of CS First Boston's closing fees and expenses in respect of the Subordinated Notes). CC. Other Documents. Such other certificates, documents and --------------- agreements respecting any Credit Party as Agent may, in its sole discretion, request. D-5 ANNEX E (Section 4.1(a)) -------------- to CREDIT AGREEMENT ---------------- FINANCIAL STATEMENTS AND PROJECTIONS -- REPORTING ------------------------------------------------- Borrower shall deliver or cause to be delivered to Agent or to Agent and Lenders, as indicated, the following: (a) Monthly Financials. To Agent 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 Agent 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 information presented is true, correct and complete in all material respects and that there was no E-1 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 Agent 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 Agent and Lenders, as soon as available, but -------------- not later than sixty (60) 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 Agent 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 Default has occurred and is continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event of Default. E-2 (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 $500,000, (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; provided, however, that -------- ------- Borrower shall give Agent written notice of any litigation commenced or threatened against any Credit Party that seeks damages in excess of $100,000 on a quarterly basis; (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 located, and (ii) such other notices or documents as Agent may request in its reasonable discretion. E-3 (m) Product Recall. 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 Agent, 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 three (3) Business Days after the end of each month (as of the last Business Day of each month), 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 three (3) Business Days after the end of each week. (c) As requested by Agent, 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 Agent in their reasonable discretion each of which shall be prepared by Borrower as of the last day of the immediately preceding week; (d) As requested by Agent, 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 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 F-1 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 Agent 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 Agent (i) appraisals of its Inventory no more frequently than one (1) time per year 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; (h) Borrower shall cause to be delivered to Agent on the two (2) year anniversary of the Closing Date and the anniversary of the Closing Date each year thereafter until the Termination Date, a guaranty renewal in the form of Schedule II to that certain Guaranty dated as of the Closing Date between ICON of Canada and Agent and shall deliver to Agent a legal opinion from counsel and in form and substance satisfactory to Agent as to the due authorization, execution, delivery and enforceability of such documents and as to such other matters relating to Guarantor and such documents as Agent may reasonably request; (i) (j) 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 $15,000,000 in the aggregate during any Fiscal Year; provided, however, that the amount of -------- ------- permitted Capital Expenditures for each Fiscal Year after Fiscal Year 2002 may be increased by an amount equal to the lesser of the unspent amount of Capital Expenditures in any Fiscal Year or $7,500,000 (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 Fixed Charge Coverage Ratio. Borrower and its Subsidiaries ----------------------------------- shall have on a consolidated basis at the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending on or about August 31, 2002, a Fixed Charge Coverage Ratio of not less than 1.25%. (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: $62,250,000 for the Fiscal Quarter ending on or about August 31, 2002; $63,250,000 for the Fiscal Quarter ending on or about November 30, 2002; $63,250,000 for the Fiscal Quarter ending on or about February 28, 2003; $64,250,000 for the Fiscal Quarter ending on or about May 31, 2003; $64,250,000 for the Fiscal Quarter ending on or about August 31, 2003; $65,250,000 for the Fiscal Quarter ending on or about November 30, 2003; $65,250,000 for the Fiscal Quarter ending on or about February 28, 2004; $66,250,000 for the Fiscal Quarter ending on or about May 31, 2004; $66,250,000 for the Fiscal Quarter ending on or about August 31, 2004; $67,500,000 for the Fiscal Quarter ending on or about November 30, 2004; $67,500,000 for the Fiscal Quarter ending on or about February 28, 2005; $68,500,000 for the Fiscal Quarter ending on or about May 31, 2005; $68,500,000 for the Fiscal Quarter ending on or about August 31, 2005; $69,500,000 for the Fiscal Quarter ending on or about November 30, 2005; $69,500,000 for the Fiscal Quarter ending on or about February 28, 2006; $70,750,000 for the Fiscal Quarter ending on or about May 31, 2006; $70,750,000 for the Fiscal Quarter ending on or about August 31, 2006; and $71,750,000 for each Fiscal Quarter ending thereafter. G-1 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-2 ANNEX H (Section 9.9(a)) to CREDIT AGREEMENT ---------------- LENDERS' WIRE TRANSFER INFORMATION General Electric Capital Corporation: Bankers Trust 90 Hudson Street., 5TH Floor Jersey City, NJ 07302 ABA #021001033 Account #50232854 Account Name: GECC/CAF Depository Reference: ICON Comerica Bank: Comerica Bank 39200 W. Six Mile Road Livonia, MI 48152 Commercial Loan Department ABA Number 072000096 Account Name: Commercial Loan Department Account Number: 4094920030 Account Reference: ICON Health & Fitness JPMorgan Chase Bank: JPMorgan Chase Bank Asset Based Region 395 North Service Road, 3/rd/ Floor Melville, NY 11747 Attention: Diane Butler ABA Number: 021-000-021 Account Name: ICON Health & Fitness Account Number: 801-903211 Fleet Capital Corporation: Fleet National Bank Hartford, CT ABA Number: 011-900-571 Account Name: Fleet Capital Corp. Account Number: 9401743041 Account Reference: ICON Health & Fitness The CIT Group/Business Credit, Inc.: [To come] H-1 ANNEX I (Section 11.10) to CREDIT AGREEMENT ---------------- NOTICE ADDRESSES ---------------- (A) If to Agent or GE Capital, at General Electric Capital Corporation 500 West Monroe Street Chicago, Illinois 60661 Attention: ICON Health & Fitness, Account Manager Telecopier No.: (312) 419-7500 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) 750-5000 I-1 with copies to: ICON Health & Fitness, Inc. 1500 South 1000 West Logan, Utah 84321 Attention: Brad Bearnson, General Counsel Telecopier No.: (435) 750-3665 Telephone No.: (435) 750-5000 and --- Hutchins, Wheeler & Dittmar 101 Federal Street Boston, Massachusetts 02110 Attention: Charles W. Robins Telecopier No.: (617) 951-1295 Telephone No.: (617) 951-6600 (C) If to Lenders, at Comerica Bank 4100 Spring Valley Road, Suite 400 Dallas, TX 75244 Attention: Riley C. Couch Telecopier No.: (972) 361-2550 Telephone No.: (972) 361-2549 JPMorgan Chase Bank 2200 Ross Avenue, 4/th/ Floor Dallas, TX 75201 Attention: Chad Ramsey Telecopier No.: (214) 965-3294 Telephone No.: (214) 965-3294 Fleet Capital Corporation MA DE 10307X, One Federal Street Boston, MA 02110 Attention: Craig G. Nutbrown Telecopier No.: (617) 654-1167 Telephone No.: (617) 654-1182 The CIT Group/Business Credit, Inc. [To come] I-2 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): $111,702,127.00 Term Loan Commitment $ 13,297,873.00 Comerica Business Credit - ------------------------ Revolving Loan Commitment: $ 13,404,255.00 Term Loan Commitment $ 1,595,745.00 Fleet Capital Corporation - ------------------------- Revolving Loan Commitment: $ 31,276,596.00 Term Loan Commitment $ 3,723,404.00 JPMorgan Chase Bank - ------------------- Revolving Loan Commitment: $ 31,276,596.00 Term Loan Commitment $ 3,723,404.00 The CIT Group/Business Credit, Inc. - ----------------------------------- Revolving Loan Commitment: $ 22,340,426.00 Term Loan Commitment $ 2,659,574.00 J-1 EX-10.12 10 dex1012.txt EXHIBIT 10.12 - STCKHOLDER AGREE. DTD 09/27/99 EXHIBIT 10.12 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 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. 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. 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. 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. 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 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 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; (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 R egistrable 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 "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]. 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 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. 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 (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 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, 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 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 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. 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-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. 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 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 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 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 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 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, 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 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 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 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 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. 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" 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. 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. 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 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 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 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 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 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 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 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 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 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 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; 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 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. 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. 12.2. 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 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. 12.3. 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. 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 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: 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. 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. 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, 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] [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-10.13 11 dex1013.txt EXHIBIT 10.13 - JOINDER & SUPP. TO STKHLDRS AGREE. EXHIBIT 10.13 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. 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. 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. 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 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] [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-10.14 12 dex1014.txt EXHIBIT 10.14 - EMPLOYMENT AGREEMENT - WATTERSON Exhibit 10.14 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 hereunderand (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. 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 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. 5.8.2. 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 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 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. 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 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 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 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. ------------- 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 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. 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. 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 EX-10.15 13 dex1015.txt EXHIBIT 10.15 - EMPLOYMENT AGREEMENT - STEVENSON Exhibit 10.15 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 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. 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 such companies for a maximum of 5 hours per week and 200 hours per year; and b) If the EMPLOYEE purchases securities in any corporatio 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. 5.8.2. 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 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 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. 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 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 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 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. -------------- 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 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. 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. 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 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 EX-10.16 14 dex1016.txt EXHIBIT 10.16 - NON-RECOURSE NOTE -WATTERSON Exhibit 10.16 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 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. 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 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 ---- ------- ------- 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 (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. (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 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. 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. 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 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. * * * * * * * 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-10.17 15 dex1017.txt EXHIBIT 10.17 - NON-RECOURSE NOTE- STEVENSON Exhibit 10.17 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 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. 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 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 ---- ------- ------- 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 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. (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 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. 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. 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 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. * * * * * * * 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-10.18 16 dex1018.txt EXHIBIT 10.18 - PLEDGE & SEC. AGREE.-WATTERSON Exhibit 10.18 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. (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 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. 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. 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 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. * * * * * * * 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 EX-10.19 17 dex1019.txt EXHIBIT 10.19 - PLEDGE & SEC. AGREE.-STEVENSON Exhibit 10.19 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. (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 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. 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. 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 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. * * * * * * * 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-10.20 18 dex1020.txt EXHIBIT 10.20 - HF HOLDINGS JR. MGT. SOP EXHIBIT 10.20 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. 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 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. 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. (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. 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. 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, 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. 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] [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-10.21 19 dex1021.txt EXHIBIT 10.21 - ICON JR. MGT. DEFERRED BONUS PLAN Exhibit 10.21 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-10.22 20 dex1022.txt EXHIBIT 10.22 - MGT. AGREE. DTD 09/27/99-BAIN Exhibit 10.22 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 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 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 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 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. 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. 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, 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. [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 EX-10.23 21 dex1023.txt EXHIBIT 10.23 - MGT. AGREE. DTD 09/27/99-WATTERSON Exhibit 10.23 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. (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 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. 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 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. 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 EX-10.24 22 dex1024.txt EXHIBIT 10.24 - MGT. AGREE. DTD 09/27/99-STEVENSON Exhibit 10.24 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. (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 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. 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 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. 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 EX-10.25 23 dex1025.txt EXHIBIT 10.25 - TAX AGREEMENT DTD 09/27/99 Exhibit 10.25 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 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 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. (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. 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 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. (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. (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. 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-12.1 24 dex121.txt COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.1 Computation of Ratio of Earnings to Fixed Charges
For the Nine Months Ended --------------------------------- 31-May March 3, March 2, March 2, ---------------------------------------- --------- ---------- ---------- --------- Historical Pro Forma Historical Historical Pro Forma ---------------------------------------- --------- ---------- ---------- --------- 1997 1998 1999 2000 2001 2001 2001 2002 2002 ------- ------- ------- ------ ----- ----- ----- ----- ----- Income (loss) before income taxes $(15.9) $(15.4) $(12.6) $(1.0) $16.8 $29.8 $26.2 $33.8 $37.4 Interest expense 33.6 35.0 33.0 33.9 34.8 24.1 27.1 19.7 18.1 Interest portion of rentals 2.8 3.1 2.9 2.6 3.2 3.2 2.4 3.2 3.2 Amortization of deferred financing fees 3.0 4.8 7.0 2.7 3.2 0.9 2.3 2.7 0.7 ------- ------- ------- ------ ----- ----- ----- ----- ----- Total fixed charges 39.4 42.9 42.9 39.2 41.2 28.2 31.8 25.6 22.0 ------- ------- ------- ------ ----- ----- ----- ----- ----- Earnings available for fixed charges $ 23.5 $ 27.5 $ 30.3 $38.2 $58.0 $58.0 $58.0 $59.4 $59.4 ======= ======= ======= ====== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 0.6 0.6 0.7 1.0 1.4 2.1 1.8 2.3 2.7 ======= ======= ======= ====== ===== ===== ===== ===== ===== Excess (deficiency) to cover fixed charges $(15.9) $(15.4) $(12.6) $(1.0) $16.8 $29.8 $26.2 $33.8 $37.4 ======= ======= ======= ====== ===== ===== ===== ===== =====
EX-21.1 25 dex211.txt EXHIBIT 21.1 - SUBSIDIARIES Exhibit 21.1 SUBSIDIARIES OF HF HOLDINGS, INC. Jurisdiction of Name Incorporation Trade Names - ---- ------------- ----------- ICON Health & Fitness, Inc. Delaware PROFORM WEIDERCARE WORKOUT WAREHOUSE IMAGE WESLO HEALTHRIDER NORDICTRACK UTS SUBSIDIARIES OF ICON HEALTH & FITNESS, INC. Jurisdiction of Name Incorporation - ---- ------------- Jumpking, Inc. Utah Universal Technical Services Utah ICON International Holdings, Inc. Delaware ICON IP, Inc. Delaware Free Motion Fitness, Inc. Utah NordicTrack, Inc. Utah ICON du Canada Inc. Quebec, Canada 510152 N.B. Ltd. New Brunswick, Canada ICON OS, Inc. U.S. Virgin Islands ICON Health & Fitness (Holdings) Ltd. United Kingdom ICON Fitness Lifestyle Ltd. United Kingdom ICON Health & Fitness France SARL France Weider Health & Fitness France SA France ICON Health & Fitness Italia Srl Italy AICON Health & Fitness GmbH Germany EX-23.1 26 dex231.txt EXHIBIT 23.1 - CONSENT - PRICEWATERHOUSECOOPERS 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 July 18, 2001, except for Note 17 for which the date is August 29, 2001, 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 Historical Consolidated Financial Data" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah May 29, 2002 EX-25.1 27 dex251.txt EXHIBIT 25.1 - FORM T-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.) NordiTrack, Inc. (Exact name of obligor as specified in its charter) Utah 87-0674680 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) Free Motion Fitness (Exact name of obligor as specified in its charter) Utah 87-0666332 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1500 South, 100 West Logan, Utah 84321 (Address of principal executive offices) (Zip code) _____________ 11.25% Senior Subordinated Notes due 2012 (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. 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 3rd day of May, 2002. THE BANK OF NEW YORK By: /s/ ROBERT A. MASSIMILLO -------------------------------- Name: ROBERT A. MASSIMILLO Title: VICE PRESIDENT -4- EXHIBIT 17 - -------------------------------------------------------------------------------- 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, 2001, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act. Dollar Amounts ASSETS In Thousands Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin ..... $ 3,163,218 Interest-bearing balances .............................. 5,923,554 Securities: Held-to-maturity securities ............................ 1,210,537 Available-for-sale securities .......................... 9,596,941 Federal funds sold and Securities purchased under agreements to resell ................................... 4,723,579 Loans and lease financing receivables: Loans and leases held for sale ......................... 1,104,560 Loans and leases, net of unearned income ............... 36,204,516 LESS: Allowance for loan and lease losses .............. 608,227 Loans and leases, net of unearned income and allowance .............................................. 35,596,289 Trading Assets ............................................ 8,039,857 Premises and fixed assets (including capitalized leases) ................................................ 836,786 Other real estate owned ................................... 1,292 Investments in unconsolidated subsidiaries and associated companies ................................... 207,616 Customers' liability to this bank on acceptances outstanding ............................................ 292,295 Intangible assets Goodwill ............................................... 1,579,965 Other intangible assets ................................ 18,971 Other assets .............................................. 5,723,285 ----------- Total assets .............................................. $78,018,745 =========== LIABILITIES Deposits: In domestic offices .................................... $28,786,182 Noninterest-bearing .................................... 12,264,352 Interest-bearing ....................................... 16,521,830 In foreign offices, Edge and Agreement subsidiaries, and IBFs ............................................... 27,024,257 Noninterest-bearing .................................... 407,933 Interest-bearing ....................................... 26,616,325 Federal funds purchased and securities sold under agreements to repurchase ............................... 1,872,762 Trading liabilities .................................... 2,181,529 Other borrowed money: (includes mortgage indebtedness and obligations under capitalized leases) ........................... 1,692,630 Bank's liability on acceptances executed and outstanding ......................................... 336,900 Subordinated notes and debentures ...................... 1,940,000 Other liabilities ...................................... 7,217,748 ----------- Total liabilities ...................................... $71,052,008 =========== EQUITY CAPITAL Common stock ........................................... 1,135,284 Surplus ................................................ 1,050,729 Retained earnings ...................................... 4,266,676 Accumulated other comprehensive income ................. 13,733 Other equity capital components ........................ 0 - ---------------------------------------------------------------------- Total equity capital ................................... 6,466,422 ----------- Total liabilities and equity capital ................... $78,015,745 =========== 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, Senior Vice President and Comptroller 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 ] Gerald L. Hassell ] Directors Alan R. Griffith ] - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----