-----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, HPx6cKozw9lSLgjzKQBkdHuSesYBQx6Js/5BOg5mtxh6heC5/xB3nn66PjFAOq0G YTMd30DSeMOwZJJ+RtJZSg== 0000950131-98-006646.txt : 19981230 0000950131-98-006646.hdr.sgml : 19981230 ACCESSION NUMBER: 0000950131-98-006646 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUTRACEUTICAL INTERNATIONAL CORP CENTRAL INDEX KEY: 0001050007 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 870515089 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23731 FILM NUMBER: 98777515 BUSINESS ADDRESS: STREET 1: 1400 KEARNS BOULEVARD STREET 2: 2ND FLOOR CITY: PARK CITY STATE: UT ZIP: 84060 BUSINESS PHONE: 4356556000 MAIL ADDRESS: STREET 1: 1400 KEARNS BOULEVARD STREET 2: 2ND FLOOR CITY: PARK CITY STATE: UT ZIP: 84060 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-K --------- (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September 30, 1998 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period from to . Commission file number: 000-23731 --------------------------- NUTRACEUTICAL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) --------------------------- Delaware 87-0515089 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification Number) 1400 Kearns Boulevard, 2nd Floor Park City, Utah 84060 (Address of principal executive offices including zip code) Registrant's telephone number, including area code: (435) 655-6106 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of voting stock held by non-affiliates of the Registrant as of December 23, 1998 at a closing sale price of $4.88 as reported by the Nasdaq National Market was approximately $26.2 million. Shares of Common Stock held by each officer and director and by each person who owns or may be deemed to own 10% or more of the outstanding Common Stock have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of December 23, 1998, the Registrant had 11,670,475 shares of Common Stock outstanding. --------------------------- Documents Incorporated by Reference: Portions of the Registrant's Proxy Statement to be used in connection with the solicitation of proxies for the Registrant's Fiscal 1998 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference in Part III of this Annual Report of Form 10-K (the "Form 10-K"). ================================================================================ NUTRACEUTICAL INTERNATIONAL CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K PART I - ------ Item 1 Business................................................................................. 1 Item 2 Properties............................................................................... 15 Item 3 Legal Proceedings........................................................................ 15 Item 4 Submission of Matters to a Vote of Security-Holders...................................... 15 Item 4A Executive Officers of the Registrant................................................ 16 PART II - ------- Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters................ 17 Item 6 Selected Financial Data.................................................................. 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.... 19 Item 7A Quantitative and Qualitative Disclosure About Market Risk........................... 24 Item 8 Financial Statements and Supplementary Data.............................................. 24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 24 PART III - -------- Item 10 Directors and Executive Officers of the Registrant....................................... 25 Item 11 Executive Compensation................................................................... 25 Item 12 Security Ownership of Certain Beneficial Owners and Management........................... 25 Item 13 Certain Relationships and Related Transactions........................................... 25 PART IV - ------- Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 26
PART I ------ Item 1. Business. Unless the context otherwise requires, the terms "Company" and "Nutraceutical" refer to Nutraceutical International Corporation and, as applicable, its direct and indirect subsidiaries, Nutraceutical Corporation, Solaray, Inc. ("Solaray"), Premier One Products, Inc. ("Premier One"), Makers of KAL, Inc. and Makers of KAL, B.V. ("KAL"), NaturalMax, Inc. ("NaturalMax"), Veglife, Inc. ("VegLife"), Action Labs, Inc. ("Action Labs"), Monarch Nutritional Laboratories, Inc. ("Monarch Nutritional Laboratories"), Au Naturel, Inc. ("Au Naturel") and NutraForce (Canada) International, Inc. ("NutraForce"). General Nutraceutical is one of the nation's largest manufacturers and marketers of quality branded nutritional supplements sold to health food stores. The Company sells its branded products under the Solaray, KAL, NaturalMax, VegLife, Premier One, Solar Green and Natural Sport brand names directly to health food stores in the United States. The Action Labs product line is sold to distributors and health food stores in the United States. Internationally, the Company sells its branded products primarily to distributors and retailers. The Company manufactures and/or distributes one of the broadest branded product lines in the industry with over 1600 stock keeping Units ("SKUs"), including approximately 200 SKUs exclusively sold internationally. With its new Natural Sport line (introduced late in fiscal 1998), the Company introduced its all-natural sport supplement line to health food stores. The Company believes that as a result of its emphasis on quality, loyalty, education and customer service, the Company's brands are widely recognized in health food stores and among health food store consumers. In addition to branded products, the Company manufactures premium bulk formulations for use by itself and for sale to other manufacturers and marketers of nutritional supplements under the tradenames Monarch Nutritional Laboratories and Great Basin Botanicals. The Company was formed in 1993 by senior management and Bain Capital, Inc. ("Bain") to effect a consolidation strategy in the highly fragmented vitamin, mineral, herbal and other nutritional supplements industry (the "VMS Industry"). Since its formation, the Company has successfully completed six acquisitions, including Solaray, Premier One, KAL/NaturalMax, Monarch Nutritional Laboratories, Action Labs and NutraForce. As a result of these acquisitions and internal growth, the Company has grown in net sales and operating income. Management believes that the Company is well positioned to continue to capitalize on the consolidation occurring in the VMS Industry. The Company has adopted a strategy of selling its branded products directly to health food stores in the United States (the "Healthy Foods Channel"). This strategy has enabled the Company to benefit from the rapid growth of the Healthy Foods Channel. The Healthy Foods Channel consists of approximately 10,100 retailers including (i) independent health food stores, (ii) health food stores affiliated with local, regional and national health food chains (including healthy food supermarket chains, such as Whole Foods Market and Wild Oats Markets) and (iii) GNC stores. The Healthy Foods Channel has historically experienced strong growth based on the continued expansion of independent health food stores and local, regional and national health food chains in response to strong demand from consumers who desire product education, service and high quality natural ingredients. The growth of the Healthy Foods Channel does not appear to be currently at (and may not continue at) historical levels. The Company believes there are significant differences between mass market retailers (such as drugstores, warehouse clubs and supermarkets), which typically offer a limited selection of discounted and lower potency items, and the Healthy Foods Channel, where natural ingredients, quality, potency, selection and customer support are emphasized. The Company believes that it benefits from substantially greater customer diversification than most of its larger competitors. The Company 1 also benefits from product diversification. The Company believes that it is among the largest suppliers of nutritional supplements to the Healthy Foods Channel that develops, manufactures, markets and directly distributes a majority of its own products. The Company manufactured over 90% of its products in fiscal 1998 and believes that the quality of its products is among the highest in the industry. The Company markets its branded products through one of the industry's largest sales forces dedicated to the Healthy Foods Channel. The Company seeks to be a market leader in the development of new and innovative products, introducing over 150 new SKUs in fiscal 1998. The Company's principal executive offices are located at 1400 Kearns Blvd., Second Floor, Park City, Utah, 84060. The Company's telephone number is 435-655- 6106. Industry The total United States retail market for nutritional supplements (the "VMS Market") is highly fragmented and historically has grown rapidly, generating $6.5 billion in 1996 sales, as compared to $5.0 billion in 1994. The Company believes that this growth was due to a number of factors, including (i) increased interest in healthier lifestyles, (ii) the publication of research findings supporting the positive health effects of certain nutritional supplements and (iii) the aging of the "Baby Boom" generation combined with the tendency of consumers to purchase more nutritional supplements as they age. The Company does not have reliable data for industry trends after calendar 1996. Recently various publicly traded nutritional supplement companies have announced that there appears to be a slow-down in sales of nutritional supplements which the Company also experienced during the third and fourth fiscal quarters of 1998. The Company believes that this slow-down may be the result of, among other things, the lack of any recent industry-wide "hit" products (such as St. John's Wort in 1997). Products As of September 30, 1998, the Company sold over 1600 SKUs, including approximately 200 SKUs exclusively sold internationally. The Company's products generally fall into one of three categories: (i) supplements, (ii) vitamins and minerals and (iii) diet, energy and other. The Company's products come in various formulations and delivery forms, including tablets, capsules, softgels, liquids, powders and whole herbs. The Company currently markets its products through a multiple brand strategy that the Company believes has been successful in encouraging retailers to allocate additional shelf space to the Company's brands. The Company has enhanced the strength of all of its brands since their respective acquisitions by instituting appropriate business strategies in each case that have included (i) consolidating sales forces and increasing the brands' geographic coverage through an expanded sales force, (ii) instituting performance and growth based incentives for sales representatives, (iii) introducing more sophisticated management information systems and (iv) updating each brand's packaging. As of September 30, 1998, the Company's portfolio of established brand names consisted of the following: Solaray. Solaray began manufacturing and selling herbal products in 1973, originally as a pioneer in formulating and marketing blended herbal products that contain two or more herbs with complementary effects. From its inception, Solaray focused on encapsulated products which offer rapid disintegration and are easy to swallow and has sold its products through independent sales representatives to the Healthy Foods Channel. By 1984, Solaray had become a full line manufacturer, carrying not only herbs, but also a full line of vitamins and minerals. Solaray has become one of the most popular and well-known brands of nutritional supplements in the Healthy Foods Channel and has developed a reputation for quality, consistency and innovation. Three of the most 2 popular products developed by Solaray include (i) Spectro, considered by many to be the premier multivitamin/mineral supplement, (ii) CranActin, which the Company believes is the best-selling cranberry supplement in the Healthy Foods Channel, and (iii) Pygeum/Saw Palmetto, two ingredients intended to help maintain a healthy prostate. Solaray's brand packaging is distinguished by white bottles with a rainbow of five colors across the top of the label as a backdrop to the distinctive Solaray logo. KAL. The KAL product line was established in Southern California in 1932 as one of the first nutritional supplement lines in the United States. Although KAL's first products were in powdered form, KAL soon shifted its focus to tableted products that are generally more economical than capsules as a delivery form and which allow for fewer units per dose than encapsulated products. KAL has been a pioneer in the introduction of new and innovative products, as well as new and unique delivery forms. Among its innovative product introductions was Beyond Garlic, which remains a popular garlic product in the Healthy Foods Channel and was the first "enteric coated softgel" garlic product. This unique delivery form allowed for fresh garlic oil inside of a softgel to pass through the stomach into the intestine before being digested, thereby virtually eliminating any potential garlic odor. KAL was also the first nutritional supplement marketer in the Healthy Foods Channel to introduce pycnogenol and melatonin. More recently, KAL has been an innovator in introducing lipospray products, a new delivery form that allows for quick absorption through a liquid spray. KAL's brand packaging consists of a white bottle and includes the circular red and black KAL logo as a prominent feature on the principal display panel. NaturalMax. The NaturalMax brand began as a product line of the KAL brand in approximately 1993, with a focus on diet products (with diet plans) as well as energy and rest products. The NaturalMax brand uses tablets, softgels, capsules and liquids, depending on the most desired form for the particular product. After the acquisition of KAL/Natural Max, the Company established NaturalMax as a separate brand in order to bring special focus to the NaturalMax product line. The product line includes such innovative and popular products as Super DietMax and Thin-Thin, a nutritional supplement and diet plan with natural 5-HTP derived from griffonia beans. The packaging of NaturalMax products always includes the distinctive NaturalMax logo. Premier One. The Premier One brand was founded in July 1984 in Omaha, Nebraska as one of the first product lines devoted entirely to natural, nutritional supplements derived from bee products. The Premier One brand uses various delivery forms, each chosen for its particular benefits, including capsules, chewable wafers, granules, energy bars, tinctures and products in a honey base. Aside from Royal Jelly in Honey, some of Premier One's other popular products include Raw Energy, an energy product that includes royal jelly, bee pollen and a variety of herbs, and Beefense, a popular product which includes bee propolis and echinacea. Premier One's brand packaging includes a distinctive logo of a bee harvesting scene in a mountain setting, with gold highlights on the label. VegLife. VegLife is a relatively new brand which began in 1992 as a product line under the Solaray brand. The goal was to create a line of products that would be suitable for strict vegetarians who will not consume any products which include any animal-derived ingredients, including gelatin capsules. VegLife was among the first to introduce a line of nutritional supplements using a cellulose-based capsule with substantially equivalent characteristics to traditional gelatin capsules. Vegetarian consumers showed substantial interest in this product line, so the Company established it as a separate brand in 1995 in order to allow a management team to focus on the development of a full line of vegetarian products. This management team scrutinizes every element of each product developed, as well as the materials used in formulation, to ensure that strict vegetarian standards are met. The VegLife brand focuses primarily on encapsulated products, but also now includes a popular soy-based protein drink supplement sold under the trademark Peaceful Planet as well as a kava beverage sold under the trademark Peaceful Kava. VegLife's brand packaging includes a distinctive green and blue label, as well as a logo with an attractive depiction of a budding plant. Solar Green. Solar Green was launched in April 1997. The Solar Green brand is focused on chlorophyll-laden "green foods," such as algaes (including chlorella, spirulina and blue green algae) and cereal grasses (such as barley and wheat grass). These products are currently offered in tablet forms. Solar Green also introduced "green food" drink mixes which can be combined with juice or water to create a nutritious beverage 3 supplement. Solar Green's brand packaging includes a distinctive Solar Green logo and a label with green borders and accents. Action Labs. The Action Labs brand started in 1989 with a focus on men's and women's specialty supplements and diet and energy products. The Company acquired this brand late in fiscal 1998 and is in the process of bringing the manufacturing of many Action Labs products in-house and updating some of the labeling. The Action Labs brand has a relatively strong presence on the East Coast and in GNC stores. The packaging of Action Labs products includes the distinctive Action Labs logo and brightly colored text. Natural Sport. Natural Sport was launched in September 1998 as the Company's newest brand. The Natural Sport brand is focused on all-natural sport supplements for not only serious athletes, but also for individuals who exercise for fitness, health or to lose weight. As of September 30, 1998, the Natural Sport line included two innovative sport beverage supplements, Pre-Burn (to be taken prior to exercise to increase fat metabolism and endurance) and Post-Up (to be taken after exercise to increase muscle glycogen rejuvenation). The line also includes ProSoy, a soy protein beverage supplement, creatine monohydrate and two separate sport multivitamin mineral formulas, one for men and one for women, under the name Phyto Sport. Natural Sport's packaging includes a distinctive Natural Sport logo in black and white, as well as blue lids and a label with an attractive blue swath running up one side of the front panel. Research and Development; Quality Control The Company has a strong commitment to research and development. The Company believes that product quality and innovation are fundamental to its long-term growth and success. Through its research and development efforts, the Company seeks to (i) identify the active ingredients in current and potential new products, (ii) test the safety, potency and efficacy of products, (iii) develop more effective and efficient means of extracting ingredients for use in products, (iv) develop testing methods for ensuring and verifying the consistency of the dosage of ingredients included in the Company's products, (v) develop new, more effective product delivery forms and (vi) develop new products either by combining existing ingredients used in nutritional supplements or identifying new ingredients that can be used in nutritional supplements. The Company's efforts are designed to lead not only to the development of new and improved products, but also to ensure effective manufacturing quality control measures. The Company has entered into a cooperative arrangement with Weber State University in Ogden, Utah through which, among other things, the University provides the Company with access to certain laboratory space and equipment. The University has assigned one faculty member as a project director to coordinate the use of any projects undertaken at the University facility. The Company also conducts research and development in Company-owned laboratories. The Company currently employs various professionals in its research and development and quality control departments, including individuals with Ph.D. degrees. Professionals employed by the Company have degrees in, among other things, chemistry, botany, microbiology, nutrition and engineering and, in many cases, have received training in natural health food products. In addition, the Company retains the services of outside laboratories from time to time to validate its product standards and manufacturing protocols. The Company's quality control program seeks to ensure the superior quality of the Company's products and that they are manufactured in accordance with current Good Manufacturing Practices. The Company's processing methods are monitored closely to ensure that only quality ingredients are used and to ensure product purity. The Company has been a leader in establishing industry product quality guidelines. Sales and Marketing The Company promotes demand for its products by educating retailers, who in turn educate consumers, as to the qualities of its natural vitamin, mineral and herbal nutritional supplements and the wide range of its products. The Company's branded products are currently sold in the United States to retailers in the Healthy Foods Channel, which consists of approximately 10,100 stores, including (i) independent health food stores, (ii) health food stores affiliated with local, regional and national health food chains (including healthy food supermarket chains such as Whole Foods Market and Wild Oats Markets) and (iii) GNC stores. Unlike many of its competitors, the Company does not sell its branded products in the United States to mass market retailers, but 4 instead focuses on sales to the Healthy Foods Channel. The Company believes that its products are attractive to retailers in the Healthy Foods Channel due to factors such as the strength of its brand names, the quality and potency of its products, service and the availability of sales support and educational materials regarding the products. The Company markets its products through a direct sales force dedicated to the Healthy Foods Channel. The Company's sales representatives (including independent, employee and sub-representatives) regularly visit each assigned health food store in their respective territories to assist in the solicitation of orders for products and provide related product sales assistance. The Company monitors and periodically updates its payment structure for its sales force in order to ensure that appropriate incentives are provided for sales growth. The Company also sells products directly to certain retailers through its telephone marketing organization. The Action Labs brand of products are sold principally to distributors and through the Action Labs separate telephone marketing organization. The Company's marketing efforts are focused on educating retailers to enable them to then educate the ultimate consumer about the Company's products. The Company sponsors a retailer seminar program which the Company believes has made an important contribution to the growth of its brands. The Company also sponsors seminars for consumers. Participants receive product education presentations with background information relating to existing products and with special emphasis given to new products. The Company's seminars are designed to foster relationships with the Company's customers in the Healthy Foods Channel and to increase retailer and consumer awareness of the Company's products. Au Naturel was formed in fiscal 1995 for the purpose of marketing the Company's branded products internationally. During fiscal 1998, Au Naturel marketed products to distributors and customers in more than 30 foreign countries. Although Au Naturel is not a product brand, it functions as a separate business unit. Au Naturel markets standard and unique formulations that must meet specific requirements of certain foreign countries, including minor product formulation and labeling changes for Au Naturel's international customers. Au Naturel uses specialized labels to meet the specific requirements of each country. During late fiscal 1998, the Company acquired all of the outstanding stock of its Canadian distributor and shortly thereafter merged this entity into its Canadian subsidiary, NutraForce (Canada) International, Inc. Monarch Nutritional Laboratories and Great Basin Botanicals market premium bulk formulations as well as bulk minerals and herbs in the United States through its own sales force and internationally both directly to manufacturers and through an independent sales representative and a distributor, both based in Europe. Manufacturing The Company's manufacturing process generally consists of the following operations (i) extracting the ingredients contained in a particular product from a bulk source of such ingredient and measuring the ingredient for inclusion in such product, (ii) blending the measured ingredients into a mixture with a homogeneous consistency and 5 (iii) encapsulating or tableting the blended mixture into the appropriate dosage form using either automatic or semiautomatic equipment. The next step, bottling and packaging, involves placing the encapsulated or tableted product in packaging with appropriate tamper-evident features and sending the packaged product to a distribution point for delivery to retailers. The Company places special emphasis on quality control and conducts inspections throughout the manufacturing process, including raw material verification, homogeneity testing, weight deviation measurements and package quality sampling. See "Research and Development; Quality Control." The Company manufactured over 90% of its products in fiscal 1998, based on net sales. By manufacturing the majority of its own products, the Company believes it maintains better control over product quality and availability while also reducing production costs. The Company's manufacturing operations are performed in its facilities located in the greater Ogden, Utah area. The Company also has a working relationship with numerous outside manufacturers and packagers and utilizes these outside sources from time to time. The Company does not have any material backlogs. Monarch Nutritional Laboratories and Great Basin Botanicals source raw material components, provide contract grinding and milling services, manufacture premium bulk formulations and supply these to the Company and other marketers of nutritional supplements, including, in certain cases, competitors of the Company. Monarch Nutritional Laboratories was acquired in September 1995, and certain assets of Great Basin Botanicals were purchased in March 1997. Management Information and Communication Systems The Company uses a custom computer software system for handling order entry and invoicing, shipping, warehouse operations and customer service inquiries. The system provides product delivery and order information and allows for inventory management. The Company believes that this system has improved operating efficiencies and customer service. In addition, the Company has installed an advanced telephone communication system which provides the platform for computer-telephone integration and facilitates intra-company communication. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issue" for a discussion of concerns and potential exposures related to the Company's computer systems vis-a-vis the "Year 2000" issue. Materials and Suppliers The Company's purchasing staff includes individuals with product knowledge and experience related to herbs, minerals, bulk products, bottles, caps, labels, packaging and advertising, marketing and selling material and merchandise. The purchasing staff, in cooperation with quality control personnel, maintains supplier relationships and gathers market information to inform management of issues that might adversely impact the Company's ability to acquire sufficient quantities of raw materials to meet customer demand. The Company engages in extensive sample testing of raw materials to be incorporated in the Company's products. The Company believes that its continued success will depend upon the availability of raw materials that permit the Company to meet its labeling claims, quality control standards and demand for unique ingredients. Due to issues related to quality, efficacy, safety or third-party intellectual property protection, a number of the Company's branded products contain one or more ingredients that may only be available from a single source or supplier. In addition, the supply of herbal products is subject to the same risks normally associated with agricultural production, such as climatic conditions, insect infestations and availability of manual labor for harvesting. Any significant delay in or disruption of the supply of raw materials could substantially increase the cost of such materials and could require product reformulations, as well as the qualification of new suppliers and repackaging. Accordingly, 6 there can be no assurance that the disruption of the Company's supply sources will not have a material adverse effect on the Company. Although the Company acquires the majority of its raw materials from U.S. suppliers, the ingredients of a number of the Company's products include one or more ingredients that originate outside of the United States. The Company's business is therefore subject to the risks generally associated with doing business outside the United States, such as delays in shipments, embargoes, changes in economic and political conditions, tariffs, foreign exchange rates and trade disputes. The Company's business is also subject to the risks associated with the enactment of United States and foreign legislation and regulations relating to imports and exports, including quotas, duties, taxes or other charges or restrictions that could be imposed upon the importation of products into the United States. The Company seeks to mitigate the risk of the shortage of certain raw materials through its relationships with approximately 100 principal suppliers. The Company also acquired Monarch Nutritional Laboratories, a manufacturer of premium bulk formulations, which has purchased manufacturing equipment and hired personnel to allow more extensive vertical integration and to improve the quality and consistency of ingredients. Distribution The Company ships the majority of its products directly to retailers via Federal Express. Shipments are generally made from the Company's primary distribution facilities in Clearfield, Utah and Memphis, Tennessee. These distribution facilities have been strategically located to reduce the Company's expenses relating to outbound freight charges without sacrificing delivery times. Certain of the Company's largest customers receive shipments directly from the Company's central warehouse, located in a separate facility in Clearfield, Utah, which also services the Company's two primary distribution centers. In fiscal 1998, the Company executed a short-term two year lease with multiple two year renewal options for a facility formerly used by the Department of Defense in the Ogden, Utah area ("DDO") in which it intends to consolidate distribution and certain other operations which are currently being performed in five different buildings and locations. This facility is currently under renovation and has been designed to respond quickly to customer demands for the Company's products and to assist the Company to reduce the risk of out-of-stocks and to maintain appropriate levels of finished goods inventory. By integrating the bulk product inventory distribution operation with the bottling and packaging operation, the Company believes it will be able to bottle and package finished goods on a more selective customer demand basis. The Company expects that its Memphis, Tennessee facility will continue to operate for Eastern distribution. Government Regulation The formulation, manufacturing, processing, packaging, labeling, advertising, distribution and sale of nutritional supplements such as those sold by the Company are subject to regulation by one or more federal agencies, principally the FDA and the FTC, and to a lesser extent the Consumer Product Safety Commission and United States Department of Agriculture. These activities are also regulated by various governmental agencies for the states and localities in which the Company's products are manufactured, distributed or sold, as well as by governmental agencies in certain foreign countries in which the Company's products are sold. Among other matters, regulation of the Company by the FDA and FTC is concerned with claims made with respect to a product which refer to the value of the product in treating or preventing disease or other adverse health conditions. Federal agencies, primarily the FDA and FTC, have a variety of remedies and processes available to them, including initiating investigations, issuing warning letters and cease and desist orders, requiring corrective labels or advertising, requiring consumer redress (for example, requiring that a company offer to repurchase products previously sold to consumers), seeking injunctive relief or product seizure and imposing civil penalties or commencing criminal prosecution. In addition, certain state agencies have similar authority, as well as the authority to prohibit or restrict the manufacture or sale of products within their jurisdiction. These federal and state agencies have in the past used these remedies in regulating participants in the nutritional supplements industry, including the imposition by federal agencies of civil penalties in the millions of dollars against a few industry participants. In 7 addition, certain product lines now manufactured by the Company had been the subject of investigations prior to the acquisition of those product lines by the Company, and the Company's bulk product subsidiary has been the subject of an investigation by the FDA and by the Attorney General's Office of the State of California during fiscal 1998. Although none of these investigations has had a material adverse effect on the Company, there can be no assurance that future regulatory action will not have such an effect. There can be no assurance that the regulatory environment in which the Company operates will not change or that such regulatory environment, or any specific action taken against the Company, will not result in a material adverse effect on the Company's business, financial condition or results of operations. In addition, increased sales and publicity of nutritional supplements may result in increased regulatory scrutiny of the nutritional supplements industry. The Dietary Supplement Health and Education Act of 1994 (the "Act") was enacted in October 1994, amending the Food, Drug and Cosmetic Act. The Company believes this law is generally favorable to the dietary supplement industry. The Act establishes a new statutory class of "dietary supplements," which provide vitamins, minerals, herbs, amino acids and other dietary ingredients for human use to supplement the diet. Dietary ingredients on the market as of October 15, 1994 will not require the submission by the manufacturer or distributor of evidence of a history of use or other evidence of safety establishing that the supplement will reasonably be expected to be safe, but a dietary supplement which contains a dietary ingredient which was not on the market as of October 15, 1994 does require such submission of evidence of a history of use or other evidence of safety. Among other things, this law prevents the further regulation of dietary ingredients as "food additives" and allows the use of statements of nutritional support on product labels. The FDA issued final dietary supplement labeling regulations in calendar 1997. These final regulations require the Company to revise most of its product labels by March 1999. The Company has completed its first round of revisions, but still expects to incur substantial increased costs related to these labeling conversions, in part because many of the new labels are the more expensive "peel off" variety. Applicable regulations also currently require the Company to submit notification to the FDA of certain "statements of nutritional support" made in labeling and advertising for the Company's products. Advertising and label claims for dietary supplements and conventional foods have been regulated by state and federal authorities under a number of disparate regulatory schemes. There can be no assurance that a state will not interpret claims presumptively valid under federal law as illegal under that state's regulations, or that future FDA regulations or FTC decisions will not restrict the permissible scope of such claims. The FDA is currently proposing to regulate the sale of nonprescription products containing ephedra, a natural product that contains a small percentage of ephedrine alkaloids which are used in some prescriptions and over the counter stimulants and antihistamines. Various state legislatures and agencies have also expressed concern regarding ephedra-based products. For example, Arkansas, Hawaii, Missouri, Ohio, Florida and Texas have passed legislation or adopted regulations regulating the over-the-counter sale of certain ephedra products or are considering doing so. The Company believes that other states are considering or will consider taking similar action and may take such action in the future. The loss of sales of these products or a further limitation in the states and other jurisdictions where these products may be sold could have a material adverse effect on the Company. More recently, the DEA issued proposed regulations governing the sale of products containing ephedrine alkaloids because of concerns by the DEA that these products may be used in the illegal manufacture of methamphetamines. These proposed regulations would require that certain manufacturers, distributors and retailers who carry covered products register with the DEA and comply with certain requirements. The proposed regulations exempt from registration any products containing 2% or less by weight of ephedrine alkaloids. As of September 30, 1998, all of the Company's products which contain ephedrine alkaloids had 2% or less by weight of ephedrine alkaloids. However, there can be no assurance that the DEA will not modify its proposal or take a more aggressive stance such that some of the Company's products, as well as certain of Company's customers, might be subject to registration and other requirements, and it is possible such a regulation could have a material adverse effect on the Company. 8 In March 1993, the staff of the Cleveland Regional Office of the FTC began an investigation into advertising claims made by the seller in the KAL/Max Acquisition, and made an inquiry to the Company in August 1995 concerning certain products and claims associated with the KAL and NaturalMax product lines. The Company has responded to the FTC and, to the Company's knowledge, the FTC has taken no further action. In July 1997, the Company received a notice that it may be a defendant along with a number of other participants in the dietary supplement industry in a threatened action by certain private litigants or the Attorney General of the State of California, which alleged that certain products containing fish and salmon oils also may be in violation of a California law known as "Proposition 65" for failure to include required warning labels. Proposition 65 allows private litigants or the California Attorney General to recover monetary penalties or injunctive relief under certain circumstances. The Company has learned that the Attorney General of the State of California completed testing of all of the products in question sometime during the early summer of 1998, and has further been advised that the Attorney General would contact each company individually to discuss the results. The Company has not been contacted concerning the results of these tests, nor has the Company received any correspondence or communication from the Attorney General of the State of California or the private party litigant for many months. The Company believes that this issue may have been resolved by the test results. If not, the Company intends to dispute the allegations. However, there can be no assurance that this matter has been completely resolved or that the resolution would not have an adverse impact on the Company's results of operations and financial conditions. In October 1997, the Company and a number of other suppliers, processors and marketers of nutritional supplements received warning letters from the FDA relating to an allegedly contaminated batch of an herb called plantain. These letters claimed that the plantain, which had been shipped to the United States from Europe, had been contaminated with another botanical product with potentially harmful side effects. The letter that the Company received alleged that some of this plantain had been included in a shipment of products that Great Basin had processed for a third party on a contract basis. The Company has replied to the FDA, explaining that, among other things, it did not own the products or market them for human consumption but simply provided grinding services for the owner of the herbs. The Company further noted to the FDA that it did not process any plantain that could have been incorporated into any products that were actually consumed as the only batch it processed was returned to the supplier/owner following the FDA's initial press releases on this matter. The Company has denied responsibility for any adverse effects and affirmed its commitment to good manufacturing practices. There can be no assurances that the FDA will not take further action and that, if taken, such action will not result in a material adverse effect on the Company. On January 20, 1998, Monarch Nutritional Laboratories received a written notice from an attorney representing a private party that alleged that Monarch violated Proposition 65 by not providing appropriate warning statements with respect to the level of lead contained in copper gluconate. This notice alleged that the violation arose from the sale of bulk quantities of copper gluconate to a wholesale customer. The private party that initiated this notice alleged that it purchased some of these bulk products from Monarch's customer. Monarch reached a resolution of this matter with the private party and has had no further communication from the Attorney General of the State of California. However, the FDA contacted the Company regarding this matter and conducted an investigation of the Company's bulk product subsidiary with the assistance of the Company and its outside counsel. The Company has not received any correspondence or communications from the FDA regarding this matter for many months. It is possible that either or both of the foregoing proceedings may result in monetary penalties, adverse publicity, lost sales or a change in the Company's labeling as to the products in question and could have a material adverse effect on the Company. In September 1998, the Company received a letter written by the FDA to all manufacturers and distributors of the supplement L-5-hydroxytryptophan, warning that the FDA believed this supplement might be implicated in the occurrence of a certain disorder known as EMS in a small subgroup of the general population. The FDA asserted in this correspondence that it believed EMS might be related to the presence of a contaminant or substance possibly found in L-5- hydroxytryptophan which it labeled "Peak X." The FDA's letter described a protocol for testing for "Peak X" and urged manufacturers, distributors and marketers of these supplements to test for "Peak X" and to report adverse events related to this supplement to the FDA. The Company has established its own testing protocol for "Peak X" and is actively monitoring the product and any potential adverse reactions. 9 In November 1998, the FTC announced its new advertising guidelines for the dietary supplement industry, which it labeled "Dietary Supplements: An Advertising Guide for Industry." These guidelines reiterate many of the policies the FTC has periodically announced over the years, including requirements for substantiation of claims made in advertising about dietary supplements. Governmental regulations in foreign countries where the Company plans to commence or expand sales may prevent or delay entry into the market or prevent or delay the introduction, or require the reformulation, of certain of the Company's products. Compliance with such foreign governmental regulations is generally the responsibility of the Company's distributors for those countries. These distributors are independent contractors over whom the Company has limited control. As a result of the Company's efforts to comply with applicable statutes and regulations, the Company has from time to time reformulated, eliminated or relabeled certain of its products and revised certain provisions of its sales and marketing program. The Company cannot predict the nature of any future laws, regulations, interpretations or applications, nor can it determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not capable of reformulation, additional recordkeeping, expanded documentation of the properties of certain products, expanded or different labeling, and/or scientific substantiation. Any or all of such requirements could have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the foregoing proceedings or investigations, or any future proceedings or investigations, will not have a material adverse effect on the Company. Competition The nutritional supplements segment of the natural health food products industry is highly competitive. The Company's principal competitors in the Healthy Foods Channel include a limited number of large nationally known manufacturers (such as Twinlab Corporation, Solgar and Nature's Way Products, Inc.) and many smaller manufacturers and distributors of nutritional supplements. Certain of the Company's principal competitors are larger than the Company, have greater access to capital and may be better able to withstand volatile market conditions within the VMS Industry. Moreover, because this industry generally has low barriers to entry, additional competitors could enter the market at any time. Private label products of the Company's customers also provide competition to the Company's products. For example, a substantial portion of GNC's vitamin and mineral supplement offerings are products offered under GNC's own private label. Whole Foods Market, Wild Oats Markets and most large health food stores also sell a portion of their supplement offerings under their own private labels. The Company believes that health food retailers are increasingly likely to align themselves with those companies that offer a wide variety of high quality products, have a loyal customer base, support their brands with strong marketing and advertising programs and provide consistently high levels of customer service. The Company believes that it competes favorably with other nutritional supplement companies because of its comprehensive line of products, premium brand names, commitment to quality, ability to rapidly introduce innovative products, competitive pricing, strong and effective sales force and distribution strategy and sophisticated advertising and promotional support. The wide variety and diversity of the forms, potencies and categories of the Company's products are important points of differentiation between the Company and many of its competitors. Although the Company does not compete in the mass market retail channel of distribution, it is possible that as increasing numbers of companies sell nutritional supplement products in the mass market channels, these product offerings may affect sales in the Healthy Foods Channel. Several major pharmaceutical companies have recently introduced herbal lines in the mass market, including American Home Products (Centrum), Whitehall-Robins (Quanterra) and Bayer (One-A-Day). Many of these companies have substantially greater financial and other resources than the Company. 10 In that regard, although the VMS Industry to date has been characterized by many relatively small participants, there can be no assurance that additional national or international companies (which may include additional pharmaceutical companies or additional suppliers to mass merchandisers) will not seek in the future to enter or to increase their presence in the VMS Market. Increased competition in the VMS Market could have a material adverse effect on the Company. Intellectual Property The Company owns 78 trademarks that have been registered with the United States Patent and Trademark Office and has filed applications to register an additional 55 trademarks. In addition, the Company claims domestic trademark and servicemark rights in numerous additional marks used by the Company. The Company owns a number of trademark registrations in foreign countries and is in the process of filing additional registration applications in various countries. The Company regards its trademarks and other proprietary rights as valuable assets and believes they make a significant positive contribution to the marketing of its products. The Company protects its legal rights concerning its trademarks by appropriate legal action. The Company relies on common law trademark rights to protect its unregistered trademarks. Common law trademark rights do not provide the company with the same level of protection as afforded by a United States federal registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere in the United States, even if the registrant has never used the trademark in the geographic area wherein the unauthorized use is being made (provided, however, that an unauthorized third party user has not, prior to the registration date, perfected its common law rights in the trademark in that geographic area). The Company has registered and intends to register its trademarks in certain foreign jurisdictions where the Company's products are sold. However, the protection available in such jurisdictions may not be as extensive as the protection available to the Company in the United States. The Company is currently involved in trademark infringement litigation relating to the Solaray rainbow logo. The Company is vigorously defending the suit and believes that its use of such logo does not infringe on the plaintiff's registered trademark. See "Legal Proceedings." Employees At September 30, 1998, the Company and its subsidiaries employed over 410 full-time and over 50 part-time employees. None of the Company's employees is represented by a collective bargaining unit. The Company believes that it has a good relationship with its employees. RISK FACTORS In addition to the other information contained in this Form 10-K, the following factors should be considered in evaluating whether to buy, sell, or hold Common Stock of the Company: Government Regulation The formulation, manufacturing, processing, packaging, labeling, advertising, distribution and sale of nutritional supplements such as those sold by the Company are subject to regulation by a number of federal, state and foreign agencies, principally, the Food and Drug Administration ("FDA") and the Federal Trade Commission ("FTC"). Among other matters, such regulation is concerned with health claims made with respect to a product that assert the healing or nutritional value of such product. Such agencies have a variety of remedies and processes available to them, including initiating investigations, issuing warning letters and cease and desist orders, requiring corrective labels or advertising, requiring consumer redress (for example, by requiring that a company offer to repurchase products previously sold to consumers), seeking injunctive relief or product seizure, imposing civil penalties, or commencing criminal prosecution. Federal and state agencies have in the past used these remedies in regulating participants in the nutritional supplements industry, including the imposition by federal agencies of civil penalties in the millions of dollars against a few industry participants. In addition, increased sales and publicity of nutritional supplements may result in increased regulatory scrutiny of the nutritional supplements industry. There can be no assurance that the regulatory environment in which the Company operates will not change or that such regulatory environment, or any specific action taken against the Company, will not result in a material adverse effect on the Company's business, financial condition or results of operations. Additional proceedings and issues are outlined under "Business--Government Regulation." There can be no assurance that such proceedings or investigations or any future proceedings or investigations will not have a material adverse effect on the Company. See "Business--Government Regulation." Product Liability; Potential Adverse Product Publicity The Company, like any other retailer, distributor or manufacturer of products that are designed to be ingested, faces an inherent risk of exposure to 11 product liability claims in the event that the use of its products results in injury. In the event that the Company does not have adequate insurance or contractual indemnification, product liability claims could have a material adverse effect on the Company. Like other manufacturers and distributors of nutritional supplements, the Company and its predecessors currently are or have been named as defendants in product liability lawsuits. The successful assertion or settlement of any uninsured claim, a significant number of insured claims, or a claim exceeding the Company's insurance coverage could have a material adverse effect on the Company. The Company is highly dependent upon consumers' perception of the safety and quality of its products as well as similar products distributed by other companies. Thus, the mere publication of reports asserting that such products may be harmful could have a material adverse effect on the Company, regardless of whether such reports are scientifically supported and regardless of whether the harmful effects would be present at the dosages recommended for such products. Limited Availability of Conclusive Clinical Studies Although many of the ingredients in the Company's products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, some of the Company's products contain innovative ingredients or combinations of ingredients. Although the Company believes all of its products to be safe when taken as directed by the Company, there is little long-term experience with human consumption of certain of these innovative product ingredients or combinations thereof in concentrated form. Although the Company performs research and/or tests the formulation and production of its products, it has only sponsored limited clinical studies. Competition See "Business--Competition." Risk of Limited Supply Sources; Dependence on Foreign Suppliers The Company believes that its continued success will depend upon the availability of raw materials that permit the Company to meet its labeling claims, quality control standards and desire for unique ingredients. Due to issues relating to quality or third party intellectual property rights, a number of the Company's branded products contain one or more ingredients that may only be available from a single source or supplier. In addition, the supply of herbal products is subject to the same risks normally associated with agricultural production, such as climactic conditions, insect infestations and availability of manual labor or equipment for harvesting. Any significant delay in or disruption of the supply of raw materials could substantially increase the cost of such materials, could require product reformulations, the qualification of new suppliers and repackaging and could result in a substantial reduction or termination by the Company of its sales of certain products, any of which could have a material adverse effect upon the Company. Accordingly, there can be no assurance that the disruption of the Company's supply sources will not have a material adverse effect on the Company. Although the Company acquires the majority of its raw materials from U.S. suppliers, the ingredients of a number of the Company's products include one or more ingredients that originate outside of the United States. The Company's business is therefore subject to the risks generally associated with doing business outside the United States, such as delays in shipments, embargoes, changes in economic and political conditions, tariffs, foreign exchange rates and trade disputes. The Company's business is also subject to the risks associated with the enactment of United States and foreign legislation and regulations relating to imports and exports, including quotas, duties, taxes or other charges or restrictions that could be imposed upon the importation of products into the United States. See "Business--Materials and Suppliers." These factors could result in a delay in or disruption of the supply of certain raw materials and could have the consequences described in the preceding paragraph, any of which could have a material adverse effect on the Company. Reliance on Key Management The operation of the Company requires managerial and operational expertise. In particular, the Company is dependent upon the management and leadership skills of a number of its senior managers, including Frank W. Gay II, Bruce R. Hough, Jeffrey A. Hinrichs, William T. Logan and Leslie M. Brown, Jr. Substantially all of the Company's employees are employed "at will." None of the key management employees has a long-term employment contract with the Company and there can be no assurance that such individuals will remain with the Company. The failure of such key personnel to continue to be active in management could have a material adverse effect on the Company. See "Executive Officers of the Registrant." Risks Associated with Implementation of the Business Strategy Implementation of the Company's business strategy is subject to risks and uncertainties, including certain factors that are within the Company's control and other factors that are outside of the Company's control. In addition, certain elements of the Company's business strategy, notably the acquisition of complementary businesses or product lines, could result in significant expenditures of cash and management resources. See "--Risk Associated with Acquisitions." Finally, implementation of the Company's business strategy is subject to risks associated with market and competitive conditions. See "--Competition" and "--No Assurance of Future Industry Growth." 12 Risks Associated with Acquisitions The Company has completed six acquisitions, including the Solaray acquisition, since 1993 and expects to pursue additional acquisitions in the future as a key component of the Company's business strategy. See "Business-- General." There can be no assurances that attractive acquisition opportunities will be available to the Company, that the Company will be able to obtain financing for or otherwise consummate any future acquisitions or that any acquisitions which are consummated will prove to be successful. Moreover, acquisitions involve numerous risks, including the risk that the acquired business will not perform in accordance with expectations, difficulties in the integration of the operations and products of the acquired businesses with the Company's other businesses, the diversion of management's attention from other aspects of the Company's business, the risks associated with entering geographic and product markets in which the Company has limited or no direct prior experience and the potential loss of key employees of the acquired business. The acquisition of another business can also subject the Company to liabilities and claims arising out of such business. In addition, future acquisitions would likely require additional financing, which would likely result in an increase in the Company's indebtedness or the issuance of additional capital stock which could be dilutive to holders of Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." No Assurance of Future Industry Growth There can be no assurance that the VMS Market or the Healthy Foods Channel are as large as reported or that projected or expected growth will occur or continue. Market data and projections, such as those presented in this Form 10-K, are inherently uncertain and subject to change. In addition, the underlying market conditions are subject to change based on economic conditions, consumer preferences and other factors that are beyond the Company's control. There can be no assurance that an adverse change in size or growth rate of the VMS Market or the Healthy Foods Channel will not have a material adverse effect on the Company. Risks Associated with International Markets The Company's continued growth is dependent in part upon its ability to expand its operations into new markets, including international markets. The Company may experience difficulty entering new international markets due to greater regulatory barriers, the necessity of adapting to new regulatory systems and problems related to entering new markets with different cultural bases and political systems. Operating in international markets exposes the Company to certain risks, including, among other things: (i) changes in or interpretations of foreign regulations that may limit the Company's ability to sell certain products or repatriate profits to the United States, (ii) exposure to currency fluctuations, (iii) the potential imposition of trade or foreign exchange restrictions or increased tariffs and (iv) political instability. As the Company continues to expand its international operations, these and other risks associated with international operations are likely to increase. See "Business-- General." Reliance on Independent Contractors The Company places significant reliance on its independent contractors to act as its primary sales force and sell its products to health food retailers. As with any independent contractor, such contractors are not employed or otherwise controlled by the Company and are generally free to conduct their businesses at their own discretion. Although these contractors enter into contracts with the Company, such contracts typically can be terminated at any time by the Company or the independent contractor. The simultaneous loss of the services of a number of these independent contractors could have a material adverse effect on the Company. Control by Existing Stockholders Investment funds (the "Bain Capital Funds") controlled by Bain Capital beneficially own approximately 40.1% of the outstanding Common Stock. By virtue of such stock ownership, Bain Capital may be able to exert significant influence over the election of the members of the Company's Board of Directors and to exert significant influence over the affairs of the Company. Such concentration of ownership could also have the effect of delaying, deterring or preventing a change in control of the Company that might otherwise be beneficial to stockholders. In addition, three representatives of Bain Capital currently serve on the Company's Board of Directors. There can be no assurance that conflicts of interest will not arise with respect to such Directors or that such conflicts will be resolved in a manner favorable to the Company. Computer Systems and Year 2000 Issues The "Year 2000" issue concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the application of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issue." Failure of the Company or its software providers to adequately address the Year 2000 issue could result in misstatement of reported financial information or otherwise adversely affect the Company's business operations. 13 Possible Volatility of Stock Price The market price of the Common Stock may fluctuate significantly. These fluctuations could result from, among other things, variations in the Company's results of operations, which could be adversely affected by a number of factors (some which are beyond the Company's control), including economic downturns, variations in demand for nutritional supplements, changes in the mix of products sold, price changes in response to competition, increases in the cost of raw materials and possible supply shortages. In particular, the market price of the Common Stock could be materially adversely affected by reports by official or unofficial health and medical authorities and the general media regarding the potential health benefits or detriments of products sold by the Company or of similar products distributed by other companies regardless of whether such reports are scientifically supported and regardless of whether the Company's operating results are likely to be affected by such reports, as well as by consumer perceptions regarding the safety and efficacy of nutritional supplements and consumer preferences generally. In addition, the stock market in general has experienced wide price and volume fluctuations in recent periods, and these fluctuations may be unrelated to the operating performance of the specific issuers whose stock is affected. Shares Eligible for Future Sale No prediction can be made as to the effect, if any, that sales of shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price of the Common Stock from time to time. The sale of a substantial number of shares held by existing stockholders, whether pursuant to subsequent public offerings or otherwise, or the perception that such sales could occur, could adversely affect the market price of the Common Stock and could materially impair the Company's future ability to raise capital through an offering of equity securities. Certain Anti-Takeover Effects Certain provisions of the Company's Restated Certificate of Incorporation (the "Restated Certificate") and Amended and Restated By-laws (the "By-laws") may inhibit changes in control of the Company not approved by the Company's Board of Directors. These provisions include (i) a classified Board of Directors, (ii) a prohibition on stockholder action through written consents, (iii) a requirement that special meetings of stockholders be called only by the Board of Directors, (iv) advance notice requirements for stockholder proposals and nominations, (v) limitations on the ability of stockholders to amend, alter or repeal the By-laws and (vi) the authority of the Board to issue without stockholder approval preferred stock, with such terms as the Board may determine. The Company is also afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein under "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," including statements concerning (i) the Company strategy, (ii) the Company's expansion plans, (iii) the market for the Company's products, (iv) the effects of government regulation of the Company's products and (v) the effects on the Company of certain legal proceedings, contain certain forward-looking statements concerning the Company's operations, economic performance and financial condition. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward- looking statements. Factors that could cause such differences include, but are not limited to, those discussed under "Risk Factors." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Forward-Looking Statements." 14 Item 2. Properties. The following table describes the principal properties of the Company as of September 30, 1998:
Square Purpose Location Footage ------- --------------------- ------- DDO (proposed distribution, bottling and bulk material manufacturing). Ogden, Utah 297,200 Brand manufacturing+.................................................. Ogden, Utah 31,230 Finished goods warehouse*............................................. Clearfield, Utah 28,000 Western distribution*................................................. Clearfield, Utah 28,000 Raw material and bulk distribution*................................... Ogden, Utah 25,000 Eastern distribution.................................................. Memphis, Tennessee 22,400 Monarch manufacturing*................................................ Ogden, Utah 21,100 Brand marketing and product development............................... Park City, Utah 10,444 Printing facility..................................................... Las Vegas, Nevada 7,974 Administrative offices and customer service........................... Ogden, Utah 7,830 Action Labs sales and marketing....................................... Long Island, New York 7,300 Great Basin manufacturing*............................................ Clearfield, Utah 6,400 Executive offices and corporate sales and marketing................... Park City, Utah 6,103 Information systems and data management............................... Park City, Utah 3,228 Canadian distribution................................................. Langley, British 2,817 Columbia Research, development and quality control............................. Ogden, Utah 1,813
- -------------------- + With the exception of this property, which is owned by the Company, the Company leases all of the principal properties identified above. Lease terms with respect to such properties end between 1998 and 2003, although the Company has negotiated extension options in many cases. * The operations currently housed in these facilities are expected to be moved to the Company's proposed distribution, bottling and bulk material manufacturing facility at DDO in Ogden, Utah. Item 3. Legal Proceedings. The Company is currently a party to various claims and legal actions which arise in the ordinary course of business. The Company believes such claims and legal actions, individually or in the aggregate, will not have a material adverse effect on the business, financial condition or results of operations of the Company. The Company carries insurance coverage in the types and amounts that management considers reasonably adequate to cover the risks it faces in the industry in which it competes. There can be no assurance, however, that such insurance coverage will be adequate to cover all losses which the Company may incur in future periods. The Company has been sued by American Cyanimid, the manufacturer of the Centrum line of vitamin/mineral supplements. American Cyanimid alleges that the Solaray rainbow logo, as well as two KAL labels, infringe, or have infringed, on the Centrum color spectrum logo. The Company is vigorously defending the lawsuit. The case appears to be proceeding to trial, and although the Company expects to prevail, there can be no assurance of this, nor any assurance that the Company may not be required to pay damages or attorney fees and costs, and change or abandon some of its labels and/or logos. The Company is presently engaged in various other legal actions which arise in the ordinary course of business. Although ultimate liability cannot be determined at the present time, the Company believes that the amount of such liability, if any, from these other actions, after taking into consideration the Company's insurance coverage, will not have a material adverse effect on its results of operations or financial condition. Item 4. Submission of Matters to a Vote of Security-Holders. No matters were submitted to a vote of the Company's security-holders in the fourth quarter of fiscal 1998. 15 Item 4A. Executive Officers of the Registrant. The following table sets forth certain information concerning the executive officers of the Company.
Name Age Position - ---- --- -------- Frank W. Gay II.......... 53 Director, Chairman of the Board and Chief Executive Officer Bruce R. Hough........... 44 Director, President Jeffrey A. Hinrichs...... 41 Director, Chief Operating Officer and Executive Vice President William T. Logan......... 56 Senior Vice President, Marketing and Sales Leslie M. Brown, Jr...... 34 Senior Vice President, Finance and Chief Financial Officer Stanley E. Soper......... 35 Vice President, Legal Affairs
Frank W. Gay II has served as the Chairman of the Board of Directors of the Company since its inception and as Chief Executive Officer since 1994. Mr. Gay has been a partner of F.W. Gay & Sons, a private equity investment group, from 1967 to present. Bruce R. Hough has served as a member of the Board of Directors of the Company since its inception and was made its President in 1994. Prior to joining the Company, Mr. Hough acted as a consultant from 1991 to 1993 and as President of Keystone Communications, a telecommunications firm, from 1987 to 1991. Jeffrey A. Hinrichs has served as Chief Operating Officer and Executive Vice President of the Company since 1994. Prior to joining the Company, Mr. Hinrichs served as President of Solaray, from 1993 to 1994 and as Chief Financial Officer and in other management positions with Solaray from 1984 to 1993. William T. Logan has served as Senior Vice President, Marketing and Sales since February 1995. Mr. Logan served as Senior Vice President of Makers of KAL, Inc. ("Old KAL") from 1978 to January 1995. Prior to joining Old KAL, he held several sales and marketing positions with Gillette. Leslie M. Brown, Jr. joined the Company in January 1995 as Vice President and Controller. Mr. Brown became Senior Vice President, Finance and Chief Financial Officer in October 1997. Prior to joining the Company, he was employed by Price Waterhouse LLP. Mr. Brown is a Certified Public Accountant. Stanley E. Soper has been Vice President, Legal Affairs for the Company since July 1997. Mr. Soper graduated from Yale Law School in 1991, and was in private law practice from 1991 to 1997, most recently with Holland & Hart LLP. 16 PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Market Information The Company's Common Stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "NUTR." The Common Stock commenced trading on February 20, 1998. The following table sets forth the high and low prices per share for the Common Stock as reported by the Nasdaq for the period indicated:
High Low -------- ------- 1998: Second Quarter (from February 20, 1998)........ $23.63 $19.88 Third Quarter.................................. 22.25 8.50 Fourth Quarter................................. 12.75 5.88 1999: First Quarter (through December 23, 1998)...... 7.69 4.88
Holders As of the close of business on December 23, 1998, there were 68 holders of record of Common Stock. The Company believes that it has a significantly larger number of beneficial holders of Common Stock. A recent reported last sale price of the Common Stock on the Nasdaq is set forth on the cover page of this report. Dividends Since its incorporation in 1993, the Company has not declared or paid any cash or other dividends on its Common Stock and does not expect to pay dividends for the foreseeable future. Instead, the Company currently intends to retain earnings to support its growth strategy and reduce indebtedness. As a holding company, the ability of the Company to pay dividends in the future is dependent upon the receipt of dividends or other payments from its principal operating subsidiary. Any future determination to pay dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other factors, the Company's results of operations, financial condition, capital requirements and contractual restrictions. Recent Sales of Unregistered Securities No securities of the Company that were not registered under the Securities Act have been issued or sold by the Company within the period covered by this report. Use of Proceeds The 3,829,500 shares of Common Stock registered and sold in the Company's initial public offering on February 25, 1998 (the "Offering") were offered and sold on behalf of the Company by Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Smith Barney (the "Underwriters"). The issuance of 2,144,618 primary shares resulted in gross proceeds to the Company of $37,530,815 based on the price to the public of $17.50. The Company incurred the following expenses in connection with the Offering: (i) underwriting discounts and commissions of $2,627,157; (ii) non-accountable expenses to the Underwriter of $55,000; and (iii) other expenses including, but not limited to, legal, accounting and printing expenses of $2,041,718. From the effective date of the Company's registration statement on February 11, 1998 until the end of the Company's fiscal year on September 30, 1998, the Company applied approximately $28,678,000 of net proceeds toward the repayment of indebtedness and $4,128,940 for other general corporate purposes. 17 Item 6. Selected Financial Data. The selected financial data presented below were derived from the consolidated financial statements of the Company. The consolidated financial statements for each of the years in the five year period ended September 30, 1998 have been audited by PricewaterhouseCoopers LLP, independent accountants. This selected financial data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Company's consolidated financial statements and the notes thereto.
Year Ended September 30, --------------------------------------------------------------- 1994(a) 1995 1996 1997 1998 ---------- ---------- ----------- ------------ ----------- Consolidated Statement of Operations Data: Net sales...................................... $ 26,083 $ 62,932 $ 83,923 $ 98,096 $ 104,688 Cost of sales.................................. 13,410 35,885 45,099 52,277 57,750 ---------- ---------- ----------- ----------- ----------- Gross profit................................. 12,673 27,047 38,824 45,819 46,938 Operating expenses: Selling, general and administrative.......... 8,116 21,140 27,308 28,879 31,233 Amortization of intangibles.................. 394 1,059 1,483 1,346 1,391 Non-recurring payments to management advisors................................... 187 269 300 300 1,135 One-time payment to executive officer........ -- -- -- 1,700 -- ---------- ---------- ----------- ----------- ----------- Income from operations......................... 3,976 4,579 9,733 13,594 13,179 Interest expense, net.......................... 1,820 4,478 7,126 6,572 3,971 ---------- ---------- ----------- ----------- ----------- Income before provision for income taxes....... 2,156 101 2,607 7,022 9,208 Provision for income taxes..................... 848 23 1,056 2,774 3,509 ---------- ---------- ----------- ----------- ----------- Net income before extraordinary loss........... 1,308 78 1,551 4,248 5,699 Extraordinary loss on early extinguishment of debt, net of tax............................. -- (478) -- -- (3,129) ---------- ---------- ----------- ----------- ----------- Net income (loss).............................. $ 1,308 $ (400) $ 1,551 $ 4,248 $ 2,570 ========== ========== =========== =========== =========== Net income before extraordinary loss per common share, basic................................. $ 0.18 $ 0.01 $ 0.17 $ 0.46 $ 0.53 Net income before extraordinary loss per common share, diluted........................ $ 0.16 $ 0.01 $ 0.15 $ 0.40 $ 0.48 Net income per common share, basic............. $ 0.18 $ (0.05) $ 0.17 $ 0.46 $ 0.24 Net income per common share, diluted........... $ 0.16 $ (0.04) $ 0.15 $ 0.40 $ 0.22 Weighted average shares outstanding, basic..... 7,279,196 8,824,623 9,308,583 9,308,583 10,806,178 Weighted average shares outstanding, diluted... 8,198,261 9,878,693 10,421,667 10,502,749 11,902,348 Other Financial Data: Adjusted EBITDA (b)............................ $ 5,724 $ 11,831 $ 13,118 $ 19,563 $ 19,410 Capital expenditures (excluding acquisitions).. 452 2,837 5,498 3,652 3,380 Cash flows provided by (used in): Operating activities......................... 1,958 (64) 4,559 9,363 10,063 Investing activities......................... (10,065) (49,155) (5,498) (3,652) (17,815) Financing activities......................... 8,341 49,645 2,600 (3,617) 5,309 Balance Sheet Data (at period end): Cash........................................... $ 234 $ 660 $ 2,321 $ 4,415 $ 1,967 Working capital................................ 2,814 17,165 19,727 15,616 24,047 Total assets................................... 16,076 83,498 84,755 90,110 104,308 Total debt..................................... 8,769 60,881 63,657 60,259 37,133 Stockholders' equity........................... 3,738 10,512 12,091 16,354 51,622
- ----------------- (a) The Company's audited financial statements for the year ended September 30, 1994 primarily reflect operations after October 27, 1993, the date of the Solaray acquisition. The Company's operations prior to such date were immaterial. (b) "Adjusted EBITDA" is defined herein as net income before extraordinary loss plus provision for income taxes, net interest expense, depreciation and amortization and other non-recurring items. Management believes that Adjusted EBITDA, as presented, represents a useful measure of assessing the performance of the Company's ongoing operating activities as it reflects the earnings trends of the Company without the impact of the purchase accounting applied in connection with the Company's history of acquisitions, the financing required to consummate such transactions and other non-recurring items. Targets and positive trends in Adjusted EBITDA are used as the 18 performance measure for determining management's bonus compensation and are also used by the Company's creditors in assessing debt covenant compliance. The Company understands that while Adjusted EBITDA is frequently used by securities analysts in the evaluation of nutritional supplement companies, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. Adjusted EBITDA is not intended as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to net income as an indicator of the Company's operating performance or any other measure of performance in accordance with generally accepted accounting principles. The following table sets forth a reconciliation of net income before extraordinary loss to Adjusted EBITDA for each period included herein:
Year Ended September 30, --------------------------------------------- 1994 1995 1996 1997 1998 ------ ------- ------- ------- ------- Net income before extraordinary loss.............................. $1,308 $ 78 $ 1,551 $ 4,248 $ 5,699 Provision for income taxes.......... 848 23 1,056 2,774 3,509 Interest expense, net (1)........... 1,820 4,478 7,126 6,572 3,971 Depreciation and amortization (2)... 1,561 6,983 3,085 3,969 5,096 Non-recurring payments to management advisors (3)...................... 187 269 300 300 1,135 One-time payment to executive officer (4)....................... -- -- -- 1,700 -- ------ ------- ------- ------- ------- Adjusted EBITDA................... $5,724 $11,831 $13,118 $19,563 $19,410 ====== ======= ======= ======= =======
- ----------------- (1) Includes amortization of capitalized debt issuance costs. (2) Includes non-recurring amortization of inventory write up. (3) Represents management fees paid to Bain Capital and F.W. Gay & Sons pursuant to a management advisory agreement, which was terminated in connection with the Offering. As is often the case in stand-alone acquisition scenarios such as the Company's original acquisition of Solaray, during the early stages of the Company's development it relied heavily on an affiliate of its equity sponsors, Bain Capital, to provide certain management services, paying a recurring annual fee pursuant to the management advisory agreement in respect of such services. Over time, the Company has developed the infrastructure to provide these services internally and, as a result, terminated the management advisory agreement (and the recurring management fees payable thereunder) upon consummation of the Offering. (4) Reflects a one-time payment to the Company's Chief Executive Officer for successfully positioning the Company for the Offering. Such payment is in excess of the Chief Executive Officer's annual compensation (salary and bonus), and the Company does not expect to make any further payments of this nature or magnitude in the future. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes thereto included elsewhere in this Form 10-K. Overview The Company was formed in 1993 by senior management and Bain Capital to effect a consolidation strategy in the fragmented VMS Industry. The Company purchased Solaray in October 1993 with a view toward using it as a platform for future acquisitions of businesses in the VMS Industry. In fiscal 1995, the Company completed three additional significant acquisitions: Premier One in October 1994, KAL/NaturalMax in January 1995 and Monarch Nutritional Laboratories in September 1995 (collectively, the "Fiscal 1995 Acquisitions"). In fiscal 1998, the Company completed two additional acquisitions: Action Labs in July 1998 and NutraForce in August 1998 (collectively, the "Fiscal 1998 Acquisitions"). 19 Results of Operations The following table sets forth certain consolidated statement of operations data as a percentage of net sales for the periods indicated:
Year Ended September 30, ------------------------ 1996 1997 1998 ----- ----- ----- Net sales............................................................ 100.0% 100.0% 100.0% Cost of sales........................................................ 53.7 53.3 55.2 ----- ----- ----- Gross profit......................................................... 46.3 46.7 44.8 Selling, general and administrative.................................. 32.5 29.4 29.8 Amortization of intangibles.......................................... 1.8 1.4 1.3 Non-recurring payments to management advisors........................ 0.4 0.3 1.1 One-time payment to executive officer................................ -- 1.7 -- ----- ----- ----- Income from operations............................................... 11.6 13.9 12.6 Interest expense, net................................................ 8.5 6.7 3.8 ----- ----- ----- Income before provision for income taxes............................. 3.1 7.2 8.8 Provision for income taxes........................................... 1.3 2.8 3.4 ----- ----- ----- Net income before extraordinary loss................................. 1.8 4.4 5.4 Extraordinary loss on early extinguishment of debt, net of tax....... -- -- (2.9) ----- ----- ----- Net income........................................................... 1.8% 4.4% 2.5% ===== ===== =====
Comparison of Fiscal 1998 to Fiscal 1997 Net Sales. Net sales increased by $6.6 million, or 6.7%, to $104.7 million for fiscal 1998 from $98.1 million for fiscal 1997. The increase in net sales was primarily the result of increased sales volume. The Company believes that the increased volume was primarily attributable to industry growth and the success of new product introductions and, to a lesser extent, the Fiscal 1998 Acquisitions which occurred during the fourth fiscal quarter. Gross Profit. Gross profit increased by $1.1 million, or 2.4%, to $46.9 million for fiscal 1998 from $45.8 million for fiscal 1997. This increase in gross profit was primarily attributable to growth in sales volume. As a percentage of net sales, gross profit decreased to 44.8% for fiscal 1998 from 46.7% for fiscal 1997. This decrease in gross profit as a percentage of net sales was primarily attributable to higher packaging costs associated with label and bottle conversions and additional discounting associated with certain promotional programs during fiscal 1998. Label conversions are and were necessitated by FDA regulations which become effective in March 1999. Bottle costs increased as the Company moved from polystyrene to PET bottles. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $2.3 million, or 8.2%, to $31.2 million for fiscal 1998 from $28.9 million for fiscal 1997. As a percentage of net sales, selling, general and administrative expenses increased to 29.8% for fiscal 1998 from 29.4% for fiscal 1997. This increase in selling, general and administrative expenses as a percentage of net sales was primarily attributable to the Company's investment in information systems, including increased amortization associated with prior year capital expenditures. Amortization of Intangibles. Amortization of intangibles increased by $0.1 million, or 3.3%, to $1.4 million for fiscal 1998 from $1.3 million for fiscal 1997. As a percentage of net sales, amortization of intangibles decreased to 1.3% for fiscal 1998 from 1.4% for fiscal 1997. This increase in amortization of $0.1 million was primarily attributable to the Fiscal 1998 Acquisitions. During fiscal 1998, approximately two months of amortization expense related to these acquisitions was incurred compared to no amortization expense for fiscal 1997. Non-recurring Payments to Management Advisors. Non-recurring payments to management advisors represent payments pursuant to a management advisory agreement which was terminated in connection with the Offering. One-Time Payment to Executive Officer. One-time payment to executive officer of $1.7 million for fiscal 1997 represents a payment to the Company's Chief Executive Officer for successfully positioning the Company for the Offering. Interest Expense, Net. Interest expense decreased by $2.6 million, or 39.6%, to $4.0 million for fiscal 1998 from $6.6 million for fiscal 1997. As a percentage of net sales, interest expense decreased to 3.8% for fiscal 1998 from 6.7% for fiscal 1997. This decrease in interest expense was primarily attributable to decreased indebtedness associated with debt repayments made with proceeds of the Offering. 20 Provision for Income Taxes. The Company's effective tax rate decreased to 38.1% for fiscal 1998 from 39.5% for fiscal 1997. In each fiscal year, the effective tax rate is higher than statutory rates primarily due to the non- deductibility for tax purposes of goodwill amortization arising from the purchase of Solaray. The impact of Solaray goodwill on the effective tax rate for fiscal 1998 decreased compared to fiscal 1997 as a result of the Company's higher income before provision for taxes. Extraordinary Loss on Early Extinguishment of Debt. An extraordinary loss on early extinguishment of debt of $3.1 million, net of tax, was recognized in fiscal 1998. This loss was incurred in connection with the Offering when new financing (the "New Credit Agreement") was used to extinguish previous debt arising from the Company's previous credit agreement (the "Senior Credit Agreement"). Comparison of Fiscal 1997 to Fiscal 1996 Net Sales. Net sales increased by $14.2 million, or 16.9%, to $98.1 million for fiscal 1997 from $83.9 million for fiscal 1996. The increase in net sales was primarily the result of increased sales volume and, to a lesser extent, minimal increases in the prices of the Company's products. Such price increases were immaterial to revenue growth. The Company believes that the increased volume was primarily attributable to industry growth as well as to the success of the Company's new growth-based incentive compensation structure for independent sales representatives and the success of new product introductions. Gross Profit. Gross profit increased by $7.0 million, or 18.0%, to $45.8 million for fiscal 1997 from $38.8 million for fiscal 1996. This increase in gross profit was primarily attributable to growth in sales volume. As a percentage of net sales, gross profit increased to 46.7% for fiscal 1997 from 46.3% for fiscal 1996. This increase in gross profit as a percentage of net sales was primarily attributable to decreased material costs associated with new vendor sourcing. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1.6 million, or 5.8%, to $28.9 million for fiscal 1997 from $27.3 million for fiscal 1996. As a percentage of net sales, selling, general and administrative expenses decreased to 29.4% for fiscal 1997 from 32.5% for fiscal 1996. This decrease in selling, general and administrative expenses as a percentage of net sales was primarily attributable to the Company's efforts to implement new incentive and cost control programs. Amortization of Intangibles. Amortization of intangibles decreased by $0.2 million, or 9.2%, to $1.3 million for fiscal 1997 from $1.5 million for fiscal 1996. As a percentage of net sales, amortization of intangibles decreased to 1.4% for fiscal 1997 from 1.8% for fiscal 1996. This decrease in amortization of intangibles was primarily attributable to the use of the declining balance method of amortization associated with certain non-compete covenants arising from the Fiscal 1995 Acquisitions. Non-recurring Payments to Management Advisors. Non-recurring payments to management advisors represent payments pursuant to a management advisory agreement which was terminated in connection with the Offering. One-Time Payment to Executive Officer. One-time payment to executive officer of $1.7 million for fiscal 1997 represents a payment to the Company's Chief Executive Officer for successfully positioning the Company for the Offering. Interest Expense, Net. Interest expense decreased by $0.5 million, or 7.8%, to $6.6 million for fiscal 1997 from $7.1 million for fiscal 1996. As a percentage of net sales, interest expense decreased to 6.7% for fiscal 1997 from 8.5% for fiscal 1996. This decrease in interest expense was primarily attributable to decreased indebtedness associated with the Senior Credit Agreement. Provision for Income Taxes. The Company's effective tax rate decreased to 39.5% for fiscal 1997 from 40.5% for fiscal 1996. In each fiscal year, the effective tax rate is higher than statutory rates primarily due to the non- deductibility for tax purposes of goodwill amortization arising from the purchase of Solaray. The impact of Solaray goodwill on the effective tax rate for fiscal 1997 decreased compared to fiscal 1996 as a result of the Company's higher income before provision for taxes. 21 Selected Quarterly Financial Data; Seasonality The following table sets forth certain quarterly financial date for fiscal 1997 and 1998. This quarterly information is unaudited, has been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, reflects all normally recurring adjustments necessary for fair presentation of the information for the periods presented. Operating results for any quarter are not necessarily indicative of results of any future period.
Fiscal 1997 Fiscal 1998 ---------------------------------- --------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- (dollars in thousands, except per share data: unaudited) Net sales....................... $22,365 $25,120 $24,795 $25,815 $25,857 $27,799 $25,004 $26,027 Gross profit.................... 10,562 11,800 11,540 11,917 12,000 13,057 11,027 10,854 Net income before extraordinary loss(a)......... 1,023 1,493 1,632 100 1,432 1,482 1,724 1,061 Net income (loss)............... 1,023 1,493 1,632 100 1,432 (1,647) 1,724 1,061 Earnings (loss) per common share before extraordinary loss: Basic....................... $0.11 $0.16 $0.18 $0.01 $0.15 $0.14 $0.15 $0.09 Diluted..................... $0.10 $0.14 $0.16 $0.01 $0.14 $0.13 $0.14 $0.08 - ----------------
(a) During the second quarter of fiscal 1998, the Company incurred an extraordinary loss of $3,129, net of tax, related to the early extinguishment of debt in connection with the Offering. The Company believes that its business is characterized by minor seasonality. Furthermore, sales to any particular customer can vary substantially from one quarter to the next based on such factors as industry trends, timing of promotional discounts, international economic conditions and acquisition related activities. Historically, the Company has recorded higher sales volume during the second fiscal quarter due to increased interest in health-related products among consumers following the holiday season and in anticipation of the summer months. The Company does not believe that the impact of seasonality on its results of operations is material. In addition, the Company's sales of premium bulk formulations are characterized by periodic shipments to certain customers and can vary significantly from quarter to quarter. Year 2000 Issue Many existing computer programs use only two digits to identify years. These programs were designed without consideration for the effect of the upcoming change in century, and if not corrected, could fail or create erroneous results by or at the year 2000. Essentially all the Company's information technology based systems, as well as many non-information technology based systems, are affected by the Year 2000 issue. Specific systems include accounting, payroll, financial reporting, product formulation and development, manufacturing, inventory tracking and control, business planning, tax, accounts receivable, accounts payable, purchasing, distribution and numerous word processing and similar applications. Non-information technology based systems include equipment and services containing imbedded microprocessors, such as manufacturing and bottling equipment, clocks, security systems and building management systems. The Company also has relationships with numerous third parties, including material suppliers, utility companies, transportation companies, and banks and brokerage firms that may be affected by the Year 2000 issue. Remediation plans have been established for all major systems potentially affected by the Year 2000 issue. These remediation plans constitute an ongoing process that the Company expects to adequately complete before the Year 2000. Identification of areas of potential third party risk is currently in process. Plans will be developed and implemented based on the results of such identification and assessment. No areas of material risk have been identified to date. The Company is in the process of determining the risks it would face in the event certain aspects of its Year 2000 remediation plan fail. It is also developing contingency plans for all mission-critical processes. Under a "worst case" scenario, the Company's manufacturing operations would be unable to build and deliver products in a timely fashion due to internal system failures and/or the inability of vendors to deliver raw materials and components. Alternative suppliers are being identified (where possible) and inventory levels of certain key components may be temporarily increased. While virtually all internal systems can be replaced with manual systems on a temporary basis, the failure of mission-critical systems would have at least a short-term negative affect on operations. The failure of national and worldwide banking systems could result in the inability of many businesses, including the Company, to conduct business. Remediation, risk assessment and contingency plans are expected to be completed in a timely enough manner before the Company experiences any material adverse impact to its ongoing operations. The total cost to the Company of achieving Year 2000 compliance is not expected to exceed $200,000, not including internal resources. Spending to date totals approximately $20,000. 22 Liquidity and Capital Resources For the fiscal year ended September 30, 1998, net cash provided by operations was $10.1 million compared to $9.4 million for the year ended September 30, 1997 and $4.6 million for the year ended September 30, 1996. The increases in fiscal 1998 and 1997 were primarily attributable to higher net income before extraordinary loss and reflect higher levels of accounts payable and deferred income taxes, offset by higher accounts receivable and inventory balances arising from higher sales volume. Net cash used in investing activities was $17.8 million, $3.7 million and $5.5 million for the years ended September 30, 1998, 1997 and 1996, respectively. The Company's investing activities consist primarily of acquisitions and, to a lesser extent, costs associated with capital expenditures. The higher level of cash used in investing activities for fiscal 1998 reflects the Company's purchase of net assets related to the Fiscal 1998 Acquisitions. Capital expenditures during fiscal 1998, 1997 and 1996 related primarily to manufacturing equipment and information systems required to expand capacity and improve overall operating efficiency. The Company intends to finance anticipated capital expenditures through internally generated cash flow and, if necessary, through funds provided under the New Credit Agreement. Net cash provided by (used in) financing activities was $5.3 million, $(3.6) million and $2.6 million for the years ended September 30, 1998, 1997 and 1996, respectively. The Company's financing activities consist primarily of the proceeds generated in connection with the Offering and, to a lesser extent, borrowings and repayments under the Senior Credit Agreement and the New Credit Agreement related to operating needs. The New Credit Agreement currently makes $70.0 million of revolving credit borrowings available to the Company. The available revolving credit borrowings are reduced to $65.0 million, $45.0 million and $37.5 million during fiscal 2001, 2002 and 2003, respectively. Borrowings under the New Credit Agreement are secured by certain assets of the Company and bear interest at the applicable Eurodollar Rate plus a variable margin or at the Federal Funds Rate plus 0.5% plus a variable margin. At September 30, 1998, the applicable interest rate was 5.88%. The Company is also required to pay a variable quarterly fee on the unused balance under the New Credit Agreement. At September 30, 1998, the applicable rate was 0.2%. Accrued interest on Federal Funds Rate borrowings is payable quarterly. Accrued interest on Eurodollar Rate borrowings is payable based on an elected interval of one, two or three months. The Company is required to pay all principal outstanding under the New Credit Agreement in January 2003. The New Credit Agreement contains restrictive covenants, including restrictions on incurring other indebtedness, limitations on capital expenditures, requirements that the Company maintain a minimum level of consolidated net worth, a minimum ratio of cash flow to fixed charges, a minimum level of Adjusted EBITDA, and a maximum ratio of debt to Adjusted EBITDA. Upon the occurrence of an event of default under the New Credit Agreement, the lender may require the Company to repay all amounts borrowed thereunder and may proceed against the collateral. The New Credit Agreement also restricts the Company's ability to make certain payments, including the payment of dividends on its Common Stock and payments with respect to certain capital expenditures, without the approval of its lenders. A key component of the Company's business strategy is to seek to make additional acquisitions, which will likely require that the Company obtain additional financing, which could include the incurrence of substantial additional indebtedness. The Company believes that borrowings under the New Credit Agreement or a replacement credit facility, together with cash flows from operations, will be sufficient to make required payments under the New Credit Agreement or any such replacement facility, and to make anticipated capital expenditures and fund working capital needs for fiscal 1999. New Accounting Standards The Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income, which became effective for fiscal years beginning after December 15, 1997 and established standards for the way that companies report and display comprehensive income and its components in a full set of general purpose financial statements. The Company is currently assessing the impact of SFAS No. 130 on its financial statements. The Financial Accounting Standards Board issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which became effective for fiscal years beginning after December 15, 1997 and established standards for the way that public business enterprises report information about operating segments in annual and quarterly financial statements. SFAS No. 131 also established standards for related disclosures about products and services, geographic areas and major customers. The Company is currently assessing the impact of SFAS No. 131 on its financial statements. The American Institute of Certified Public Accountants issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which became effective for fiscal years beginning after December 15, 1997 and established standards for the way that public business enterprises account for the costs of internal use computer software. The Company is currently assessing the impact of SOP 98-1 on its financial statements. Inflation Inflation affects the cost of raw materials, goods and services used by the Company. In recent years, inflation has been modest. The competitive environment somewhat limits the ability of the Company to recover higher costs resulting form inflation by raising prices. Overall product prices have generally been stable and the Company seeks to mitigate the adverse effects of inflation primarily through improved productivity and cost containment programs. The Company does not believe that inflation has had a material impact on its results of operations for the periods presented. 23 Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information currently available to the Company at the time such statements were made. When used in this MD&A, the words "anticipate," "believe," "estimate," "expect," "intends," and similar expressions, as they relate to the Company are intended to identify forward- looking statements, which include statements relating to, among other things, (i) the ability of the Company to continue to compete successfully in the dietary supplements market; (ii) the anticipated benefits from new product introductions; (iii) the continued effectiveness of the Company's sales and marketing strategy; and (iv) the ability of the Company to continue to successfully develop and launch new products. Actual results could differ materially from those projected in the forward-looking statements as a result of the matters discussed herein and certain economic and business factors, some of which may be beyond the control of the Company. Item 7A. Quantitative and Qualitative Disclosure About Market Risk. Borrowings under the New Credit Agreement bear interest at the applicable Eurodollar Rate plus a variable margin or at the Federal Funds Rate plus 0.5% plus a variable margin. At September 30, 1998, the applicable interest rate was 5.88% and the Company had total borrowings outstanding of $37.0 million. To date, the Company has not obtained interest rate protection with respect to these borrowings due to the recent stability of interest rates. Item 8. Financial Statements and Supplementary Data. The information required by Item 8 is set forth on pages F-1 through F-17 of this Form 10-K. The supplementary financial information required by Item 302 of Regulation S-K is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Selected Quarterly Financial Data; Seasonality." Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 24 PART III -------- Item 10. Directors and Executive Officers of the Registrant. Information with respect to Directors of the Company is set forth in the Proxy Statement under the heading "The Board of Directors," which information is incorporated herein by reference. Information regarding the executive officers of the Company is included as Item 4A of Part I of the Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K is set forth in the Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance," which information is incorporated herein by reference. Item 11. Executive Compensation. Information with respect to executive compensation is set forth in the Proxy Statement under the heading "Executive Compensation," which information is incorporated herein by reference (except for the Compensation Committee Report and the Performance Graph). Item 12. Security Ownership of Certain Beneficial Owners and Management. Information with respect to security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Principal Stockholders," which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information with respect to certain relationships and related transactions is set forth in the Proxy Statements under the headings "The Board of Directors- - - Compensation Committee Interlocks and Insider Participation" and "The Board of Directors--Certain Relationships and Related Transactions," which information is incorporated herein by reference. 25 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements, as set forth on the attached Index to Financial Statements. 2. Exhibits, as set forth on the attached Exhibit Index. 3. Financial Statement Schedules. Schedule II--Valuation and Qualifying Accounts (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on July 21, 1998. 26 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 29th day of December, 1998. NUTRACEUTICAL INTERNATIONAL CORPORATION By: /s/ Frank W. Gay II ---------------------------- Name: Frank W. Gay II Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1994, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on this 29th day of December, 1998.
Signature Capacity --------- -------- /s/ Frank W. Gay II Director, Chairman of the Board and Chief Executive - -------------------------------- Officer Frank W. Gay II /s/ Bruce R. Hough - -------------------------------- Bruce R. Hough Director, President /s/ Jeffrey A. Hinrichs Director, Chief Operating Officer and Executive Vice - -------------------------------- President Jeffrey A. Hinrichs /s/ Leslie M. Brown, Jr. - -------------------------------- Leslie M. Brown, Jr. Senior Vice President, Finance and Chief Financial Officer /s/ Alexander Gordon Bearn, M.D. - -------------------------------- Alexander Gordon Bearn, M.D. Director /s/ Robert C. Gay - -------------------------------- Robert C. Gay Director /s/ Matthew S. Levin - -------------------------------- Matthew S. Levin Director /s/ Geoffrey S. Rehnert - -------------------------------- Geoffrey S. Rehnert Director /s/ Jon Steven Young - -------------------------------- Jon Steven Young Director
EXHIBIT INDEX -------------
Number Description - ------ ----------- 3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant(1) 3.2 Form of By-laws of the Registrant(1) 4.1 Form of certificate representing Common Stock(1) 4.2 Amended and Restated Registration Agreement dated as of January 31, 1995 among the Company and certain of its stockholders(1) 4.3 Credit Agreement dated as of February 25, 1998 among the Company and its lenders* 10.1 Nutraceutical International Corporation 1998 Stock Incentive Plan(1) 10.2 Nutraceutical International Corporation 1998 Non-Employee Director Stock Option Plan(1) 10.3 Nutraceutical International Corporation Employee Stock Discount Purchase Plan(1) 10.4 Transaction Services Agreement between the Company and Bain Capital(1) 10.5 Consultant Stock Agreement dated as of October 28, 1993 between the Company and Bruce R. Hough(1) 10.6 Executive Stock Agreement dated as of October 28, 1993 between the Company and Jeffrey A. Hinrichs(1) 10.7 Stock Option Agreement dated as of November 15, 1994 between the Company and Jeffrey A. Hinrichs(1) 10.8 Stock Option Agreement dated as of November 15, 1994 between the Company and Bruce R. Hough(1) 10.9 Stock Option Agreement dated as of November 15, 1994 between the Company and Frank W. Gay II(1) 10.10 Form of Area Sales Consultant Agreement(1) 11.1 Computation of earnings per share The information required by Exhibit 11.1 is set forth on page F-14 of this Form 10-K. 21.1 Subsidiaries of the Company 23.1 Consent of PricewaterhouseCoopers LLP 27.1 Financial Data Schedule
- ------------------ (1) Incorporated by reference to the applicable exhibit to the Registrant's Registration Statement on Form S-1, Registration No. 333-41909. * The Company agrees to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to such agreement upon request by the Commission. NUTRACEUTICAL INTERNATIONAL CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Financial Statements: Report of Independent Accountants...................................... F-2 Consolidated Balance Sheets at September 30, 1997 and 1998............. F-3 Consolidated Statements of Operations for the years ended September 30, 1996, 1997 and 1998................................................... F-4 Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1997 and 1998................................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1996, 1997 and 1998..................................... F-6 Notes to Consolidated Financial Statements............................. F-7 Financial Statement Schedules: For each of the three years in the period ended September 30, 1998 Schedule II -- Valuation and Qualifying Accounts
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Nutraceutical International Corporation. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Nutraceutical International Corporation and its subsidiaries at September 30, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah November 17, 1998 F-2 NUTRACEUTICAL INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
SEPTEMBER 30, ----------------- 1997 1998 ------- -------- ASSETS - ------ Current assets: Cash...................................................... $ 4,415 $ 1,967 Accountants receivable, net............................... 8,001 9,149 Inventories, net.......................................... 20,753 23,935 Prepaid expenses and other assets......................... 1,018 1,649 Deferred income taxes..................................... 897 1,101 ------- -------- Total current assets.................................... 35,084 37,801 Property, plant and equipment, net.......................... 10,711 10,770 Goodwill, net............................................... 42,008 54,375 Other assets, net........................................... 2,307 1,362 ------- -------- $90,110 $104,308 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current portion of long-term debt......................... $ 7,085 $ -- Current portion of capital lease obligations.............. 181 53 Accounts payable.......................................... 6,932 9,614 Accrued expenses.......................................... 5,270 4,087 ------- -------- Total current liabilities............................... 19,468 13,754 Long-term debt.............................................. 52,860 37,000 Capital lease obligations................................... 133 80 Deferred income taxes, net.................................. 1,295 1,852 ------- -------- Total liabilities....................................... 73,756 52,686 ------- -------- Commitments and contingencies (Notes 10, 13 and 16) Stockholders' equity: Common Stock, $.01 par value, 50,000,000 shares authorized, 9,308,583 and 11,764,879 shares issued and outstanding at September 30, 1997 and 1998, respectively............................................. 93 118 Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at September 30, 1997 and 1998........................................ -- -- Additional paid-in capital................................ 9,609 42,515 Subscriptions receivable.................................. (55) -- Retained earnings......................................... 6,707 9,277 Cumulative translation adjustment......................... -- 13 Treasury stock at cost, 41,800 shares at September 30, 1998..................................................... -- (301) ------- -------- Total stockholders' equity.............................. 16,354 51,622 ------- -------- $90,110 $104,308 ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 NUTRACEUTICAL INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data)
YEAR ENDED SEPTEMBER 30, -------------------------------- 1996 1997 1998 ---------- ---------- ---------- Net sales................................... $ 83,923 $ 98,096 $ 104,688 Cost of sales............................... 45,099 52,277 57,750 ---------- ---------- ---------- Gross profit............................ 38,824 45,819 46,938 ---------- ---------- ---------- Operating expenses: Selling, general and administrative....... 27,308 28,879 31,233 Amortization of intangibles............... 1,483 1,346 1,391 Non-recurring payments to management advisors................................. 300 300 1,135 One-time payment to executive officer..... -- 1,700 -- ---------- ---------- ---------- 29,091 32,225 33,759 ---------- ---------- ---------- Income from operations...................... 9,733 13,594 13,179 Interest expense, net....................... 7,126 6,572 3,971 ---------- ---------- ---------- Income before provision for income taxes.... 2,607 7,022 9,208 Provision for income taxes.................. 1,056 2,774 3,509 ---------- ---------- ---------- Net income before extraordinary loss........ 1,551 4,248 5,699 Extraordinary loss on early extinguishment of debt, net of tax........................ -- -- (3,129) ---------- ---------- ---------- Net income.................................. $ 1,551 $ 4,248 $ 2,570 ========== ========== ========== Net income before extraordinary loss per common share: Basic..................................... $ 0.17 $ 0.46 $ 0.53 Diluted................................... $ 0.15 $ 0.40 $ 0.48 Extraordinary loss per common share: Basic..................................... $ -- $ -- $ (0.29) Diluted................................... $ -- $ -- $ (0.26) Net income per common share: Basic..................................... $ 0.17 $ 0.46 $ 0.24 Diluted................................... $ 0.15 $ 0.40 $ 0.22 Weighted average common shares outstanding: Basic..................................... 9,308,583 9,308,583 10,806,178 Diluted................................... 10,421,667 10,502,749 11,902,348
The accompanying notes are an integral part of these consolidated financial statements. F-4 NUTRACEUTICAL INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands, except per share data)
YEAR ENDED SEPTEMBER 30, -------------------------- 1996 1997 1998 ------- ------- -------- Cash flows from operating activities: Net income....................................... $ 1,551 $ 4,248 $ 2,570 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (includes amortization of inventory write-up of $381 during 1998).................................. 3,085 3,969 5,096 Amortization of debt issuance costs............ 785 817 468 Extraordinary loss on early extinguishment of debt, net of tax.............................. -- -- 3,129 Loss on disposal of property, plant and equipment..................................... -- -- 7 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable.......................... 3,932 (794) (456) Inventories.................................. (1,491) (3,390) (2,460) Prepaid expenses and other assets............ (358) 190 (453) Deferred income taxes........................ 909 608 520 Other assets................................. (1) (3) (305) Accounts payable............................. (2,838) 1,939 1,960 Accrued expenses............................. (1,015) 1,779 (13) ------- ------- -------- Net cash provided by operating activities.. 4,559 9,363 10,063 ------- ------- -------- Cash flows from investing activities: Purchases of property and equipment.............. (5,498) (3,652) (3,380) Acquisitions, net of cash acquired............... -- -- (14,435) ------- ------- -------- Net cash used in investing activities...... (5,498) (3,652) (17,815) ------- ------- -------- Cash flows from financing activities: Proceeds from long-term debt..................... 4,250 -- 46,450 Payments on long-term debt....................... (1,500) (3,450) (71,955) Principal payments on capital lease obligations.. (178) (182) (181) Payment of deferred financing fees............... -- -- (1,058) Prepayment penalty and fees on early extinguishment of debt.......................... -- -- (632) Receipts of subscriptions receivable............. 28 15 55 Proceeds from issuance of common stock........... -- -- 32,931 Purchase of treasury shares...................... -- -- (301) ------- ------- -------- Net cash provided by (used in) financing activities................................ 2,600 (3,617) 5,309 ------- ------- -------- Effect of exchange rate changes on cash............. -- -- (5) ------- ------- -------- Net increase (decrease) in cash.................... 1,661 2,094 (2,448) Cash at beginning of period........................ 660 2,321 4,415 ------- ------- -------- Cash at end of period.............................. $ 2,321 $ 4,415 $ 1,967 ======= ======= ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest....................................... $ 6,164 $ 5,924 $ 3,882 Income taxes................................... $ 513 $ 2,432 $ 874
The accompanying notes are an integral part of these consolidated financial statements. F-5 NUTRACEUTICAL INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands, except per share data)
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL ----------------- PAID-IN SUBSCRIPTIONS RETAINED TRANSLATION TREASURY STOCKHOLDERS' SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS ADJUSTMENT STOCK EQUITY ---------- ------ ---------- ------------- -------- ----------- -------- ------------- Balance at October 1, 1995................... 9,308,583 $ 93 $ 9,609 $(98) $ 908 $-- $ -- $10,512 Receipt of subscriptions receivable............. -- -- -- 28 -- -- -- 28 Net income.............. -- -- -- -- 1,551 -- -- 1,551 ---------- ---- ------- ---- ------ ---- ----- ------- Balance at September 30, 1996................... 9,308,583 93 9,609 (70) 2,459 -- -- 12,091 Receipt of subscriptions receivable............. -- -- -- 15 -- -- -- 15 Net income.............. -- -- -- -- 4,248 -- -- 4,248 ---------- ---- ------- ---- ------ ---- ----- ------- Balance at September 30, 1997................... 9,308,583 93 9,609 (55) 6,707 -- -- 16,354 Issuance of common stock.................. 2,456,296 25 32,906 -- -- -- -- 32,931 Receipt of subscriptions receivable............. -- -- -- 55 -- -- -- 55 Net income.............. -- -- -- -- 2,570 -- -- 2,570 Cumulative translation adjustment............. -- -- -- -- -- 13 -- 13 Purchase of treasury stock.................. -- -- -- -- -- -- (301) (301) ---------- ---- ------- ---- ------ ---- ----- ------- Balance at September 30, 1998................... 11,764,879 $118 $42,515 $-- $9,277 $ 13 $(301) $51,622 ========== ==== ======= ==== ====== ==== ===== =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 1. DESCRIPTION OF BUSINESS Nutraceutical International Corporation (the Company) develops, manufactures and markets high quality branded vitamin, mineral, herbal and specialty dietary supplements to domestic health food stores and international distributors under the Solaray, Kal, NaturalMax, VegLife, Premier One, Solar Green, Natural Sport and Action Labs brand names. The Company also produces chelated minerals and processed herbs for its own use and sells these items to other manufacturers and marketers in the dietary supplement industry. The Company's wholly-owned direct and indirect subsidiaries consist of Nutraceutical Corporation; Solaray, Inc. (Solaray); Premier One Products, Inc. (Premier One); Makers of KAL, Inc. and Makers of KAL B.V. (KAL); NaturalMax, Inc. (NaturalMax); Monarch Nutritional Laboratories, Inc. (Monarch Nutritional Laboratories); AuNaturel, Inc.; VegLife, Inc.; Action Labs, Inc. (Action Labs) and Nutraforce (Canada) International, Inc. (Nutraforce). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation--The consolidated financial statements include the accounts of the Company and its subsidiaries (Note 1). The acquired operations of Action and Nutraforce have been consolidated from their respective dates of acquisition (Note 3). All significant intercompany transactions and balances have been eliminated. Use of Estimates--The preparation of these financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Estimates include reserves for obsolete and slow moving inventory, customer returns and allowances and uncollectible accounts receivable. Actual results could differ from these estimates. Reclassification--Certain prior year amounts have been reclassified to conform with the current year's presentation. Fair Value of Financial Instruments--The fair value of financial instruments, including cash, accounts receivable, other current assets, accounts payable, accrued expenses and debt, approximates their respective book values. Cash--Substantially all of the Company's cash is held by one bank at September 30, 1998. 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 include freight-in, materials, labor and overhead costs and are stated at the lower of cost or market, cost being determined by a moving weighted average under the first-in, first-out method. Property, Plant and Equipment--Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the respective assets. Expenditures for renewals and betterments are capitalized while maintenance and repairs are charged to operations in the period incurred. Goodwill--The excess of the purchase price over the fair market values of the assets acquired and liabilities assumed is classified as goodwill and is being amortized using the straight-line method over periods ranging from 25 to 40 years. The Company periodically evaluates the recoverability of goodwill based on undiscounted future cash flows. No impairments of goodwill have been recorded as a result of these evaluations. Non-Compete Agreements--Included in long-term other assets are capitalized costs associated with non-compete agreements the Company entered into with certain key executives associated with the Solaray, Premier One, KAL/NaturalMax and Monarch Nutritional Laboratories acquisitions. These capitalized costs are being amortized using the declining balance method over the lives of the agreements which expire during fiscal 2000. F-7 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) Deferred Financing Fees--The Company deferred certain debt issuance costs related to the establishment of new financing loans (Note 9). These costs are capitalized in long-term other assets and are being amortized using the effective interest rate method over the life of the loans. Interest Rate Cap Agreement--During fiscal 1995, the Company entered into an interest rate cap agreement to hedge against the interest rate risk associated with its variable rate debt obligations (Note 9). The effect of this interest rate cap was to minimize the impact of interest rate fluctuations on the Company's operating results. At September 30, 1997, the Company had an outstanding interest rate cap agreement with a notional principal amount of $26,000. This interest rate cap agreement was cancelled in connection with the Offering. Common Stock--On February 19, 1998, the Company completed the initial public offering (the Offering) of its common stock (Common Stock), par value $0.01 per share. In connection with the Offering, the Company reclassified all of its outstanding classes of capital stock (including accrued preference amounts) into shares of Common Stock and authorized a single class of undesignated preferred stock. Concurrently with the Offering, the Company effected a 7.5291-for-one stock split of all outstanding shares of Common Stock and a corresponding adjustment in the number of shares issuable upon the exercise of all outstanding options and warrants. After giving effect to the reclassification and stock split, the Company had 9,308,583 shares of Common Stock outstanding and no shares of preferred stock outstanding. All periods presented have been retroactively adjusted for the effect of the reclassification and stock split. The Company sold 2,144,618 shares of Common Stock in the Offering and certain selling stockholders sold an additional 1,684,882 shares of Common Stock (including shares sold pursuant to the underwriters overallotment option). Of the shares sold by the selling stockholders, 302,947 shares were issued in connection with the Offering upon the exercise of outstanding warrants. Immediately following the Offering, the Company had a total of 11,756,148 shares of Common Stock outstanding. The net proceeds to the Company from the sale of shares in the Offering of approximately $32,807 were primarily used to repay existing indebtedness (Note 9). In addition, the Company recorded a one-time payment related to the termination of a management advisory agreement and for services rendered in connection with the Offering (Note 14). Foreign Currency Translation--All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at fiscal year-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the fiscal year. The resulting translation adjustments are recorded as a component of stockholders' equity. Revenue Recognition--Sales are recognized upon shipment of merchandise to a customer. Provision is made for estimated customer returns, discounts and allowances at the time of sale. Research and Development--The Company expenses research and development costs as incurred. For the years ended September 30, 1996, 1997 and 1998, the Company incurred $837, $850 and $842, respectively, in research and development expenditures. These costs are included in selling, general and administrative expenses for the respective periods. Advertising--The Company expenses advertising costs as incurred. These costs are included in selling, general and administrative expenses for the respective periods in the statements of operations. Income Taxes--The Company accounts for income taxes using the asset and liability method as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires the Company to record deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in different periods for financial statements versus tax returns. F-8 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) Accounting for Stock-Based Compensation--The Company has adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and will, when material, provide pro forma disclosures of net income and net income per share as if the fair value-based method prescribed by SFAS 123 had been applied in measuring compensation expense. Concentrations of Credit Risk--In the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations. From time to time, a higher concentration of credit risk may exist on outstanding accounts receivable for a select number of customers depending on individual buying patterns. At September 30, 1997 and 1998, no customer accounted for more than 10 percent of trade accounts receivable. Furthermore, no customer accounted for more than 10 percent of net sales in any of the three years ended September 30, 1998. 3. ACQUISITIONS Acquisitions--On July 20, 1998 and August 31, 1998, the Company acquired substantially all of the assets and assumed certain liabilities of Action Labs and Nutraforce, respectively (collectively referred to as the Acquired Businesses or the Fiscal 1998 Acquisitions). These acquisitions were accounted for using the purchase method of accounting. Accordingly, the purchase price assigned to the assets acquired and liabilities assumed was their fair market values at their respective dates of acquisition. The excess of the purchase price over the fair market values of the assets acquired and liabilities assumed has been classified as goodwill and is being amortized using the straight-line method (Note 2). The consolidated statements of operations and statements of cash flows presented herein include the activities of the Acquired Businesses from their respective dates of acquisition. The aggregate purchase price for the Fiscal 1998 Acquisitions totaled $14,683, consisting of cash of $14,435, forgiveness of certain seller liabilities of $224 owed to the Company and a net payable to a seller of $24. The following reflects the allocation of the aggregate purchase price for the Fiscal 1998 Acquisitions to the aggregate assets acquired and the liabilities assumed:
FISCAL 1998 ACQUISITIONS ------------ Aggregate purchase price for Fiscal 1998 Acquisitions........ $14,683 ======= Aggregate assets acquired and liabilities assumed: Current assets............................................. 2,022 Property, plant and equipment.............................. 12 Goodwill................................................... 13,665 Other assets............................................... 166 Current liabilities........................................ (1,182) ------- Total.................................................... $14,683 =======
4. ACCOUNTS RECEIVABLE, NET Accounts receivable, net, consist of the following:
SEPTEMBER 30, --------------- 1997 1998 ------ ------- Accounts receivable...................................... $8,811 $10,173 Less allowances.......................................... (810) (1,024) ------ ------- $8,001 $ 9,149 ====== =======
F-9 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) 5. INVENTORIES, NET Inventories, net of reserves for obsolete and slow moving inventory, are comprised of the following:
SEPTEMBER 30, --------------- 1997 1998 ------- ------- Raw materials............................................. $10,090 $ 8,562 Work-in-process........................................... 3,064 4,981 Finished goods............................................ 7,599 10,392 ------- ------- $20,753 $23,935 ======= =======
In connection with the Fiscal 1998 Acquisitions (Note 3), the inventories of the Acquired Businesses were valued at net realizable value as of their respective acquisition dates. The amount ascribed in excess of historical cost (write-up) was $381 for the year ended September 30, 1998 and was charged to cost of sales in the accompanying statements of operations as the inventories were sold. 6. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net, are comprised of the following:
ESTIMATED USEFUL SEPTEMBER 30, LIFE ---------------- (YEARS) 1997 1998 --------- ------- ------- Land........................................ -- $ 422 $ 422 Building and improvements................... 30 2,576 2,623 Furniture, fixtures and equipment........... 3-10 12,708 16,033 ------- ------- 15,706 19,078 Less accumulated depreciation and amortization............................... (4,995) (8,308) ------- ------- $10,711 $10,770 ======= =======
At September 30, 1997 and 1998, furniture, fixtures and equipment includes $474 of leased equipment with an accumulated amortization balance of $304 and $352, respectively. Certain property and equipment collateralize debt obligations (Note 9). Depreciation and amortization of property, plant and equipment totaled $1,541, $2,561 and $3,324 for the years ended September 30, 1996, 1997 and 1998, respectively. 7. GOODWILL, NET Goodwill, net, is comprised of the following:
SEPTEMBER 30, ---------------- 1997 1998 ------- ------- Goodwill................................................ $45,237 $58,902 Less accumulated amortization........................... (3,229) (4,527) ------- ------- $42,008 $54,375 ======= =======
F-10 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) 8. ACCRUED EXPENSES Accrued expenses are comprised of the following:
SEPTEMBER 30, ---------------- 1997 1998 ------- ------- Employee payroll, benefits, taxes and performance incentives.............................................. $ 2,009 $ 2,036 One-time payment to executive officer.................... 1,700 -- Other.................................................... 1,561 2,051 ------- ------- $ 5,270 $ 4,087 ======= =======
9. LONG-TERM DEBT Long-term debt is comprised of the following:
SEPTEMBER 30, ---------------- 1997 1998 ------- ------- Note payable, payable in two installments as follows: $500 in October 1997 and $765 in January 1998; interest is payable with principal installments and accrues at 8% per annum........................................... $ 1,265 $ -- Senior Credit Agreement: Revolving Credit Facility............................. 9,240 -- Term A Loan........................................... 37,000 -- Term B Loan, net of unamortized discount of $2,560.... 12,440 New Credit Agreement: Revolving Credit Facility............................. -- 37,000 ------- ------- Total long-term debt.................................... 59,945 37,000 Less current portion.................................... (7,085) -- ------- ------- $52,860 $37,000 ======= =======
On February 25, 1998, the Company replaced its Senior Credit Agreement, under which the Company had outstanding borrowings of $60,178 (before unamortized discount of $2,454), with a new credit agreement (the New Credit Agreement). The Company realized an extraordinary loss on the early extinguishment of the Senior Credit Agreement of $3,129, net of tax of $1,804. The New Credit Agreement currently makes $70,000 of revolving credit borrowings available to the Company. The available revolving credit borrowings are reduced to $65,000, $45,000 and $37,500 during fiscal 2001, 2002 and 2003, respectively. Borrowings under the New Credit Agreement are secured by certain assets of the Company and bear interest at the applicable Eurodollar Rate plus a variable margin or at the Federal Funds Rate plus 0.5% plus a variable margin. At September 30, 1998, the applicable interest rate was 5.88%. The Company is also required to pay a variable quarterly fee on the unused balance under the New Credit Agreement. At September 30, 1998, the applicable rate was 0.2%. Accrued interest on Federal Funds Rate borrowings is payable quarterly. Accrued interest on Eurodollar Rate borrowings is payable based on an elected interval of one, two or three months. The Company is required to repay all principal outstanding under the New Credit Agreement in January 2003. Accordingly, the outstanding principal balance at September 30, 1998 was classified as long-term debt. F-11 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) 10. LEASE COMMITMENTS AND OBLIGATIONS The Company leases office and warehouse facilities under non-cancelable operating leases expiring June of 2003. These operating leases require the Company to pay all taxes, insurance and maintenance. The Company also leases certain computer, manufacturing and laboratory equipment under capital leases. The following summarizes future minimum lease payments required under capital and operating leases:
YEAR ENDING CAPITALIZED OPERATING SEPTEMBER 30, LEASES LEASES ------------- ----------- --------- 1999............................................. $ 63 $1,110 2000............................................. 63 656 2001............................................. 23 151 2002............................................. -- 126 2003............................................. -- 52 Thereafter....................................... -- -- ---- ------ Future minimum lease payments.................... 149 $2,095 ====== Less amounts representing interest............... (16) ==== Present value of future minimum lease payments... 133 Less amounts due within one year................. (53) ---- Amounts due after one year....................... $ 80 ====
Total rent expense incurred by the Company under non-cancelable operating leases for the years ended September 30, 1996, 1997 and 1998 was $898, $950 and $1,142, respectively. 11. INCOME TAXES The provision for income taxes is comprised of the following:
YEAR ENDED SEPTEMBER 30, -------------------- 1996 1997 1998 ------ ------ ------ Current: Federal............................................ $ 134 $2,058 $ 862 State.............................................. 13 197 133 Deferred: Federal............................................ 830 508 647 State.............................................. 79 11 63 ------ ------ ------ $1,056 $2,774 $1,705 ====== ====== ======
The provision for income taxes for 1998 consists of a provision of $3,509 resulting from income before provision for income taxes offset by a benefit of $1,804 resulting from the extraordinary loss on early extinguishment of debt. F-12 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) A summary of the composition of net deferred income tax assets and liabilities is as follows:
SEPTEMBER 30, ------------- 1997 1998 ------ ------ ASSETS Inventory differences...................................... $ 108 $ 470 Accounts receivable reserves............................... 41 347 Accrued liabilities........................................ 748 273 Other...................................................... -- 11 ------ ------ Current deferred income tax assets......................... $ 897 $1,101 ====== ====== LIABILITIES Amortization of intangibles................................ $1,131 $1,845 Depreciation............................................... 164 7 ------ ------ Long-term deferred income tax liabilities, net............. $1,295 $1,852 ====== ======
The differences between income taxes at the statutory federal income tax rate and income taxes reported in the statements of operations are as follows:
YEAR ENDED SEPTEMBER 30, --------------------- 1996 1997 1998 ------ ------ ------ Tax at federal statutory rate...................... $ 886 $2,387 $1,454 State tax, net of federal benefit.................. 94 249 152 Non-deductible expenses............................ 86 102 113 Other.............................................. (10) 36 (14) ------ ------ ------ $1,056 $2,774 $1,705 ====== ====== ======
12. CAPITAL STOCK Description of Capital Stock -- At September 30, 1998, the Company had two authorized classes of stock: Common Stock with a par value of $0.01 per share and Preferred Stock with a par value of $0.01 per share. The Company has adopted Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). Under this statement, both "basic" earnings per share and "diluted" earnings per share are presented on the face of the income statement. As required under SFAS 128, both basic earnings per share and diluted earnings per share for the years ended September 30, 1996 and 1997 have been calculated giving retroactive effect to the Company's stock reclassification and stock split which occurred in conjunction with the Offering (Note 2). The following table provides a reconciliation of both net income and the number of common shares used in the computations of basic earnings per share, which utilizes the weighted average number of common shares outstanding without regard to potential common shares, and diluted earnings per share which includes all such shares: F-13 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data)
YEAR ENDED SEPTEMBER 30, -------------------------------- 1996 1997 1998 ---------- ---------- ---------- Net income (Numerator): Net income before extraordinary loss....... $ 1,551 $ 4,248 $ 5,699 Extraordinary loss on early extinguishment of debt, net of tax....................... -- -- (3,129) ---------- ---------- ---------- Net income................................. $ 1,551 $ 4,248 $ 2,570 ========== ========== ========== Weighted average common shares (Denominator): Basic weighted average common shares....... 9,308,583 9,308,583 10,806,178 Add: Dilutive effect of stock options and warrants.................................. 1,113,084 1,194,166 1,096,170 ---------- ---------- ---------- Diluted weighted average common shares..... 10,421,667 10,502,749 11,902,348 ========== ========== ========== Net income before extraordinary loss per common share: Basic...................................... $ 0.17 $ 0.46 $ 0.53 Diluted.................................... $ 0.15 $ 0.40 $ 0.48 Extraordinary loss per common share: Basic...................................... -- -- $ (0.29) Diluted.................................... -- -- $ (0.26) Net income (loss) per common share: Basic...................................... $ 0.17 $ 0.46 $ 0.24 Diluted.................................... $ 0.15 $ 0.40 $ 0.22
Stock Warrants--As part of the Solaray acquisition, the Company issued detachable stock warrants which entitle the holder to purchase 993,393 shares of Common Stock at an exercise price of $0.01 per share, of which 302,947 warrants were exercised in connection with the Offering. The aggregate estimated fair value of these warrants on the date of issuance was $292. These warrants expire October 28, 2003. As part of the Premier One and KAL acquisitions, the Company issued warrants to purchase 163,976 shares of Common Stock at exercise prices ranging from $4.86 to $4.91 per share, which were considered to be the estimated fair market values per share of the Common Stock at the respective dates of issuance. These warrants expire in January 2005. Stock Options--During November 1994, the Company issued 301,164 options to certain key executives at an exercise price of $3.45, which was considered to be the estimated fair market value of the Company's stock at the date of grant. These grants vest over a period of up to five years and expire no later than the 10th anniversary of the date of grant. As of September 30, 1998, 257,495 shares were exercisable. Stock Option Plans--During the year ended September 30, 1995, the Company's Board of Directors adopted the 1995 Stock Option Plan (the 1995 Option Plan). The 1995 Option Plan provides for granting options to executives and key employees of the Company and its subsidiaries to purchase Common Stock. In aggregate, 225,873 shares have been reserved for issuance under the 1995 Option Plan. During the year ended September 30, 1998, the Company's Board of Directors adopted the 1998 Stock Incentive Plan (the 1998 Stock Plan). The 1998 Stock Plan provides for granting options to executives and key employees of the Company and its subsidiaries to purchase Common Stock. In aggregate, 1,050,000 shares of Common Stock have been reserved for issuance under the 1998 Stock Plan. During the year ended September 30, 1998, the Company's Board of Directors adopted the 1998 Non-Employee Director Stock Option Plan (the Director Option Plan). The Director Option Plan provides for granting options to non-employee Directors of the Company to purchase Common Stock. In aggregate, 150,000 shares of Common Stock have been reserved for issuance under the Director Option Plan. F-14 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) The following table sets forth option grants made under the 1995 Option Plan, the 1998 Stock Plan and the Director Option Plan:
NUMBER OF AVERAGE PRICE AGGREGATE OPTIONS PER SHARE OPTION PRICE --------- ------------- ------------ Outstanding at October 1, 1995...... -- $-- $ -- Granted........................... 190,486 5 936 Exercised......................... -- -- -- Canceled.......................... (15,246) 5 (75) ------- --- ------ Outstanding at September 30, 1996... 175,240 5 861 ------- --- ------ Granted........................... 26,352 9 228 Exercised......................... -- -- -- Canceled.......................... (33,316) 5 (164) ------- --- ------ Outstanding at September 30, 1997... 168,276 5 925 ------- --- ------ Granted........................... 314,074 16 5,105 Exercised......................... -- -- -- Canceled.......................... (20,580) 16 (336) ------- --- ------ Outstanding at September 30, 1998... 461,770 $12 $5,694 ------- --- ------
These options were issued at exercise prices which represent management's estimate of the fair market value per share of Common Stock at the respective grant dates. The 1995 Option Plan grants vest over a period of four years and expire on the tenth anniversary of the date of grant. The 1998 Stock Incentive Plan grants vest over a period of two to four years and expire no later than the tenth anniversary of the date of grant. The Director Option Plan grants vest over a period of approximately three years and expire no later than the tenth anniversary of the date of grant. F-15 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) The following table sets forth data related to exercise prices and lives for option grants made under the 1995 Option Plan, the 1998 Stock Plan and the Director Option Plan:
SEPTEMBER 30, 1998 OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------- --------------------------- RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE PRICES SHARES EXERCISE PRICE SHARES EXERCISE PRICE - ---------------------- ------- ---------------- ------- --------------- $ 4.91 - $ 4.91 140,042 $ 4.91 108,979 $ 4.91 (Avg. life: 6.5 years) $ 8.63 - $13.38 92,881 $10.77 9,920 $10.23 (Avg. life: 9.4 years) $17.50 - $17.50 228,847 $17.50 37,545 $17.50 (Avg. life: 9.3 years)
The weighted average fair value per share of options granted was $1.76 and $10.13 for the years ended September 30, 1997 and 1998, respectively. The Company's pro forma net income for the years ended September 30, 1997 and 1998 would have been $4,239 and $2,321, respectively, if compensation cost had been measured under the fair value method of SFAS 123. The Company's pro forma basic net income per common share for the fiscal years ended September 30, 1997 and 1998 would have been $0.46 and $0.21, respectively. The Company's pro forma diluted net income per common share for the fiscal years ended September 30, 1997 and 1998 would have been $0.40 and $0.20, respectively. The fair value of these options was estimated as of the date of grant using a Black-Scholes option pricing model with the following assumptions for the years ended September 30, 1997 and 1998, respectively: risk free interest rate of 6.15% and 5.52%; expected life of 5 years and 5 years; expected volatility of 1% and 70%; and expected dividend yield of 0% and 0%. Because changes in the subjective input assumptions can materially affect the fair value estimate, management's opinion is that the existing valuation models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The initial impact on pro forma net income may not be representative of pro forma compensation expense in future years, depending upon the amount of stock options awarded in the future and their related vesting periods. Stock Purchase Plan--During the year ended September 30, 1998, the Company's Board of Directors adopted the Employee Stock Discount Purchase Plan (the Stock Purchase Plan). The Stock Purchase Plan is intended to give employees desiring to do so a convenient means of purchasing shares of Common Stock through payroll and lump-sum deductions. In aggregate, 750,000 shares of Common Stock have been reserved for issuance under the Stock Purchase Plan. Treasury Stock Repurchase Program--During the year ended September 30, 1998, the Company's Board of Directors approved a treasury stock repurchase program to repurchase up to 400,000 shares of Common Stock of the Company. As of September 30, 1998, the Company had repurchased 41,800 shares under this plan at an aggregate price of $301. F-16 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) 13. EMPLOYEE BENEFIT PLANS 401(k) Plan--The Company has a 401(k) defined contribution profit sharing plan which covers substantially all employees. Under the plan, employees can contribute up to 15% of their compensation, not to exceed the prescribed annual statutory limit ($10 for calendar 1998). The Company makes matching and discretionary contributions to the plan which approximate 5% of all eligible employees' salaries. The amounts contributed to the plan by the Company during the years ended September 30, 1996, 1997 and 1998 were $254, $317 and $384, respectively. Self-Funded Health Insurance Plan--The Company has a self-insured health care program for its employees and their dependents. Under the program, the Company pays claims up to $35 per year for each individual, while claims exceeding $35 per individual, or $694 in the aggregate as of September 30, 1998, are covered by a third party stop-loss insurance policy. Total health insurance expense incurred by the Company, which includes claims, third party insurance premiums and other related costs, for the years ended September 30, 1996, 1997 and 1998 was $526, $770 and $898, respectively. At September 30, 1998, the Company had accrued $166 for claims incurred but not reported and claims reported but not paid. 14. RELATED PARTY TRANSACTIONS On January 31, 1995, the Company entered into a five year management agreement (the Agreement) with certain stockholders of the Company. The Agreement required the Company to pay a monthly management fee of $25 plus out-of-pocket expenses payable on a quarterly basis in arrears commencing March 31, 1995. The Agreement was terminated in conjunction with the Offering. A fee of $1,012 was incurred related to the termination of the Agreement and other services performed in connection with the Offering. For the years ended September 30, 1996, 1997, and 1998, the Company incurred $339, $360 and $1,185, respectively, in fees and out-of-pocket expenses for these certain stockholders. During fiscal 1994, the Company loaned $112 to certain stockholders for the purchase of the Company's stock. The loans accrued interest at 6% per annum and were payable in four annual installments commencing October 28, 1994 and ending October 28, 1997. The amount outstanding under these loans at September 30, 1997 was $55 and was repaid in full during fiscal 1998. 15. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES As part of the Fiscal 1998 Acquisitions, the Company forgave $224 in certain seller liabilities owed to the Company and incurred a net payable of $24 to a seller. 16. COMMITMENTS AND CONTINGENCIES The formulation, manufacturing, processing, packaging, labeling, advertising, distribution and sale of dietary supplements (consisting of vitamins, amino acids, minerals, herbs, other botanicals and other dietary ingredients) such as those sold by the Company are subject to regulation by one or more federal agencies, principally the Food and Drug Administration and the Federal Trade Commission and, to a lesser extent, the Consumer Product Safety Commission and United States Department of Agriculture. These activities are also regulated by various governmental agencies for the states and localities in which the Company's products are sold, as well as by governmental agencies in certain foreign countries in which the Company's products are sold. Although management believes that the Company is in compliance, in all material respects, with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company's compliance with applicable statutes, laws, rules and regulations will not be challenged by governing authorities or that such challenges will not have a material adverse effect on the Company's financial position or results of operations or cash flows. F-17 NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (dollars in thousands, except per share data) The Company, like any other retailer, distributor and manufacturer of products that are designed to be ingested, also faces inherent risk of exposure to product liability claims in the event that the use of its products results in injury. With respect to product liability claims, the Company has liability insurance; however, there can be no assurance that such insurance will be adequate to cover potential liabilities. In the event that the Company does not have adequate insurance or contractual indemnification from parties supplying raw materials or marketing its products, product liabilities relating to defective products could have a material adverse effect on the Company. The Company is not currently a named defendant in any product liability lawsuit. However, the Company is involved in various legal matters arising in the normal course of business. In the opinion of management, the Company's liability, if any, arising from legal proceedings related to these matters is not expected to have a material adverse impact on the Company's financial position. F-18 Nutraceutical International Corporation Schedule II--Valuation and Qualifying Accounts
Balance at Charged Charged Balance at Beginning to Costs and to Other End of Description of Period Expenses Accounts Deductions Period ---------- ---------- ------------ -------- ---------- ---------- September 30 1998 Deducted from related asset account: Allowance for sales returns.................... $ 420 $313 $165 $295 $ 603 Allowance for doubtful accounts................ $ 390 $223 $ 15 $207 $ 421 Provision for inventory........................ $1,167 $410 $164 $620 $1,121 September 30 1997 Deducted from related asset account: Allowance for sales returns.................... $ 456 $207 $ -- $243 $ 420 Allowance for doubtful accounts................ $ 355 $ 35 $ -- $ -- $ 390 Provision for inventory........................ $ 675 $492 $ -- $ -- $1,167 September 30 1996 Deducted from related asset account: Allowance for sales returns.................... $ 412 $601 $ -- $557 $ 456 Allowance for doubtful accounts................ $ 420 $ -- $ -- $ 65 $ 355 Provision for inventory........................ $ 625 $ 50 $ -- $ -- $ 675
EX-4.3 2 CREDIT AGREEMENT EXHIBIT 4.3 [Conformed Copy with EXHIBITS F, G and H Conformed as Executed] - -------------------------------------------------------------------------------- CREDIT AGREEMENT among NUTRACEUTICAL INTERNATIONAL CORPORATION, NUTRACEUTICAL CORPORATION, VARIOUS LENDING INSTITUTIONS, and BANKERS TRUST COMPANY, AS AGENT --------------------------------------------------------- Dated as of February 25, 1998 --------------------------------------------------------- $70,000,000 - -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
Page ---- SECTION 1. Amount and Terms of Credit........................................... 1 1.01 Commitments.......................................................... 1 1.02 Minimum Borrowing Amounts, etc....................................... 3 1.03 Notice of Borrowing.................................................. 3 1.04 Disbursement of Funds................................................ 4 1.05 Notes................................................................ 5 1.06 Conversions.......................................................... 5 1.07 Pro Rata Borrowings.................................................. 6 1.08 Interest............................................................. 6 1.09 Interest Periods..................................................... 7 1.10 Increased Costs, Illegality, etc..................................... 8 1.11 Compensation......................................................... 10 1.12 Change of Lending Office............................................. 11 1.13 Replacement of Banks................................................. 11 SECTION 2. Letters of Credit.................................................... 12 2.01 Letters of Credit.................................................... 12 2.02 Letter of Credit Requests; Notices of Issuance....................... 14 2.03 Agreement to Repay Letter of Credit Payments......................... 14 2.04 Letter of Credit Participations...................................... 15 2.05 Increased Costs...................................................... 17 SECTION 3. Fees; Commitments.................................................... 18 3.01 Fees................................................................. 18 3.02 Voluntary Termination or Reduction of Total Unutilized Revolving Loan Commitment......................................... 19 3.03 Mandatory Adjustments of Commitments, etc............................ 20 SECTION 4. Payments............................................................. 22 4.01 Voluntary Prepayments................................................ 22 4.02 Mandatory Prepayments................................................ 23 4.03 Method and Place of Payment.......................................... 24 4.04 Net Payments......................................................... 24 SECTION 5. Conditions Precedent................................................. 26 5.01 Execution of Agreement; Notes........................................ 26 5.02 No Default; Representations and Warranties........................... 26 5.03 Officer's Certificate................................................ 26 5.04 Opinions of Counsel.................................................. 27 5.05 Corporate Proceedings................................................ 27
(i)
Page ---- 5.06 Adverse Change, etc..................................................... 27 5.07 Litigation.............................................................. 27 5.08 Approvals............................................................... 28 5.09 Consummation of the Transaction......................................... 28 5.10 Existing Credit Agreement............................................... 28 5.11 Security Documents...................................................... 28 5.12 Subsidiary Guaranty..................................................... 29 5.13 Mortgages; Title Insurance; Surveys, etc................................ 30 5.14 Plans; Collective Bargaining Agreements; Existing Indebtedness Agreements; Shareholders' Agreements; Management Agreements; Employment Agreements; Tax Allocation Agreements; Material Contracts....................................... 31 5.15 Solvency Certificate; Evidence of Insurance............................. 32 5.16 Pro Forma Balance Sheets................................................ 32 5.17 Projections............................................................. 32 5.18 Existing Indebtedness................................................... 32 5.19 Payment of Fees......................................................... 33 5.20 Notice of Borrowing; Letter of Credit Request........................... 33 SECTION 6. Representations, Warranties and Agreements............................. 33 6.01 Corporate Status........................................................ 33 6.02 Corporate Power and Authority........................................... 34 6.03 No Violation............................................................ 34 6.04 Litigation.............................................................. 34 6.05 Use of Proceeds; Margin Regulations..................................... 35 6.06 Governmental Approvals.................................................. 35 6.07 Investment Company Act.................................................. 35 6.08 Public Utility Holding Company Act...................................... 35 6.09 True and Complete Disclosure............................................ 35 6.10 Financial Condition; Financial Statements............................... 36 6.11 Security Interests...................................................... 37 6.12 Existing Indebtedness................................................... 37 6.13 Transaction............................................................. 37 6.14 Special Purpose Corporation............................................. 38 6.15 Compliance with ERISA................................................... 38 6.16 Capitalization.......................................................... 39 6.17 Subsidiaries............................................................ 39 6.18 Intellectual Property................................................... 40 6.19 Compliance with Statutes, etc........................................... 40 6.20 Environmental Matters................................................... 40 6.21 Properties.............................................................. 41 6.22 Labor Relations......................................................... 41 6.23 Tax Returns and Payments................................................ 41
(ii)
Page ---- SECTION 7. Affirmative Covenants.................................................. 42 7.01 Information Covenants................................................... 42 7.02 Books, Records and Inspections.......................................... 45 7.03 Insurance............................................................... 45 7.04 Payment of Taxes........................................................ 46 7.05 Corporate Franchises.................................................... 46 7.06 Compliance with Statutes, etc........................................... 46 7.07 Compliance with Environmental Laws...................................... 46 7.08 ERISA................................................................... 47 7.09 Good Repair............................................................. 48 7.10 End of Fiscal Years; Fiscal Quarters.................................... 48 7.11 Additional Security; Further Assurances................................. 48 7.12 Register................................................................ 49 7.13 Foreign Subsidiaries Security........................................... 50 7.14 Contributions; Payments................................................. 50 SECTION 8. Negative Covenants..................................................... 51 8.01 Changes in Business..................................................... 51 8.02 Consolidation, Merger, Sale or Purchase of Assets, etc.................. 51 8.03 Liens................................................................... 56 8.04 Indebtedness............................................................ 58 8.05 Advances, Investments and Loans......................................... 60 8.06 Dividends, etc.......................................................... 64 8.07 Transactions with Affiliates............................................ 65 8.08 Capital Expenditures.................................................... 66 8.09 Minimum Consolidated EBITDA............................................. 67 8.10 Interest Coverage Ratio................................................. 67 8.11 Leverage Ratio.......................................................... 68 8.12 Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements; Issuance of Capital Stock; etc......................................... 68 8.13 Limitation on Certain Restrictions on Subsidiaries...................... 68 8.14 Limitation on the Creation of Subsidiaries.............................. 68 SECTION 9. Events of Default...................................................... 69 9.01 Payments................................................................ 69 9.02 Representations, etc.................................................... 69 9.03 Covenants............................................................... 69 9.04 Default Under Other Agreements.......................................... 69 9.05 Bankruptcy, etc......................................................... 70 9.06 ERISA................................................................... 70 9.07 Security Documents...................................................... 71 9.08 Guaranties.............................................................. 71 9.09 Judgments............................................................... 71
(iii)
Page ---- 9.10 Ownership............................................................. 71 SECTION 10. Definitions......................................................... 72 SECTION 11. The Agent........................................................... 97 11.01 Appointment.......................................................... 97 11.02 Delegation of Duties................................................. 98 11.03 Exculpatory Provisions............................................... 98 11.04 Reliance by Agent.................................................... 98 11.05 Notice of Default.................................................... 99 11.06 Non-Reliance on Agent and Other Banks................................ 99 11.07 Indemnification...................................................... 100 11.08 Agent in its Individual Capacity..................................... 100 11.09 Holders.............................................................. 100 11.10 Resignation of the Agent; Successor Agent............................ 101 SECTION 12. Miscellaneous....................................................... 101 12.01 Payment of Expenses, etc............................................. 101 12.02 Right of Setoff, Collateral Matters.................................. 102 12.03 Notices.............................................................. 103 12.04 Benefit of Agreement................................................. 103 12.05 No Waiver; Remedies Cumulative....................................... 105 12.06 Payments Pro Rata.................................................... 105 12.07 Calculations; Computations........................................... 105 12.08 Governing Law; Submission to Jurisdiction; Venue..................... 106 12.09 Counterparts......................................................... 107 12.10 Effectiveness........................................................ 107 12.11 Headings Descriptive ................................................ 107 12.12 Amendment or Waiver; etc............................................. 107 12.13 Survival............................................................. 108 12.14 Domicile of Loans.................................................... 108 12.15 Confidentiality...................................................... 109 12.16 Waiver of Jury Trial................................................. 109 SECTION 13. Holdings Guaranty;.................................................. 109 13.01 The Guaranty......................................................... 109 13.02 Bankruptcy........................................................... 110 13.03 Nature of Liability.................................................. 110 13.04 Independent Obligation............................................... 110 13.05 Authorization........................................................ 111 13.06 Reliance............................................................. 112 13.07 Subordination........................................................ 112 13.08 Waiver............................................................... 112
(iv)
Page ---- 13.09 Nature of Liability............................................... 113 ANNEX I List of Banks and Commitments ANNEX II Bank Addresses ANNEX III Real Properties ANNEX IV Projections ANNEX V Subsidiaries ANNEX VI Insurance ANNEX VII Existing Indebtedness ANNEX VIII Existing Liens ANNEX IX Capitalization ANNEX X Investments EXHIBIT A-1 -- Form of Notice of Borrowing EXHIBIT A-2 -- Form of Letter of Credit Request EXHIBIT B-1 -- Form of Revolving Note EXHIBIT B-2 -- Form of Swingline Note EXHIBIT C -- Form of Section 4.04(b)(ii) Certificate EXHIBIT D -- Form of Opinion of Kirkland & Ellis EXHIBIT E -- Form of Officers' Certificate EXHIBIT F -- Form of Pledge Agreement EXHIBIT G -- Form of Security Agreement EXHIBIT H -- Form of Subsidiary Guaranty EXHIBIT I -- Form of Assignment and Assumption Agreement EXHIBIT J -- Form of Intercompany Note EXHIBIT K -- Form of Solvency Certificate EXHIBIT L -- Form of Shareholder Subordinated Note EXHIBIT M -- Form of Borrower Subordinated Note
(v) CREDIT AGREEMENT, dated as of February 25, 1998, among NUTRACEUTICAL INTERNATIONAL CORPORATION, a Delaware corporation ("Holdings"), NUTRACEUTICAL CORPORATION, a Delaware corporation (the "Borrower"), the lenders from time to time party hereto (each, a "Bank" and, collectively, the "Banks"), and BANKERS TRUST COMPANY, as Agent (in such capacity, the "Agent"). Unless otherwise defined herein, all capitalized terms used herein and defined in Section 10 are used herein as so defined. WITNESSETH: ---------- WHEREAS, subject to and upon the terms and conditions set forth herein, the Banks are willing to make available the credit facility provided for herein; NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. -------------------------- 1.01 Commitments. (a) Subject to and upon the terms and conditions ----------- herein set forth, each Bank severally agrees, at any time and from time to time on and after the Effective Date and prior to the Maturity Date, to make a revolving loan or loans (each, a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower, which Revolving Loans (i) shall be denominated in U.S. Dollars, (ii) except as hereinafter provided, may, at the option of the Borrower, be incurred and maintained as and/or converted into Base Rate Loans or Eurodollar Loans, provided, that (x) all Revolving Loans made as -------- part of the same Borrowing shall, unless otherwise specifically provided herein, consist of Revolving Loans of the same Type and (y) unless the Agent has determined that the Syndication Date has occurred (at which time this clause (y) shall no longer be applicable), no more than three Borrowings of Revolving Loans to be maintained as Eurodollar Loans may be incurred prior to the 90th day after the Effective Date (each of which Borrowings of Eurodollar Loans may only have an Interest Period of one month, and the first of which Borrowings may only be made on a single date on or after the Effective Date and on or before the sixth Business Day following the Effective Date, the second of which Borrowings may only be made on the last day of the Interest Period of the first such Borrowing and the third of which Borrowing may only be made on the last day of the Interest Period of the second such Borrowing), (iii) may be repaid and reborrowed in accordance with the provisions hereof and (iv) shall not exceed for any Bank at any time outstanding that aggregate principal amount which, when combined with (I) the aggregate principal amount of all other then outstanding Revolving Loans made by such Bank and (II) such Bank's Percentage, if any, of the Swingline Loans then outstanding and the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid with the proceeds of, and simultaneously with the incurrence of, Revolving Loans or Swingline Loans) at such time, equals the Revolving Loan Commitment, if any, of such Bank at such time. (b) Subject to and upon the terms and conditions herein set forth, BTCo in its individual capacity agrees to make at any time and from time to time after the Effective Date and prior to the Swingline Expiry Date, a loan or loans to the Borrower (each, a "Swingline Loan" and, collectively, the "Swingline Loans"), which Swingline Loans (i) shall be made and maintained as Base Rate Loans, (ii) shall be denominated in U.S. Dollars, (iii) may be repaid and reborrowed in accordance with the provisions hereof, (iv) shall not exceed in aggregate principal amount at any time outstanding, when combined with the aggregate principal amount of all Revolving Loans then outstanding and the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid with the proceeds of, and simultaneously with the incurrence of, Revolving Loans or Swingline Loans) at such time, an amount equal to the Total Revolving Loan Commitment then in effect and (v) shall not exceed in aggregate principal amount at any time outstanding the Maximum Swingline Amount. BTCo shall not be obligated to make any Swingline Loans at a time when a Bank Default exists unless BTCo has entered into arrangements satisfactory to it and the Borrower to eliminate BTCo's risk with respect to the Defaulting Bank's or Banks' participation in such Swingline Loans, including by cash collateralizing such Defaulting Bank's or Banks' Percentage of the outstanding Swingline Loans. BTCo will not make a Swingline Loan after it has received written notice from the Borrower or the Required Banks stating that a Default or an Event of Default exists until such time as BTCo shall have received a written notice of (i) rescission of such notice from the party or parties originally delivering the same or (ii) a waiver of such Default or Event of Default from the Required Banks. (c) On any Business Day, BTCo may, in its sole discretion, give notice to the Banks that its outstanding Swingline Loans shall be funded with a Borrowing of Revolving Loans (provided that each such notice shall be deemed to -------- have been automatically given upon the occurrence of a Default or an Event of Default under Section 9.05 or upon the exercise of any of the remedies provided in the last paragraph of Section 9), in which case a Borrowing of Revolving Loans constituting Base Rate Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the immediately succeeding Business Day by all Banks pro rata based on each Bank's Percentage, and the proceeds thereof shall --- ---- be applied directly to repay BTCo for such outstanding Swingline Loans. Each Bank hereby irrevocably agrees to make Base Rate Loans upon one Business Day's notice pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified in writing by BTCo, notwithstanding (i) that the amount of the Mandatory Borrowing may not comply with the Minimum Borrowing Amount otherwise required hereunder, (ii) whether any conditions specified in Section 5 are then satisfied, (iii) whether a Default or an Event of Default has occurred and is continuing, (iv) the date of such Mandatory Borrowing and (v) any reduction in the Total Revolving Loan Commitment after any such Swingline Loans were made. In the event that -2- any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code in respect of the Borrower), each Bank (other than BTCo) hereby agrees that it shall forthwith purchase from BTCo (without recourse or warranty) such assignment of the outstanding Swingline Loans as shall be necessary to cause the Banks to share in such Swingline Loans ratably based upon their respective Percentages, provided that all interest -------- payable on the Swingline Loans shall be for the account of BTCo until the date the respective assignment is purchased and, to the extent attributable to the purchased assignment, shall be payable to the Bank purchasing same from and after such date of purchase. 1.02 Minimum Borrowing Amounts, etc. The aggregate principal amount of ------------------------------- each Borrowing of Loans shall not be less than the Minimum Borrowing Amount applicable to such Loans. More than one Borrowing may be incurred on any day; provided, that at no time shall there be outstanding more than ten Borrowings of - -------- Eurodollar Loans. 1.03 Notice of Borrowing. (a) Whenever the Borrower desires to incur ------------------- Revolving Loans (excluding Borrowings of Revolving Loans pursuant to a Mandatory Borrowing), the Borrower shall give the Agent at its Notice Office, prior to 1:00 P.M. (New York time), at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Eurodollar Loans to be made hereunder and shall give the Agent at its Notice Office not later than 12:00 Noon (New York time) on the day a Borrowing of Base Rate Loans is to be made, written notice (or telephonic notice promptly confirmed in writing) of each such Borrowing to be made hereunder. Each such notice (each, a "Notice of Borrowing") shall, except as provided in Section 1.10, be irrevocable, and, in the case of each written notice and each confirmation of telephonic notice, shall be in the form of Exhibit A-1, appropriately completed to specify (i) the aggregate principal amount of Revolving Loans to be made pursuant to such Borrowing, (ii) the date of such Borrowing (which shall be a Business Day) and (iii) whether the respective Borrowing shall consist of Base Rate Loans or, to the extent permitted hereunder, Eurodollar Loans and, if Eurodollar Loans, the Interest Period to be initially applicable thereto. The Agent shall promptly give each Bank written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing, of such Bank's proportionate share thereof, if any, and of the other matters covered by the Notice of Borrowing. (b) (i) Whenever the Borrower desires to make a Borrowing of Swingline Loans hereunder, it shall give BTCo not later than 2:00 P.M. (New York time) on the day such Swingline Loan is to be made, written notice (or telephonic notice promptly confirmed in writing) of each Swingline Loan to be made hereunder. Each such notice shall be irrevocable and shall specify in each case (x) the date of such Borrowing (which shall be a Business Day) and (y) the aggregate principal amount of the Swingline Loan to be made pursuant to such Borrowing. -3- (ii) Mandatory Borrowings shall be made upon the notice specified in Section 1.01(c), with the Borrower irrevocably agreeing, by its incurrence of any Swingline Loan, to the making of Mandatory Borrowings as set forth in such Section 1.01(c). (c) Without in any way limiting the obligation of the Borrower to confirm in writing any telephonic notice permitted to be given hereunder, the Agent or BTCo (in the case of a Borrowing of Swingline Loans) or the respective Letter of Credit Issuer (in the case of Letters of Credit), as the case may be, may prior to receipt of written confirmation act without liability upon the basis of such telephonic notice, believed by the Agent, BTCo, or such Letter of Credit Issuer, as the case may be, in good faith to be from an Authorized Officer of the Borrower. In each such case, the Borrower hereby waives the right to dispute the Agent's, BTCo's or such Letter of Credit Issuer's record of the terms of such telephonic notice. 1.04 Disbursement of Funds. (a) No later than 1:00 P.M. (New York --------------------- time) on the date specified in each Notice of Borrowing (or (x) in the case of Swingline Loans, not later than 4:00 P.M. (New York time) on the date specified in Section 1.03(b)(i) or (y) in the case of Mandatory Borrowings, not later than 1:00 P.M. (New York time) on the date specified in Section 1.01(c)), each Bank will make available its pro rata share of each Borrowing requested to be made on --- ---- such date (or in the case of Swingline Loans, BTCo shall make available the full amount thereof) in the manner provided below. All amounts shall be made available to the Agent in U.S. Dollars and immediately available funds at the Payment Office and the Agent promptly will make available to the Borrower by depositing to its account at the Payment Office the aggregate of the amounts so made available in the type of funds received. Unless the Agent shall have been notified by any Bank prior to the date of Borrowing that such Bank does not intend to make available to the Agent its portion of the Borrowing or Borrowings to be made on such date, the Agent may assume that such Bank has made such amount available to the Agent on such date of Borrowing, and the Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Bank and the Agent has made available same to the Borrower, the Agent shall be entitled to recover such corresponding amount from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Agent. The Agent shall also be entitled to recover from the Bank or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Agent to the Borrower to the date such corresponding amount is recovered by the Agent, at a rate per annum equal to (x) if paid by such Bank, the overnight Federal Funds rate or (y) if paid by the Borrower, the then applicable rate of interest, calculated in accordance with Section 1.08, for the respective Loans. -4- (b) Nothing herein shall be deemed to relieve any Bank from its obligation to fulfill its commitments hereunder or to prejudice any rights which the Borrower may have against any Bank as a result of any default by such Bank hereunder. 1.05 Notes. (a) The Borrower's obligation to pay the principal of, and ----- interest on, all the Loans made to it by each Bank shall be evidenced (i) if Revolving Loans, by a promissory note substantially in the form of Exhibit B-1 with blanks appropriately completed in conformity herewith (each, a "Revolving Note" and, collectively, the "Revolving Notes") and (ii) if Swingline Loans, by a promissory note substantially in the form of Exhibit B-2 with blanks appropriately completed in conformity herewith (the "Swingline Note"). (b) The Revolving Note issued to each Bank shall (i) be executed by the Borrower, (ii) be payable to the order of such Bank or its registered assigns and be dated the Initial Borrowing Date, (iii) be in a stated principal amount equal to the Revolving Loan Commitment of such Bank and be payable in the principal amount of the Revolving Loans evidenced thereby, (iv) mature on the Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and mandatory repayment as provided in Section 4.02, and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (c) The Swingline Note issued to BTCo shall (i) be executed by the Borrower, (ii) be payable to the order of BTCo or its registered assigns and be dated the Initial Borrowing Date, (iii) be in a stated principal amount equal to the Maximum Swingline Amount and be payable in the principal amount of the Swingline Loans evidenced thereby, (iv) mature on the Swingline Expiry Date, (v) bear interest as provided in Section 1.08 in respect of the Base Rate Loans evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and mandatory repayment as provided in Section 4.02, and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (d) Each Bank will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of any of its Notes endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to make any such notation shall not affect the Borrower's obligations in respect of such Loans. 1.06 Conversions. The Borrower shall have the option to convert on any ----------- Business Day occurring on or after the Initial Borrowing Date, all or a portion at least equal to the applicable Minimum Borrowing Amount of the outstanding principal amount of the Revolving Loans owing by the Borrower into a Borrowing or Borrowings of another Type of Loan; provided, that (i) except as -------- otherwise provided in Section 1.10(b), no partial conversion of a Borrowing of Eurodollar Loans shall reduce the outstanding principal amount -5- of the Eurodollar Loans made pursuant to such Borrowing to less than the Minimum Borrowing Amount applicable thereto, (ii) Base Rate Loans may only be converted into Eurodollar Loans if no payment Default, or Event of Default, is in existence on the date of the conversion, (iii) Borrowings of Eurodollar Loans resulting from this Section 1.06 shall be limited in number as provided in Section 1.02 and (iv) unless the Agent has determined that the Syndication Date has occurred (at which time this clause (iv) shall no longer be applicable), prior to the 90th day after the Effective Date, conversions of Base Rate Loans into Eurodollar Loans may only be made if any such conversion is effective on the first day of the first, second or third Interest Period referred to in clause (y) of the proviso to each of Section 1.01(a)(ii) and then only so long as such conversion does not result in a greater number of Borrowings of Eurodollar Loans prior to the 90th day after the Effective Date as are permitted under such Sections. Each such conversion shall be effected by the Borrower by giving the Agent at its Notice Office, prior to 1:00 P.M. (New York time), at least three Business Days' (or one Business Day's in the case of a conversion into Base Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each, a "Notice of Conversion") specifying the Revolving Loans to be so converted, the Type of Revolving Loans to be converted into and, if to be converted into a Borrowing of Eurodollar Loans, the Interest Period to be initially applicable thereto. The Agent shall give each Bank prompt notice of any such proposed conversion affecting any of its Revolving Loans. 1.07 Pro Rata Borrowings. All Borrowings of Revolving Loans under this ------------------- Agreement shall be made by the Banks pro rata on the basis of their Revolving --- ---- Loan Commitments. It is understood that no Bank shall be responsible for any default by any other Bank of its obligation to make Revolving Loans hereunder and that each Bank shall be obligated to make the Revolving Loans to be made by it hereunder, regardless of the failure of any other Bank to fulfill its commitments hereunder. 1.08 Interest. (a) The unpaid principal amount of each Base Rate Loan -------- shall bear interest from the date of the Borrowing thereof until the earlier of (i) the maturity (whether by acceleration or otherwise) of such Base Rate Loan and (ii) the conversion of such Base Rate Loan to a Eurodollar Loan pursuant to Section 1.06, at a rate per annum which shall at all times be the Applicable Base Rate Margin plus the Base Rate in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until the earlier of (i) the maturity (whether by acceleration or otherwise) of such Eurodollar Loan and (ii) the conversion of such Eurodollar Loan to a Base Rate Loan pursuant to Section 1.06, 1.09 or 1.10(b), as applicable, at a rate per annum which shall at all times be the Applicable Eurodollar Margin plus the relevant Eurodollar Rate. -6- (c) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan shall bear interest at a rate per annum equal to the greater of (x) the rate which is 2% in excess of the rate then borne by such Loans and (y) the rate which is 2% in excess of the rate otherwise applicable to Base Rate Loans from time to time. Interest which accrues under this Section 1.08(c) shall be payable on demand. (d) Interest shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof and shall be payable (i) in respect of each Base Rate Loan, quarterly in arrears on each Quarterly Payment Date, (ii) in respect of each Eurodollar Loan, on (x) the date of any prepayment or repayment thereof (on the amount prepaid or repaid), (y) the date of any conversion into a Base Rate Loan pursuant to Section 1.06, 1.09 or 1.10(b), as applicable (on the amount converted) and (z) the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three month intervals after the first day of such Interest Period and (iii) in respect of each Loan, at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. (e) All computations of interest hereunder shall be made in accordance with Section 12.07(b). (f) The Agent, upon determining the interest rate for any Borrowing of Eurodollar Loans for any Interest Period, shall promptly notify the Borrower and the Banks thereof. 1.09 Interest Periods. At the time the Borrower gives a Notice of ---------------- Borrowing or Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 1:00 P.M. (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, it shall have the right to elect by giving the Agent written notice (or telephonic notice promptly confirmed in writing) of the Interest Period applicable to such Borrowing, which Interest Period shall, at the option of the Borrower, be a one, two, three or six-month period or, to the extent approved by all Banks, a twelve-month period. Notwithstanding anything to the contrary contained above: (i) all Eurodollar Loans comprising a Borrowing shall have the same Interest Period; (ii) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of Base Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; -7- (iii) if any Interest Period begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iv) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided, that if any Interest Period would -------- otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (v) no Interest Period for a Borrowing may be elected if it would extend beyond the Maturity Date; (vi) no Interest Period may be elected at any time when a payment Default, or an Event of Default, is then in existence; and (vii) no Interest Period shall extend beyond any date upon which a mandatory commitment reduction is scheduled to occur under Section 3.03(b) if, after giving effect to the selection of such Interest Period, the aggregate principal amount of Revolving Loans maintained as Eurodollar Loans with Interest Periods ending after such commitment reduction date would exceed the aggregate principal amount of Revolving Loans permitted to be outstanding after such commitment reduction. If upon the expiration of any Interest Period, the Borrower has failed to elect, or is not permitted to elect by virtue of the application of clause (vi) above, a new Interest Period to be applicable to the respective Borrowing of Eurodollar Loans as provided above, the Borrower shall be deemed to have elected to convert such Borrowing into a Borrowing of Base Rate Loans effective as of the expiration date of such current Interest Period. 1.10 Increased Costs, Illegality, etc. (a) In the event that (x) in --------------------------------- the case of clause (i) below, the Agent or (y) in the case of clauses (ii) and (iii) below, any Bank, shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining the Eurodollar Rate for any Interest Period, that, by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or -8- (ii) at any time, that such Bank shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans (other than any increased cost or reduction in the amount received or receivable resulting from the imposition of or a change in the rate of net income taxes or similar charges) because of (x) any change since the Effective Date in any applicable law, governmental rule, regulation, guideline, order or request (whether or not having the force of law), or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline, order or request (such as, for example, but not limited to a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the computation of the Eurodollar Rate) and/or (y) other circumstances affecting such Bank, the interbank Eurodollar market or the position of such Bank in such market; or (iii) at any time since the Effective Date, that the making or continuance of any Eurodollar Loan has become unlawful by compliance by such Bank in good faith with any law, governmental rule, regulation, guideline or order (or would conflict with any such governmental rule, regulation, guideline or order not having the force of law but with which such Bank customarily complies even though the failure to comply therewith would not be unlawful), or has become impracticable as a result of a contingency occurring after the Effective Date which materially and adversely affects the interbank Eurodollar market; then, and in any such event, such Bank (or the Agent in the case of clause (i) above) shall (x) on such date and (y) as promptly as practicable (and in any event within five Business Days) after the date on which such event no longer exists give notice (by telephone confirmed in writing) to the Borrower and (except in the case of clause (i)) to the Agent of such determination (which notice the Agent shall promptly transmit to each of the other Banks). Thereafter, (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Agent notifies the Borrower and the Banks that the circumstances giving rise to such notice by the Agent no longer exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans which have not yet been incurred shall be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the Borrower agrees to pay to such Bank, upon written demand therefor (accompanied by the written notice referred to below), such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank in its sole discretion shall determine) as shall be required to compensate such Bank for such increased costs or reductions in amounts received or receivable hereunder (a written notice as to the additional amounts owed to such Bank, showing the basis for the calculation thereof, submitted to the Borrower by such Bank shall, absent manifest error, be final and conclusive and binding upon all parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.10(b) as promptly as possible and, in any event, within the time period required by law. -9- (b) At any time that any Eurodollar Loan is affected by the circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may (and in the case of a Eurodollar Loan affected pursuant to Section 1.10(a)(iii) the Borrower shall) either (i) if the affected Eurodollar Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Agent telephonic notice (confirmed promptly in writing) thereof on the same date that the Borrower was notified by a Bank pursuant to Section 1.10(a)(ii) or (iii), or (ii) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' notice to the Agent, require the affected Bank to convert each such Eurodollar Loan into a Base Rate Loan (which conversion, in the case of the circumstances described in Section 1.10(a)(iii), shall occur no later than the last day of the Interest Period then applicable to such Eurodollar Loan (or such earlier date as shall be required by applicable law)); provided, that if more -------- than one Bank is affected at any time, then all affected Banks must be treated the same pursuant to this Section 1.10(b). (c) If any Bank shall have determined that after the Effective Date, the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by the National Association of Insurance Commissioners ("NAIC") or any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Bank or any corporation controlling such Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of the NAIC or any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's or such other corporation's capital or assets as a consequence of such Bank's Revolving Loan Commitments or obligations hereunder to a level below that which such Bank or such other corporation could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Bank's or such other corporation's policies with respect to capital adequacy), then from time to time, upon written demand by such Bank (with a copy to the Agent), accompanied by the notice referred to in the last sentence of this clause (c), the Borrower agrees to pay to such Bank such additional amount or amounts as will compensate such Bank or such other corporation for such reduction. Each Bank, upon determining in good faith that any additional amounts will be payable pursuant to this Section 1.10(c), will give prompt written notice thereof to the Borrower, which notice shall set forth the basis of the calculation of such additional amounts, although the failure to give any such notice shall not release or diminish the Borrower's obligations to pay additional amounts pursuant to this Section 1.10(c) upon the subsequent receipt of such notice. 1.11 Compensation. The Borrower agrees to compensate each Bank, ------------ promptly upon its written request (which request shall set forth the basis for requesting such compensation and shall be made through the Agent), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Bank to fund its Eurodollar Loans but excluding loss of anticipated profit with respect to any Loans) -10- which such Bank may sustain: (i) if for any reason (other than a default by such Bank or the Agent) a Borrowing of Eurodollar Loans does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.10(a)); (ii) if any repayment (including any repayment made pursuant to Section 4.02 or as a result of an acceleration of the Loans pursuant to Section 9) or conversion of any Eurodollar Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any Eurodollar Loans is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of (x) any other default by the Borrower to repay its Eurodollar Loans when required by the terms of this Agreement or (y) an election made pursuant to Section 1.10(b). Calculation of all amounts payable to a Bank under this Section 1.11 shall be made as though that Bank had actually funded its relevant Eurodollar Loan through the purchase of a Eurodollar deposit bearing interest at the Eurodollar Rate in an amount equal to the amount of that Loan, having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Bank to a domestic office of that Bank in the United States of America; provided, -------- however, that each Bank may fund each of its Eurodollar Loans in any manner it - ------- sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section 1.11. It is further understood and agreed that if any repayment of Eurodollar Loans pursuant to Section 4.01 or any conversion of Eurodollar Loans pursuant to Section 1.06 in either case occurs on a date which is not the last day of an Interest Period applicable thereto, such repayment or conversion shall be accompanied by any amounts owing to any Bank pursuant to this Section 1.11. 1.12 Change of Lending Office. Each Bank agrees that, upon the ------------------------ occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii), 1.10(c), 2.05 or 4.04 with respect to such Bank, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Revolving Loans or Letters of Credit affected by such event; provided, that such designation is -------- made on such terms that, in the sole judgment of such Bank, such Bank and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequences of the event giving rise to the operation of any such Section. Nothing in this Section 1.12 shall affect or postpone any of the obligations of the Borrower or the right of any Bank provided in Section 1.10, 2.05 or 4.04. 1.13 Replacement of Banks. (x) If any Bank becomes a Defaulting Bank, -------------------- (y) upon the occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c), Section 2.05 or Section 4.04 with respect to any Bank which results in such Bank charging to the Borrower increased costs in excess of those being generally charged by the other Banks or (z) in the case of a refusal by a Bank to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Required Banks as provided in Section 12.12(b), the Borrower shall have the right, if no payment Default, or Event of Default, then exists, to replace such -11- Bank (the "Replaced Bank") with one or more other Eligible Transferee or Transferees, none of whom shall constitute a Defaulting Bank at the time of such replacement (collectively, the "Replacement Bank") reasonably acceptable to the Agent, provided that (i) at the time of any replacement pursuant to this Section -------- 1.13, the Replacement Bank shall enter into one or more Assignment and Assumption Agreements pursuant to Section 12.04(b) (and with all fees payable pursuant to said Section 12.04(b) to be paid by the Replacement Bank) pursuant to which the Replacement Bank shall acquire the Revolving Loan Commitment and outstanding Revolving Loans of, and participations in Letters of Credit by, the Replaced Bank and, in connection therewith, shall pay to (x) the Replaced Bank in respect thereof an amount equal to the sum of (A) an amount equal to the principal of, and all accrued interest on, all outstanding Revolving Loans of the Replaced Bank, (B) an amount equal to all Unpaid Drawings that have been funded by (and not reimbursed to) such Replaced Bank, together with all then unpaid interest with respect thereto at such time and (C) an amount equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Bank pursuant to Section 3.01, (y) the respective Letter of Credit Issuer an amount equal to such Replaced Bank's Percentage of any Unpaid Drawing (which at such time remains an Unpaid Drawing) with respect to a Letter of Credit issued by it to the extent such amount was not theretofore funded by such Replaced Bank and (z) BTCo an amount equal to such Replaced Bank's Percentage of any Mandatory Borrowing to the extent such amount was not theretofore funded by such Replaced Bank, and (ii) all obligations (including, without limitation, all such amounts, if any, due and owing under Section 1.11) of the Borrower due and owing to the Replaced Bank (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Bank concurrently with such replacement. Upon the execution of the respective Assignment and Assumption Agreements, the payment of amounts referred to in clauses (i) and (ii) above, recordation of the assignment on the Register by the Agent pursuant to Section 7.12 and, if so requested by the Replacement Bank, delivery to the Replacement Bank of the appropriate Note or Notes executed by the Borrower, (x) the Replacement Bank shall become a Bank hereunder and the Replaced Bank shall cease to constitute a Bank hereunder, except with respect to indemnification provisions under this Agreement, which shall survive as to such Replaced Bank and (y) Annex I hereto shall be deemed modified to reflect the changed Revolving Loan Commitments resulting from the assignment from the Replaced Bank to the Replacement Bank. SECTION 2. Letters of Credit. ----------------- 2.01 Letters of Credit. (a) Subject to and upon the terms and ----------------- conditions herein set forth, the Borrower may request a Letter of Credit Issuer at any time and from time to time on or after the Initial Borrowing Date and prior to the Maturity Date to issue, for the account of the Borrower and in support of, (x) trade obligations of the Borrower or any of its Subsidiaries that arise in the ordinary course of business and are in respect of general corporate purposes of the Borrower or its Subsidiaries, as the case may be, and/or -12- (y) on a standby basis, L/C Supportable Indebtedness, and subject to and upon the terms and conditions herein set forth each Letter of Credit Issuer agrees to issue from time to time, irrevocable letters of credit in such form as may be approved by such Letter of Credit Issuer (each such letter of credit, a "Letter of Credit" and, collectively, the "Letters of Credit"). Notwithstanding the foregoing, no Letter of Credit Issuer shall be under any obligation to issue any Letter of Credit if at the time of such issuance: (i) any order, judgment or decree of any governmental authority or arbitrator shall purport by its terms to enjoin or restrain such Letter of Credit Issuer from issuing such Letter of Credit or any requirement of law applicable to such Letter of Credit Issuer or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over such Letter of Credit Issuer shall prohibit, or request that such Letter of Credit Issuer refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Letter of Credit Issuer with respect to such Letter of Credit any restriction or reserve or capital requirement (for which such Letter of Credit Issuer is not otherwise compensated) not in effect on the date hereof, or any unreimbursed loss, cost or expense which was not applicable, in effect or known to such Letter of Credit Issuer as of the date hereof and which such Letter of Credit Issuer in good faith deems material to it; or (ii) such Letter of Credit Issuer shall have received notice from the Required Banks prior to the issuance of such Letter of Credit of the type described in clause (vi) of Section 2.01(b). (b) Notwithstanding the foregoing, (i) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) at such time, would exceed either (x) $10,000,000 or (y) when added to the aggregate principal amount of all Revolving Loans and Swingline Loans then outstanding, the Total Revolving Loan Commitment at such time; (ii) (x) each standby Letter of Credit shall have an expiry date occurring not later than one year (or, in the case of standby Letters of Credit issued in support of Foreign Subsidiary Working Capital Indebtedness, three years, provided, that the aggregate Stated Amount of -------- all such Letters of Credit shall not exceed $3,000,000), provided, that any -------- standby Letter of Credit may be automatically extendable for periods of up to one year so long as such standby Letter of Credit provides that the respective Letter of Credit Issuer retains an option, satisfactory to such Letter of Credit Issuer, to terminate such standby Letter of Credit within a specified period of time prior to each scheduled extension date and (y) each trade Letter of Credit shall have an expiry date occurring not later than 180 days after such trade Letter of Credit's date of issuance; (iii) (x) no standby Letter of Credit shall have an expiry date occurring later than the Business Day next preceding the Maturity Date and (y) no trade Letter of Credit shall have an expiry date occurring later than 30 days prior to the Maturity -13- Date; (iv) each Letter of Credit shall be denominated in U.S. Dollars and payable on a sight basis; (v) the Stated Amount of each Letter of Credit shall not be less than $50,000 or such lesser amount as is acceptable to the Letter of Credit Issuer; and (vi) no Letter of Credit Issuer will issue any Letter of Credit after it has received written notice from the Borrower or the Required Banks stating that a Default or an Event of Default exists until such time as such Letter of Credit Issuer shall have received a written notice of (i) rescission of such notice from the party or parties originally delivering the same or (ii) a waiver of such Default or Event of Default by the Required Banks. (c) Notwithstanding the foregoing, in the event a Bank Default exists, no Letter of Credit Issuer shall be required to issue any Letter of Credit unless the respective Letter of Credit Issuer has entered into arrangements satisfactory to it and the Borrower to eliminate such Letter of Credit Issuer's risk with respect to the participation in Letters of Credit of the Defaulting Bank or Banks, including by cash collateralizing such Defaulting Bank's or Banks' Percentage of the Letter of Credit Outstandings. 2.02 Letter of Credit Requests: Notices of Issuance. (a) Whenever it ---------------------------------------------- desires that a Letter of Credit be issued, the Borrower shall give the Agent and the respective Letter of Credit Issuer written notice (or telephonic notice confirmed in writing) thereof prior to 1:00 P.M. (New York time) at least five Business Days (or such shorter period as may be acceptable to such Letter of Credit Issuer) prior to the proposed date of issuance (which shall be a Business Day) which written notice shall be in the form of Exhibit A-2 (each such notice, a "Letter of Credit Request"). Each Letter of Credit Request shall include any other documents as the respective Letter of Credit Issuer customarily requires in connection therewith. (b) Each Letter of Credit Issuer shall, promptly after the date of each issuance of or amendment or modification to a Letter of Credit by it, give the Agent, each Bank and the Borrower written notice of the issuance of or amendment or modification to such Letter of Credit, accompanied by a copy to the Agent of such Letter of Credit or Letters of Credit or such amendment or modification. 2.03 Agreement to Repay Letter of Credit Payments. (a) The Borrower -------------------------------------------- hereby agrees to reimburse the respective Letter of Credit Issuer, by making payment to the Agent in immediately available funds at the Payment Office, for any payment or disbursement made by such Letter of Credit Issuer under any Letter of Credit issued by it (each such amount so paid or disbursed until reimbursed, an "Unpaid Drawing") no later than one Business Day following the date of such payment or disbursement, with interest on the amount so paid or disbursed by such Letter of Credit Issuer, to the extent not reimbursed prior to 1:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but not including the date such Letter of Credit Issuer is reimbursed therefor at a rate per annum which shall be the Applicable Base Rate Margin plus the Base Rate as in effect from time to time (plus an additional 2% per -14- annum if not reimbursed by the third Business Day after the date of such payment or disbursement), such interest also to be payable on demand. Each Letter of Credit Issuer shall provide the Borrower prompt notice of any payment or disbursement made by it under any Letter of Credit issued by it, although the failure of, or delay in, giving any such notice shall not release or diminish the obligations of the Borrower under this Section 2.03(a) or under any other Section of this Agreement. (b) The Borrower's obligation under this Section 2.03 to reimburse the respective Letter of Credit Issuer with respect to Unpaid Drawings (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against such Letter of Credit Issuer, the Agent or any Bank, including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit issued by it to substantially conform to the terms of the Letter of Credit or any nonapplication or misapplication by the beneficiary of the proceeds of such drawing; provided, however, that the Borrower shall not be obligated to -------- ------- reimburse such Letter of Credit Issuer for any wrongful payment made by such Letter of Credit Issuer under a Letter of Credit issued by it as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Letter of Credit Issuer. 2.04 Letter of Credit Participations. (a) Immediately upon the ------------------------------- issuance by a Letter of Credit Issuer of any Letter of Credit, such Letter of Credit Issuer shall be deemed to have sold and transferred to each other Bank, and each such Bank (each, a "Participant") shall be deemed irrevocably and unconditionally to have purchased and received from such Letter of Credit Issuer, without recourse or warranty, an undivided interest and participation, to the extent of such Participant's Percentage, in such Letter of Credit, each substitute Letter of Credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto (although Letter of Credit Fees shall be payable directly to the Agent for the account of the Banks as provided in Section 3.01(b) and the Participants shall have no right to receive any portion of any Facing Fees) and any security therefor or guaranty pertaining thereto. Upon any change in the Revolving Loan Commitments of the Banks pursuant to Section 1.13 or 12.04(b) or otherwise, it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participations pursuant to this Section 2.04 to reflect the new Percentages of the assigning and assignee Banks. (b) In determining whether to pay under any Letter of Credit, no Letter of Credit Issuer shall have any obligation relative to the Participants other than to determine that any documents required to be delivered under such Letter of Credit have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by any Letter of Credit Issuer under or in connection with any Letter of Credit issued by it if taken or omitted in the absence of gross negli- -15- gence or willful misconduct, shall not create for such Letter of Credit Issuer any resulting liability. (c) In the event that any Letter of Credit Issuer makes any payment under any Letter of Credit issued by it and the Borrower shall not have reimbursed such amount in full to such Letter of Credit Issuer pursuant to Section 2.03(a), such Letter of Credit Issuer shall promptly notify the Agent, and the Agent shall promptly notify each Participant of such failure, and each Participant shall promptly and unconditionally pay to the Agent for the account of such Letter of Credit Issuer, the amount of such Participant's Percentage of such payment in U.S. Dollars and in same day funds; provided, however, that no -------- ------- Participant shall be obligated to pay to the Agent its Percentage of such unreimbursed amount for any wrongful payment made by such Letter of Credit Issuer under a Letter of Credit issued by it as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Letter of Credit Issuer. If the Agent so notifies any Participant required to fund a payment under a Letter of Credit prior to 11:00 A.M. (New York time) on any Business Day, such Participant shall make available to the Agent for the account of the respective Letter of Credit Issuer such Participant's Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Participant shall not have so made its Percentage of the amount of such payment available to the Agent for the account of the respective Letter of Credit Issuer, such Participant agrees to pay to the Agent for the account of such Letter of Credit Issuer, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Agent for the account of such Letter of Credit Issuer at the overnight Federal Funds rate. The failure of any Participant to make available to the Agent for the account of the respective Letter of Credit Issuer its Percentage of any payment under any Letter of Credit issued by it shall not relieve any other Participant of its obligation here-under to make available to the Agent for the account of such Letter of Credit Issuer its Percentage of any payment under any such Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to the Agent for the account of such Letter of Credit Issuer such other Participant's Percentage of any such payment. (d) Whenever any Letter of Credit Issuer receives a payment of a reimbursement obligation as to which the Agent has received for the account of such Letter of Credit Issuer any payments from the Participants pursuant to clause (c) above, such Letter of Credit Issuer shall promptly pay to the Agent and the Agent shall promptly pay to each Participant which has paid its Percentage thereof, in U.S. Dollars and in same day funds, an amount equal to such Participant's Percentage of the principal amount thereof and interest thereon accruing after the purchase of the respective participations. (e) The obligations of the Participants to make payments to the Agent for the account of the respective Letter of Credit Issuer with respect to Letters of Credit issued by it shall be irrevocable and not subject to counterclaim, set-off or other defense or any -16- other qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Letter of Credit Issuer, any Bank, or other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower or any of its Subsidiaries and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; or (v) the occurrence of any Default or Event of Default. 2.05 Increased Costs. If after the Effective Date, the adoption or --------------- effectiveness of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Letter of Credit Issuer or any Participant with any request or directive (whether or not having the force of law) by any such authority, central bank or comparable agency shall either (i) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against Letters of Credit issued by such Letter of Credit Issuer or such Participant's participation therein, or (ii) impose on any Letter of Credit Issuer or any Participant any other conditions affecting this Agreement, any Letter of Credit or such Participant's participation therein; and the result of any of the foregoing is to increase the cost to such Letter of Credit Issuer or such Participant of issuing, maintaining or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Letter of Credit Issuer or such Participant hereunder, then, upon written demand to the Borrower by such Letter of Credit Issuer or such Participant (a copy of which notice shall be sent by such Letter of Credit Issuer or such Participant to the Agent), accompanied by the certificate described in the last sentence of this Section 2.05, the Borrower shall pay to such Letter of Credit Issuer or such Participant such additional amount or amounts as -17- will compensate such Letter of Credit Issuer or such Participant for such increased cost or reduction. A certificate submitted to the Borrower by such Letter of Credit Issuer or such Participant, as the case may be (a copy of which certificate shall be sent by such Letter of Credit Issuer or such Participant to the Agent), setting forth the basis for the determination of such additional amount or amounts necessary to compensate such Letter of Credit Issuer or such Participant as aforesaid shall be final and conclusive and binding on the Borrower absent manifest error, although the failure to deliver any such certificate shall not release or diminish the Borrower's obligations to pay additional amounts pursuant to this Section 2.05 upon subsequent receipt of such certificate. SECTION 3. Fees: Commitments. ----------------- 3.01 Fees. (a) The Borrower shall pay to the Agent for distribution to ---- each Non-Defaulting Bank a commitment fee (the "Commitment Fee") for the period from the Effective Date to but not including the date the Total Revolving Loan Commitment has been terminated, computed at a rate for each day equal to the Applicable Commitment Fee Percentage on the daily Unutilized Revolving Loan Commitment of such Non-Defaulting Bank. Accrued Commitment Fees shall be due and payable in arrears on each Quarterly Payment Date and the date upon which the Total Revolving Loan Commitment is terminated. (b) The Borrower shall pay to the Agent for the account of the Banks pro rata on the basis of their Percentages, a fee in respect of each Letter of - --- ---- Credit (the "Letter of Credit Fee") computed at a rate per annum equal to the Applicable Eurodollar Margin then in effect on the daily Stated Amount of such Letter of Credit. Accrued Letter of Credit Fees shall be due and payable quarterly in arrears on each Quarterly Payment Date and upon the first day after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. (c) The Borrower shall pay to the Agent for the account of the respective Letter of Credit Issuer a fee in respect of each Letter of Credit issued by such Letter of Credit Issuer (the "Facing Fee") computed at the rate of 1/4 of 1% per annum on the daily Stated Amount of such Letter of Credit; provided, that in no event shall the annual Facing Fee with respect to each - -------- Letter of Credit be less than $500; it being agreed that, on the date of issuance of any Letter of Credit and on each anniversary thereof prior to the termination of such Letter of Credit, if $500 will exceed the amount of Facing Fees that will accrue with respect to such Letter of Credit for the immediately succeeding 12-month period, the full $500 shall be payable on the date of issuance of such Letter of Credit and on each such anniversary thereof prior to the termination of such Letter of Credit. Except as provided in the immediately preceding sentence, accrued Facing Fees shall be due and payable quarterly in arrears on each Quarterly Payment Date and upon the first day after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. -18- (d) The Borrower hereby agrees to pay directly to the respective Letter of Credit Issuer upon each issuance of, payment under, and/or amendment of, a Letter of Credit issued by it such amount as shall at the time of such issuance, payment or amendment be the administrative charge which such Letter of Credit Issuer is customarily charging for issuances of, payments under or amendments of, letters of credit issued by it. (e) The Borrower shall pay to the Agent, for its own account, such fees as may be agreed to from time to time between the Borrower and the Agent, when and as due. (f) All computations of Fees shall be made in accordance with Section 12.07(b). 3.02 Voluntary Termination or Reduction of Total Unutilized Revolving ---------------------------------------------------------------- Loan Commitment. (a) Upon at least two Business Days' prior written notice (or - --------------- telephonic notice promptly confirmed in writing) to the Agent at its Notice Office (which notice the Agent shall promptly transmit to each of the Banks), the Borrower shall have the right, without premium or penalty, to terminate or partially reduce the Total Unutilized Revolving Loan Commitment; provided that -------- (x) any such termination or partial reduction shall apply to proportionately and permanently reduce the Revolving Loan Commitment of each Bank, (y) any partial reduction pursuant to this Section 3.02(a) shall be in the amount of at least $1,000,000 and (z) any partial reduction to the Total Revolving Loan Commitment pursuant to this Section 3.02(a) shall apply to reduce the remaining Scheduled Commitment Reductions on a pro rata basis (based upon the then remaining amount --- ---- of each such Scheduled Commitment Reduction). (b) In the event of certain refusals by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as provided in Section 12.12(b), the Borrower shall have the right, upon five Business Days' prior written notice to the Agent at its Notice Office (which notice the Agent shall promptly transmit to each of the Banks), to terminate the entire Revolving Loan Commitment of such Bank, so long as all Revolving Loans, together with accrued and unpaid interest, Fees and all other amounts, due and owing to such Bank are repaid concurrently with the effectiveness of such termination pursuant to Section 4.01(b) and the Borrower shall pay to the Agent at such time an amount in cash and/or Cash Equivalents equal to such Bank's Percentage of the outstanding Letters of Credit (which cash and/or Cash Equivalents shall be held by the Agent as security for the obligations of the Borrower hereunder in respect of the outstanding Letters of Credit pursuant to a cash collateral agreement to be entered into in form and substance reasonably satisfactory to the Agent, which shall permit certain investments in Cash Equivalents reasonably satisfactory to the Agent until the proceeds are applied to the secured obligations) (at which time Annex I shall be deemed modified to reflect such changed amounts), and at such time, such Bank shall no longer constitute a "Bank" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, -19- without limitation, Sections 1.10, 1.11, 2.05, 4.04, 12.01 and 12.06), which shall survive as to such repaid Bank. 3.03 Mandatory Adjustments of Commitments. etc. (a) The Total ----------------------------------------- Revolving Loan Commitment (and the Revolving Loan Commitment of each Bank) shall terminate on the earlier of (x) the date on which a Change of Control Event occurs and (y) the Maturity Date. In addition, the Total Revolving Loan Commitment (and the Revolving Loan Commitment of each Bank) shall terminate on March 30, 1998 unless the Initial Borrowing Date has occurred on or before such date. (b) The Total Revolving Loan Commitment shall be reduced on each date set forth below by the amount set forth opposite such date below (each such reduction, as the same may be reduced as provided in Sections 3.02 and 3.03(h), a "Scheduled Commitment Reduction"):
Date Amount ---- ------ April 30, 2001 $ 2,500,000 July 31, 2001 $ 2,500,000 October 31, 2001 $ 2,500,000 January 31, 2002 $ 2,500,000 April 30, 2002 $ 7,500,000 July 31, 2002 $ 7,500,000 October 31, 2002 $ 7,500,000 Maturity Date $37,500,000
(c) In addition to any other mandatory commitment reduction pursuant to this Section 3.03 but except as otherwise provided in Section 3.03(f) below, on the third Business Day after the date of receipt thereof by Holdings and/or any of its Subsidiaries of Proceeds from any Asset Sale (or, in the case of an Asset Sale in which payments to Holdings or any of its Subsidiaries originate from outside the United States, within five Business Days after the date of receipt of such Proceeds), the Total Revolving Loan Commitment shall be permanently reduced by an amount equal to 75 % of the Net Proceeds from such Asset Sale, provided that with respect to no more than $3,000,000 in the -------- aggregate of the Net Proceeds received in connection with all Asset Sales in any fiscal year of the Borrower, the Net Proceeds therefrom shall not give rise to a reduction of the Total Revolving Loan Commitment on such date pursuant to this Section 3.03(c) to the extent that no payment Default, or Event of Default, then exists and the Borrower delivers a certificate to the Agent on or prior to such date stating that such Net Proceeds shall be used to purchase assets used or to be used in the businesses referred to in Section 8.01(a) (including, without limitation, capital stock of a corporation engaged in any such business) within one year following the date of receipt of such Proceeds from such Asset Sale (which certificate shall set forth the estimates of the proceeds to be so expended), provided, that -------- -20- (1) if all or any portion of such Net Proceeds are not so used (or contractually committed to be used) within such one year period, the Total Revolving Loan Commitment shall be permanently reduced on the last day of such period by an amount equal to 75% of such remaining portion and (2) if all or any portion of such Net Proceeds are not so used within such one year period referred to in clause (1) above because such amount is contractually committed to be used and subsequent to such date such contract is terminated or expires without such portion being so used, then the Total Revolving Loan Commitment shall be permanently reduced on the date of such termination or expiration by an amount equal to 75% of such remaining portion. (d) In addition to any other mandatory commitment reduction pursuant to this Section 3.03 but except as otherwise provided in Section 3.03(f) below, on the date of the receipt thereof by Holdings and/or any of its Subsidiaries, the Total Revolving Loan Commitment shall be permanently reduced by an amount equal to 100% of the proceeds (net of underwriting discounts, fees and commissions and other costs and expenses associated therewith) of the incurrence of Indebtedness by Holdings and/or any of its Subsidiaries (other than Indebtedness permitted to be incurred by Section 8.04 as in effect on the Effective Date). (e) In addition to any other mandatory commitment reduction pursuant to this Section 3.03 but except as otherwise provided in Section 3.03(f) below, within 10 days following each date on which Holdings or any of its Subsidiaries receives any proceeds from any Recovery Event, the Total Revolving Loan Commitment shall be reduced by an amount equal to 100% of the proceeds of such Recovery Event (net of costs, expenses and taxes incurred in connection with such Recovery Event); provided that so long as no Default or Event of Default -------- then exists and such proceeds do not exceed $20,000,000, such proceeds shall not give rise to a reduction of the Total Revolving Loan Commitment pursuant to this Section 3.03(e) on such date to the extent that the Borrower has delivered a certificate to the Agent on or prior to such date stating that such proceeds shall be used to replace or restore any properties or assets in respect of which such proceeds were paid within one year following the date of the receipt of such proceeds (which certificate shall set forth the estimates of the proceeds to be so expended), and provided further, that (i) if the amount of such ---------------- proceeds exceeds $20,000,000, then the Total Revolving Loan Commitment shall be permanently reduced by the portion in excess of $20,000,000, (ii) if all or any portion of such proceeds not giving rise to a reduction of the Total Revolving Loan Commitment pursuant to the preceding proviso are not so used (or contractually committed to be used) within one year after the date of the receipt of such proceeds, the Total Revolving Loan Commitment shall be permanently reduced on the last day of such period by an amount equal to such remaining portion and (iii) if all or any portion of such proceeds are not so used within the one year period referred to in clause (ii) above because such amount is contractually committed to be used and subsequent to such date such contract is terminated or expires without such portion being so used, then the Total -21- Revolving Loan Commitment shall be permanently reduced on the date of such termination or expiration in an amount equal to such remaining portion. (f) Notwithstanding anything to the contrary contained in Sections 3.03(c), (d), and (e) above, in no event shall the Total Revolving Loan Commitment be reduced to an amount less than $15,000,000 pursuant to or as a result of any such Section. (g) Each reduction or adjustment of the Total Revolving Loan Commitment pursuant to this Section 3.03 shall apply proportionately to the Revolving Loan Commitment of each Bank. (h) Any amount required to be applied to reduce the Total Revolving Loan Commitment pursuant to this Section 3.03 shall be applied to reduce the then remaining Scheduled Commitment Reductions pro rata based upon the then --- ---- remaining amount of such Scheduled Commitment Reductions after giving effect to all prior reductions thereto. SECTION 4. Payments. --------- 4.01 Voluntary Prepayments. (a) The Borrower shall have the right to --------------------- prepay the Loans made to it, in whole or in part, without premium or penalty, except as otherwise provided in this Agreement, from time to time on the following terms and conditions: (i) the Borrower shall give the Agent at its Notice Office written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay such Loans, whether such Loans are Revolving Loans or Swingline Loans, the amount of such prepayment and (in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which made, which notice shall be given by the Borrower prior to 1:00 P.M. (New York time) (x) at least one Business Day prior to the date of such prepayment in the case of Revolving Loans maintained as Base Rate Loans, (y) on the date of such prepayment in the case of Swingline Loans and (z) at least three Business Days prior to the date of such prepayment in the case of Eurodollar Loans, which notice shall, except in the case of Swingline Loans, promptly be transmitted by the Agent to each of the Banks; (ii) each prepayment shall be in an aggregate principal amount of (A) at least $500,000 in the case of Eurodollar Loans and (B) at least $250,000 in the case of Base Rate Loans (or $100,000 in the case of Swingline Loans); provided, that no partial prepayment of Eurodollar Loans made pursuant to a - -------- Borrowing shall reduce the aggregate principal amount of the Eurodollar Loans outstanding pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto; and (iii) each prepayment in respect of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans; --- ---- provided, that at the Borrower's election in connection with any prepayment of - -------- Revolving Loans pursuant to this Section 4.01, such prepayment shall not be applied to any Revolving Loans of a Defaulting Bank at any time when the aggregate amount of Revolving Loans of any Non-Defaulting Bank exceeds such Non- Defaulting Bank's Percentage of all Revolving Loans then outstanding. -22- (b) In the event of certain refusals by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as provided in Section 12.12(b), the Borrower shall have the right, upon five Business Days' prior written notice to the Agent at its Notice Office (which notice the Agent shall promptly transmit to each of the Banks) to repay all Revolving Loans of such Bank, together with accrued and unpaid interest, Fees and all other amounts due and owing to such Bank in accordance with said Section 12.12(b), so long as (A) the Revolving Loan Commitment of such Bank is terminated concurrently with such repayment pursuant to Section 3.02(b) (at which time Annex I shall be deemed modified to reflect the changed Revolving Loan Commitments) and (B) the consents required by Section 12.12(b) in connection with the repayment pursuant to this clause (b) shall have been obtained. 4.02 Mandatory Prepayments. (a) If on any date the sum of (i) the --------------------- aggregate outstanding principal amount of Revolving Loans and Swingline Loans (after giving effect to all other repayments thereof on such date) plus (ii) the Letter of Credit Outstandings on such date exceeds the Total Revolving Loan Commitment as then in effect, the Borrower shall repay on such date the principal of Swingline Loans, and if no Swingline Loans are or remain outstanding, Revolving Loans, in an aggregate amount equal to such excess. If, after giving effect to the prepayment of all outstanding Swingline Loans and Revolving Loans, the aggregate amount of Letter of Credit Outstandings exceeds the Total Revolving Loan Commitment as then in effect, the Borrower agrees to pay to the Agent an amount in cash and/or Cash Equivalents equal to such excess (up to the aggregate amount of Letter of Credit Outstandings at such time) and the Agent shall hold such payment as security for the obligations of the Borrower hereunder pursuant to a cash collateral agreement to be entered into in form and substance reasonably satisfactory to the Agent (which shall permit certain investments in Cash Equivalents reasonably satisfactory to the Agent until the proceeds are applied to the secured obligations). (b) With respect to each repayment of Loans required by this Section 4.02, the Borrower may designate the Types of Loans which are to be repaid and the specific Borrowing(s) pursuant to which made; provided, that (i) Eurodollar -------- Loans may be designated for repayment pursuant to this Section 4.02 only on the last day of an Interest Period applicable thereto unless all Eurodollar Loans with Interest Periods ending on such date of required prepayment and all Base Rate Loans have been paid in full; (ii) if any repayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount, such Borrowing shall be immediately converted into Base Rate Loans; and (iii) each repayment of any Revolving Loans made pursuant to a Borrowing shall be applied pro rata among such Revolving Loans; provided, that no repayment --- ---- -------- pursuant to Section 4.02(a) shall be applied to any Revolving Loans of a Defaulting Bank at any time when the aggregate amount of the Revolving Loans of any Non-Defaulting Bank exceeds such Non-Defaulting Bank's Percentage of Revolving Loans then outstanding. In -23- the absence of a designation by the Borrower as described in the preceding sentence, the Agent shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.11. (c) Notwithstanding anything to the contrary contained elsewhere in this Agreement, (i) all then outstanding Swingline Loans shall be repaid in full on the Swingline Expiry Date and (ii) all outstanding Revolving Loans shall be repaid in full on the Maturity Date. 4.03 Method and Place of Payment. Except as otherwise specifically --------------------------- provided herein, all payments under this Agreement shall be made to the Agent for the ratable account of the Banks entitled thereto, not later than 1:00 P.M. (New York time) on the date when due and shall be made in immediately available funds and in U.S. Dollars at the Payment Office, it being understood that written, telex or facsimile transmission notice by the Borrower to the Agent to make a payment from the funds in the Borrower's account at the Payment Office shall constitute the making of such payment to the extent of such funds held in such account. Any payments under this Agreement which are made later than 1:00 P.M. (New York time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. 4.04 Net Payments. (a) All payments made by the Borrower hereunder or ------------ under any Note will be made without setoff, counterclaim or other defense. Except as provided in Section 4.04(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imports, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding, except as provided in the second succeeding sentence, any tax imposed on or measured by the net income or net profits of a Bank pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Bank is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imports, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. If any amounts are payable in respect of Taxes pursuant to the preceding sentence, the Borrower agrees to reimburse each Bank, upon the written request of such Bank, for taxes imposed on or measured by the net income or net profits of such Bank pursuant to the laws of the jurisdiction in which the principal office or applicable lending -24- office of such Bank is located or under the laws of any political subdivision or taxing authority of any such jurisdiction in which the principal office or applicable lending office of such Bank is located and for any withholding of taxes as such Bank shall determine are payable by, or withheld from, such Bank in respect of such amounts so paid to or on behalf of such Bank pursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Bank pursuant to this sentence. The Borrower will furnish to the Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Bank, and reimburse such Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by such Bank. (b) Each Bank that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) agrees to deliver to the Borrower and the Agent on or prior to the Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.13 or 12.04 (unless the respective Bank was already a Bank hereunder immediately prior to such assignment or transfer), on the date of such assignment or transfer to such Bank, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Bank's entitlement as of such date to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Note, or (ii) if the Bank is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate substantially in the form of Exhibit C (any such certificate, a "Section 4.04(b)(ii Certificate.) and (y) two accurate and complete original signed copies of Internal Revenue Service Form W-8 (or successor form) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Note. In addition, each Bank agrees that from time to time after the Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrower and the Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 4.04(b)(ii) Certificate, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Bank to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Note, or it shall immediately notify the Borrower and the Agent of its inability to deliver any such Form or Certificate in which case such Bank shall not be required to deliver any such Form or Certificate pursuant to this Section 4.04(b). Notwithstanding anything to the contrary contained in Section 4.04(a), but subject to Section 12.04(b) and the immediately succeeding sentence, (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder for the account of any Bank which is not a United States person (as such term is defined in Section 7701(a)(30) -25- of the Code) for U.S. Federal income tax purposes to the extent that such Bank has not provided to the Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 4.04(a) hereof to gross-up payments to be made to a Bank in respect of income or similar taxes imposed by the United States if (I) such Bank has not provided to the Borrower the Internal Revenue Service Forms required to be provided to the Borrower pursuant to this Section 4.04(b) or (II) in the case of a payment, other than interest, to a Bank described in clause (ii) above, to the extent that such Forms do not establish a complete exemption from withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 4.04 and except as set forth in Section 12.04(b), the Borrower agrees to pay additional amounts and to indemnify each Bank in the manner set forth in Section 4.04(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any amounts deducted or withheld by it as described in the immediately preceding sentence as a result of any changes that are effective after the Effective Date in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of income or similar Taxes. SECTION 5. Conditions Precedent. The obligation of each Bank to make -------------------- each Loan to the Borrower hereunder, and the obligation of any Letter of Credit Issuer to issue each Letter of Credit hereunder, is subject, at the time of each such Credit Event (except as otherwise hereinafter indicated), to the satisfaction of the following conditions: 5.01 Execution of Agreement: Notes. On or prior to the Initial ----------------------------- Borrowing Date, (i) the Effective Date shall have occurred and (ii) there shall have been delivered to the Agent for the account of each Bank the appropriate Revolving Note and to BTCo the Swingline Note, in each case executed by the Borrower and in the amount, maturity and as otherwise provided herein. 5.02 No Default: Representations and Warranties. At the time of each ------------------------------------------ Credit Event and also after giving effect thereto (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein or in the other Credit Documents in effect at such time shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Credit Event, unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date. 5.03 Officer's Certificate. On the Initial Borrowing Date, the Agent ---------------------- shall have received a certificate dated such date signed by an appropriate officer of the Borrower stating that all of the applicable conditions set forth in Sections 5.02, 5.06, 5.07, 5.08 and 5.09 have been satisfied as of such date. -26- 5.04 Opinions of Counsel. On the Initial Borrowing Date, the Agent ------------------- shall have received an opinion, addressed to the Agent and each of the Banks and dated the Initial Borrowing Date, from Kirkland & Ellis, counsel to the Credit Parties, which opinion shall cover the matters contained in Exhibit D and such other matters incident to the transactions contemplated herein as the Agent may reasonably request. 5.05 Corporate Proceedings. (a) On the Initial Borrowing Date, the --------------------- Agent shall have received from each Credit Party a certificate, dated the Initial Borrowing Date, signed by the chairman, a vice chairman, the president or any vice-president of such Credit Party, and attested to by the secretary or any assistant secretary of such Credit Party, in the form of Exhibit E with appropriate insertions, together with copies of the Certificate of Incorporation and By-Laws of such Credit Party (to the extent required thereby) and the resolutions of such Credit Party referred to in such certificate and all of the foregoing (including each such Certificate of Incorporation and By-Laws) shall be reasonably satisfactory to the Agent. (b) On the Initial Borrowing Date, all corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Documents shall be reasonably satisfactory in form and substance to the Agent, and the Agent shall have received all information and copies of all certificates, documents and papers, including good standing certificates, bring-down certificates and any other records of corporate proceedings and governmental approvals, if any, which the Agent reasonably may have requested in connection therewith, such documents and papers, where appropriate, to be certified by proper corporate or governmental authorities. 5.06 Adverse Change, etc. On or prior to the Initial Borrowing Date, -------------------- nothing shall have occurred since September 30, 1997 (and neither the Banks nor the Agent shall have become aware of any facts or conditions not previously known) which the Required Banks or the Agent shall determine (a) has, or could reasonably be expected to have, a material adverse effect on the rights or remedies of the Banks or the Agent, or on the ability of any Credit Party to perform its obligations to them hereunder or under any other Credit Document or (b) has, or could reasonably be expected to have, a Material Adverse Effect. 5.07 Litigation. On the Initial Borrowing Date, there shall be no ---------- actions, suits or proceedings pending or threatened (a) with respect to this Agreement or any other Document or the Transaction or (b) which the Agent or the Required Banks shall determine could reasonably be expected to (i) have a Material Adverse Effect or (ii) have a material adverse effect on the Transaction, the rights or remedies of the Banks or the Agent hereunder or under any other Credit Document or on the ability of any Credit Party to perform its respective obligations to the Banks or the Agent hereunder or under any other Credit Document. -27- 5.08 Approvals. On or prior to the Initial Borrowing Date, all --------- necessary governmental (domestic and foreign) and third party approvals in connection with the Transaction, the transactions contemplated by the Documents and otherwise referred to herein or therein shall have been obtained and remain in effect, and all applicable waiting periods shall have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon the consummation of the Transaction, the transactions contemplated by the Documents and otherwise referred to herein or therein. Additionally, there shall not exist any judgment, order, injunction or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified prohibiting or imposing materially adverse conditions upon the consummation of the Transaction or the making of Loans. 5.09 Consummation of the Transaction. On the Initial Borrowing Date, ------------------------------- (a) Holdings shall have received gross cash proceeds of at least $25,000,000 in connection with the registered initial public offering (the "IPO") by Holdings of Holdings Common Stock, (b) Holdings shall have used the net cash proceeds received from the IPO to make a cash common equity contribution to the Borrower, and (c) the Agent shall have received (i) true and correct copies of the IPO Documents and (ii) evidence in form, scope and substance reasonably satisfactory to it that the matters set forth in this Section 5.09 have been satisfied on such date. 5.10 Existing Credit Agreement. (a) On the Initial Borrowing Date, ------------------------- the commitments under the Existing Credit Agreement shall have been terminated, all loans thereunder shall have been repaid in full, together with all accrued and unpaid interest thereon, all accrued and unpaid fees thereon shall have been paid in full, all letters of credit issued thereunder shall have been terminated and all other amounts then owing pursuant to the Existing Credit Agreement shall have been repaid in full, and the Agent shall have received evidence in form, scope and substance reasonably satisfactory to it that the matters set forth in this Section 5.10(a) have been satisfied at such time. (b) On the Initial Borrowing Date, all security interests and Liens created under the Existing Credit Agreement and the related security documents on the capital stock of, and assets (including intercompany notes) owned by, Holdings and its Subsidiaries shall have been terminated and released, and the Agent shall have received all such releases as may have been requested by the Agent, which releases shall be in form and substance reasonably satisfactory to the Agent. 5.11 Security Documents. (a) On the Initial Borrowing Date, Holdings, ------------------ the Borrower and each Subsidiary Guarantor shall have duly authorized, executed and delivered a Pledge Agreement in the form of Exhibit F, together with such changes (or with such other documents) as may be requested by the Collateral Agent in connection with local law (as modified, amended or supplemented from time to time in accordance with the terms thereof and hereof, the "Pledge Agreement") and shall have delivered to the Collateral -28- Agent, as pledgee thereunder, all of the Pledged Securities referred to therein, endorsed in blank in the case of promissory notes or accompanied by executed and undated stock powers in the case of capital stock, and the Pledge Agreement and such other documents shall be in full force and effect. (b) On the Initial Borrowing Date, Holdings, the Borrower and each Subsidiary Guarantor shall have duly authorized, executed and delivered a Security Agreement in the form of Exhibit G, together with such changes (or with such other documents) as may be requested by the Collateral Agent in connection with local law (as modified, amended or supplemented from time to time in accordance with the terms thereof and hereof, the "Security Agreement") covering all of the Security Agreement Collateral, together with: (A) executed copies of Financing Statements (Form UCC-1 and/or UCC-3) or appropriate local equivalent in appropriate form for filing under the UCC or appropriate local equivalent of each jurisdiction as may be necessary to perfect the security interests purported to be created by the Security Agreement; (B) certified copies of Requests for Information or Copies (Form UCC- 11), or equivalent reports, each of a recent date listing all effective financing statements that name Holdings, the Borrower or any of their respective Domestic Subsidiaries or a division or operating unit of any such Person, as debtor and that are filed in the jurisdictions referred to in clause (A) above, together with copies of such financing statements (none of which shall cover the Collateral except (x) those with respect to which appropriate termination statements executed by the secured lender thereunder have been delivered to the Agent and (y) to the extent evidencing Permitted Liens); (C) evidence of the completion of all other recordings and filings of, or with respect to, the Security Agreement as may be necessary or, in the opinion of the Collateral Agent, desirable to perfect the security interests intended to be created by the Security Agreement; and (D) evidence that all other actions necessary or, in the reasonable opinion of the Collateral Agent, desirable to perfect the security interests purported to be created by the Security Agreement have been taken; and the Security Agreement shall be in full force and effect. 5.12 Subsidiary Guaranty. On the Initial Borrowing Date, each ------------------- Subsidiary Guarantor shall have duly authorized, executed and delivered a Subsidiary Guaranty in the form of Exhibit H (as modified, amended or supplemented from time to time in accordance -29- with the terms hereof and thereof, the "Subsidiary Guaranty"), and the Subsidiary Guaranty shall be in full force and effect. 5.13 Mortgages: Title Insurance: Surveys. etc. (a) On the Initial --------- Borrowing Date, the Collateral Agent shall have received fully executed counterparts of deeds of trust, mortgages and similar documents in each case in form and substance satisfactory to the Collateral Agent (as amended, modified or supplemented from time to time in accordance with the terms hereof and thereof, each a "Mortgage" and, collectively, the "Mortgages") covering all the Mortgaged Properties located in the United States, and arrangements reasonably satisfactory to the Collateral Agent shall be in place to provide that counterparts of such Mortgages shall be recorded within two Business Days after the Initial Borrowing Date in all places to the extent necessary or desirable, in the judgment of the Collateral Agent, effectively to create a valid and enforceable first priority Lien, subject only to Permitted Encumbrances, on each such Mortgaged Property in favor of the Collateral Agent (or such other trustee as may be required or desired under local law) for the benefit of the Secured Creditors. (b) On the Initial Borrowing Date, the Collateral Agent shall have received mortgagee title insurance policies (or binding commitments to issue such title insurance policies) issued by title insurers reasonably satisfactory to the Collateral Agent (the "Mortgage Policies") in amounts reasonably satisfactory to the Collateral Agent and assuring the Collateral Agent that the Mortgages are valid and enforceable first priority mortgage Liens on the respective Mortgaged Properties, free and clear of all defects and encumbrances except Permitted Encumbrances. Such Mortgage Policies shall be in form and substance reasonably satisfactory to the Collateral Agent and (i) shall include an endorsement for future advances under this Agreement, the Notes and the Mortgages and for any other matter that the Collateral Agent in its discretion may reasonably request (to the extent available in the respective jurisdiction of each Mortgaged Property), (ii) shall not include an exception for mechanics' liens and (iii) shall provide for affirmative insurance and such reinsurance (including direct access agreements) as the Collateral Agent in its discretion may reasonably request. (c) On the Initial Borrowing Date, the Collateral Agent shall have received a survey for each Mortgaged Property (other than the property located in Mountain Green, Utah), in form and substance reasonably satisfactory to the Collateral Agent, certified by a licensed professional surveyor reasonably satisfactory to the Collateral Agent. The Collateral Agent shall also have received such estoppel letters, landlord waiver letters, nondisturbance letters and similar assurances as may have been requested by the Collateral Agent, which letters shall be in form and substance reasonably satisfactory to the Collateral Agent. -30- 5.14 Plans: Collective Bargaining Agreements: Existing Indebtedness -------------------------------------------------------------- Agreements: Shareholders' Agreements: Management Agreements: Employment - ----------------------------------------------------------------------- Agreements: Tax Allocation Agreements: Material Contracts. On or prior to the - --------------------------------------------------------- Initial Borrowing Date, there shall have been delivered to the Banks copies, certified as true and correct by an appropriate officer of Holdings or its Subsidiaries, of: (a) any Plans of Holdings or any of its Subsidiaries and for each such Plan (i) that is a "single-employer plan" (as defined in Section 4001(a)(15) of ERISA) the most recently completed actuarial valuation prepared therefor by such Plan's regular enrolled actuary and the Schedule B, "Actuarial Information" to the IRS Form 5500 (Annual Report) most recently filed with the Internal Revenue Service and (ii) that is a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA), each of the documents referred to in clause (i) either in the possession of Holdings, any Subsidiary of Holdings or any ERISA Affiliate or reasonably available thereto from the sponsor or trustees of such Plan; (b) any collective bargaining agreements or any other similar agreement or arrangement covering the employees of Holdings or any of its Subsidiaries (collectively, the "Collective Bargaining Agreements"); (c) all agreements evidencing or relating to the Existing Indebtedness that are to remain in effect after giving effect to the consummation of the Transaction (collectively, the "Existing Indebtedness Agreements"); (d) all agreements entered into by Holdings or any of its Subsidiaries governing the terms and relative rights of its capital stock, and any agreements entered into by shareholders relating to any such entity with respect to their capital stock, in each case that are to remain in effect after giving effect to the consummation of the Transaction (collectively, the "Shareholders' Agreements"); (e) any material agreements (or the forms thereof) with members of, or with respect to, the management of Holdings or any of its Subsidiaries that are to remain in effect after giving effect to the consummation of the Transaction (collectively, the "Management Agreements"); (f) any employment agreements entered into by Holdings or any of its Subsidiaries (collectively, the "Employment Agreements"); (g) any tax sharing or tax allocation agreements entered into by Holdings or any of its Subsidiaries (collectively, the "Tax Allocation Agreements"); and -31- (h) all material contracts and licenses of Holdings or any of its Subsidiaries that are to remain in effect after giving effect to the consummation of the Transaction (collectively, the "Material Contracts"); all of which Plans, Collective Bargaining Agreements, Existing Indebtedness Agreements, Shareholders' Agreements, Management Agreements, Employment Agreements, Tax Allocation Agreements and Material Contracts shall be in form and substance reasonably satisfactory to the Agent and shall be in full force and effect on the Initial Borrowing Date. 5.15 Solvency Certificate: Evidence of Insurance. On the Initial ------------------------------------------- Borrowing Date, the Agent shall have received: (a) a Certificate from the Chief Financial Officer of Holdings, in the form of Exhibit K, addressed to the Agent and each of the Banks and dated the Initial Borrowing Date and supporting the conclusions, that, after giving effect to the Transaction and the incurrence of all financings contemplated herein, the Borrower (on a stand-alone basis) and Holdings and its Subsidiaries (on a consolidated basis) are not insolvent and will not be rendered insolvent by the indebtedness incurred in connection herewith, will not be left with unreasonably small capital with which to engage in their respective businesses and will not have incurred debts beyond their ability to pay such debts as they mature and become due; and (b) evidence of insurance complying with the requirements of Section 7.03 for the business and properties of Holdings and its Subsidiaries, in scope, form and substance reasonably satisfactory to the Agent and the Required Banks and naming the Collateral Agent as an additional insured and/or loss payee, and stating that such insurance shall not be cancelled or revised without 30 days prior written notice by the insurer to the Collateral Agent. 5.16 Pro Forma Balance Sheets. On or prior the Initial Borrowing Date, ------------------------ there shall have been delivered to the Agent, an unaudited pro forma --- ----- consolidated balance sheet of Holdings and its Subsidiaries after giving effect to the Transaction and prepared in accordance with GAAP, together with a related funds flow statement, which pro forma balance sheets and funds flow statement --- ----- shall be reasonably satisfactory in form and substance to the Agent and the Required Banks. 5.17 Projections. On or prior to the Initial Borrowing Date, the Banks ----------- shall have received the financial projections (the "Projections") set forth on Annex IV hereto, which include the projected results of Holdings and its Subsidiaries for the five fiscal years ended after the Effective Date. 5.18 Existing Indebtedness. On the Initial Borrowing Date and after --------------------- giving effect to the Transaction and the Loans incurred on the Initial Borrowing Date, neither -32- Holdings nor any of its Subsidiaries shall have any preferred stock or Indebtedness outstanding except for Indebtedness permitted under Section 8.04. On and as of the Initial Borrowing Date, all of the Existing Indebtedness shall remain outstanding after giving effect to the Transaction and the other transactions contemplated hereby without any default or events of default existing thereunder or arising as a result of the Transaction and the other transactions contemplated hereby (except to the extent amended or waived by the parties thereto on terms and conditions reasonably satisfactory to the Agent and the Required Banks). On and as of the Initial Borrowing Date, the Agent and the Required Banks shall be satisfied with the amount of and the terms and conditions of all Existing Indebtedness. 5.19 Payment of Fees. On the Initial Borrowing Date, all costs, fees --------------- and expenses, and all other compensation contemplated by this Agreement, due to the Agent or the Banks (including, without limitation, legal fees and expenses) shall have been paid to the extent due. 5.20 Notice of Borrowing: Letter of Credit Request. The Agent shall --------------------------------------------- have received a Notice of Borrowing satisfying the requirements of Section 1.03 with respect to each incurrence of Loans, and the Agent and the respective Letter of Credit Issuer shall have received a Letter of Credit Request satisfying the requirements of Section 2.02 with respect to each issuance of a Letter of Credit. The acceptance of the benefits of each Credit Event shall constitute a representation and warranty by each Credit Party to each of the Banks that all of the applicable conditions specified above exist as of the date of such Credit Event. All of the certificates, legal opinions and other documents and papers referred to in this Section 5, unless otherwise specified, shall be delivered to the Agent at its Notice Office for the account of each of the Banks and, except for the Notes, in sufficient counterparts for each of the Banks and shall be satisfactory in form and substance to the Agent and the Required Banks. SECTION 6. Representations, Warranties and Agreements. In order to ------------------------------------------ induce the Banks to enter into this Agreement and to make the Loans and issue and/or participate in the Letters of Credit provided for herein, each of Holdings and the Borrower makes the following representations, warranties and agreements with the Banks in each case after giving effect to the Transaction, all of which shall survive the execution and delivery of this Agreement, the making of the Loans and the issuance of the Letters of Credit (with the occurrence of each Credit Event being deemed to constitute a representation and warranty that the matters specified in this Section 6 are true and correct in all material respects on and as of the date of each such Credit Event, unless stated to relate to a specific earlier date in which all representations and warranties shall be true and correct in all material respects as of such earlier date): 6.01 Corporate Status. Holdings and each of its Subsidiaries (i) is a ---------------- duly organized and validly existing corporation in good standing (to the extent such concept is -33- relevant in such jurisdiction) under the laws of the jurisdiction of its organization, (ii) has the corporate power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (iii) is duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified would have a Material Adverse Effect. 6.02 Corporate Power and Authority. Each Credit Party has the ----------------------------- corporate power and authority to execute, deliver and carry out the terms and provisions of the Credit Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of the Credit Documents to which it is a party. Each Credit Party has duly executed and delivered each Credit Document to which it is a party and each such Credit Document constitutes the legal, valid and binding obligation of such Credit Party enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). 6.03 No Violation. Neither the execution, delivery or performance by ------------ any Credit Party of the Credit Documents to which it is a party nor compliance by any Credit Party with the terms and provisions thereof, nor the consummation of the transactions contemplated herein or therein, (i) will contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or (other than pursuant to the Security Documents) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of Holdings or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement or instrument to which Holdings or any of its Subsidiaries is a party or by which it or any of its property or assets are bound or to which it may be subject or (iii) will violate any provision of the Certificate of Incorporation or By-Laws of Holdings or any of its Subsidiaries. 6.04 Litigation. There are no actions, suits or proceedings pending --------- or, to the knowledge of Holdings or any of its Subsidiaries, threatened, with respect to Holdings or any of its Subsidiaries (i) that could reasonably be expected to have a Material Adverse Effect or (ii) that could reasonably be expected to have a material adverse effect on the rights or remedies of the Banks or on the ability of any Credit Party to perform its respective obligations to the Banks hereunder and under the other Credit Documents to which it is, or will be, a party. Additionally, there does not exist any judgment, order or injunction prohibiting or imposing material adverse conditions upon the occurrence of any Credit Event. -34- 6.05 Use of Proceeds; Margin Regulations. (a) The proceeds of ----------------------------------- Revolving Loans and Swingline Loans shall be utilized (i) to repay, on the Initial Borrowing Date, all amounts outstanding under the Existing Credit Agreement, (ii) to pay fees and expenses incurred in connection with the Transaction, (iii) to effect Permitted Acquisitions subject to the terms and conditions set forth herein and (iv) for the general corporate and working capital purposes of the Borrower and its Subsidiaries; provided that proceeds of -------- Revolving Loans and Swingline Loans used to finance the Transaction shall not exceed $40,000,000. (b) Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System and no part of the proceeds of any Loan will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock. 6.06 Governmental Approvals. No order, consent, approval, license, ---------------------- authorization, or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance of any Credit Document or (ii) the legality, validity, binding effect or enforceability of any Credit Document. 6.07 Investment Company Act. Neither Holdings nor any of its ---------------------- Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 6.08 Public Utility Holding Company Act. Neither Holdings nor any of --------------------------------- its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 6.09 True and Complete Disclosure. All factual information (taken as a ------------------------------ whole) heretofore or contemporaneously furnished by or on behalf of Holdings or any of its Subsidiaries in writing to the Agent or any Bank (including, without limitation, all information contained in the Documents) for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of any such Persons in writing to the Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided, it being understood that the representation and warranty made in this Section 6.09 with respect to the information -35- contained in the IPO Documents is only being made on and as of the Initial Borrowing Date. 6.10 Financial Condition: Financial Statements. (a) On and as of the ---------------------------------------- Initial Borrowing Date, on a pro forma basis after giving effect to the --- ----- Transaction and to all Indebtedness incurred, and to be incurred (including, without limitation, the Loans), and Liens created, and to be created, by each Credit Party in connection therewith, with respect to each of Holdings and its Subsidiaries (on a consolidated basis) and of the Borrower (on a stand-alone basis) (x) the sum of the assets, at a fair valuation, of each of Holdings and its Subsidiaries (on a consolidated basis) and of the Borrower (on a stand-alone basis) will exceed its debts, (y) it has not incurred nor intended to, nor believes that it will, incur debts beyond its ability to pay such debts as such debts mature and (z) it will have sufficient capital with which to conduct its business. For purposes of this Section 6.10, "debt" means any liability on a claim, and "claim" means (i) right to payment whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (ii) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. (b) The consolidated balance sheet of Holdings and its Subsidiaries at September 30, 1997 and the related statements of operations and cash flows and changes in shareholders' equity of Holdings and its Subsidiaries for the fiscal year ended as of said date, copies of which have heretofore been furnished to each Bank, present fairly in all material respects the consolidated financial position of Borrower and its Subsidiaries at the date of said statements and the results for the period covered thereby. All such financial statements have been prepared in accordance with GAAP consistently applied except to the extent provided in the notes to said financial statements. (c) Since September 30, 1997, nothing has occurred that has had or could reasonably be expected to have a Material Adverse Effect. (d) Except as fully reflected in the financial statements described in Section 6.10(b) and the Indebtedness incurred under this Agreement, (i) there were as of the Initial Borrowing Date (and after giving effect to any Loans made on such date), no liabilities or obligations (excluding current obligations incurred in the ordinary course of business) with respect to Holdings or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due), and (ii) neither Holdings nor the Borrower know of any basis for the assertion against Holdings or any of its Subsidiaries of any such liability or obligation which, in the case of clause (i) or (ii) either individually or in the aggregate, is or would be reasonably likely to have, a Material Adverse Effect. -36- (e) The Projections are based on good faith estimates and assumptions made by the management of Holdings, and on the Initial Borrowing Date such management believed that the Projections were reasonable and attainable, it being recognized by the Banks, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the Projections probably will differ from the projected results and that the differences may be material. There is no fact known to Holdings or any of its Subsidiaries which would have a Material Adverse Effect, which has not been disclosed herein or in such other documents, certificates and statements furnished to the Banks for use in connection with the transactions contemplated hereby. 6.11 Security Interests. On and after the Initial Borrowing Date, each ------------------ of the Security Documents creates (or after the execution and delivery thereof will create), as security for the Obligations, a valid and enforceable perfected security interest in and Lien on all of the Collateral subject thereto, superior to and prior to the rights of all third Persons and subject to no other Liens (except that the Security Agreement Collateral, the Mortgaged Properties and the collateral covered by the Additional Security Documents may be subject to Permitted Liens relating thereto), in favor of the Collateral Agent. No filings or recordings are required in order to perfect the security interests created under any Security Document except for filings or recordings required in connection with any such Security Document which shall have been made on or prior to the Initial Borrowing Date as contemplated by Section 5.11(b)or 5.13(a) or on or prior to the execution and delivery thereof as contemplated by Sections 7.11, 7.13 and 8;14. 6.12 Existing Indebtedness. Annex VII sets forth a true and complete --------------------- list of all Indebtedness of Holdings and its Subsidiaries as of the Initial Borrowing Date and which is to remain outstanding after giving effect to the Transaction and the incurrence of Loans on such date (excluding the Loans and the Letters of Credit, the "Existing Indebtedness"), in each case showing the aggregate principal amount thereof and the name of the respective borrower and any other entity which directly or indirectly guaranteed such debt. 6.13 Transaction. At the time of consummation thereof, the Transaction ----------- shall have been consummated in all material respects in accordance with the terms of the Documents and all applicable laws. At the time of consummation thereof, all consents and approvals of, and filings and registrations with, and all other actions in respect of, all governmental agencies, authorities or instrumentalities required in order to make or consummate the Transaction have been obtained, given, filed or taken or waived and are or will be in full force and effect (or effective judicial relief with respect thereto has been obtained) except where the failure to obtain, give, file, or take would not reasonably be expected to have a Material Adverse Effect. All applicable waiting periods with respect thereto have or, prior to the time when required, will have, expired without, in all such cases, any action being taken by any competent authority which restrains, prevents, or imposes material adverse conditions upon the Transaction. Additionally, there does not -37- exist any judgment, order or injunction prohibiting or imposing material adverse conditions upon the Transaction, or the performance by Holdings and its Subsidiaries of their obligations under the Documents and all applicable laws. 6.14 Special Purpose Corporation. Holdings has no significant assets --------------------------- (other than the capital stock of the Borrower, immaterial assets used for the performance of those activities permitted to be performed by Holdings pursuant to Section 8.01(b) and Borrower Subordinated Notes) or liabilities (other than this Agreement and the other Credit Documents, those liabilities under the other Documents, those liabilities permitted to be incurred by Holdings pursuant to Section 8.01(b), Indebtedness permitted to be incurred by Holdings pursuant to Section 8.04(p) and, as and when issued from time to time in accordance with the terms of this Agreement, Permitted Holdings PIK Securities and Shareholder Subordinated Notes). 6.15 Compliance with ERISA. (a) Each Plan is in substantial compliance --------------------- with ERISA and the Code; no Reportable Event has occurred with respect to a Plan; no Plan is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan has an accumulated or waived funding deficiency, has permitted decreases in its funding standard account or has applied for a waiver of the minimum funding standard or an extension of any amortization period within the meaning of Section 412 of the Code; all contributions required to be made with respect to a Plan and a Foreign Pension Plan have been timely made; neither Holdings nor any Subsidiary of Holdings nor any ERISA Affiliate has incurred any material liability to or on account of a Plan pursuant to Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971, 4975 or 4980 of the Code or reasonably expects to incur any material liability (including any indirect, contingent or secondary liability) under any of the foregoing Sections with respect to any Plan (other than liabilities of any ERISA Affiliate which could not, by operation of law or otherwise, become a liability of Holdings or any of its Subsidiaries); no proceedings have been instituted to terminate, or to appoint a trustee to administer, any Plan; no condition exists which presents a material risk to Holdings or any Subsidiary of Holdings or any ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; using actuarial assumptions and computation methods consistent with subpart 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of Holdings and its Subsidiaries and its ERISA Affiliates to all Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the date of the most recent Credit Event, would not result in a Material Adverse Effect; no lien imposed under the Code or ERISA on the assets of Holdings or any Subsidiary of Holdings or any ERISA Affiliate exists or is likely to arise on account of any Plan; and Holdings and its Subsidiaries do not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or -38- any employee pension benefit plan (as defined in Section 3(2) of ERISA) the obligations with respect to which could reasonably be expected to have a Material Adverse Effect. (b) Each Foreign Pension Plan has been maintained in substantial compliance with its terms and with the requirements of any and all applicable laws, statutes, rules, regulations and orders and has been maintained, where required, in good standing with applicable regulatory authorities. Neither Holdings nor any of its Subsidiaries has incurred any material obligation in connection with the termination of or withdrawal from any Foreign Pension Plan. The present value of the accrued benefit liabilities (whether or not vested) under each Foreign Pension Plan which is funded, determined as of the end of the most recently ended fiscal year of the Borrower on the basis of actuarial assumptions, each of which is reasonable, did not exceed the current value of the assets of such Foreign Pension Plan, and for each Foreign Pension Plan which is not funded, the obligations of such Foreign Pension Plan are properly accrued. 6.16 Capitalization. (a) On the Initial Borrowing Date after giving -------------- effect to the Transaction, the authorized capital stock of Holdings shall consist of (i) 50,000,000 shares of common stock, $.01 par value per share (such authorized shares of common stock, together with any subsequently authorized shares of common stock of Holdings, the "Holdings Common Stock"), of which 11,496,692 shares shall be issued and outstanding and (ii) 5,000,000 shares of preferred stock (the "Holdings Preferred Stock"), of which no shares shall be issued and outstanding. All outstanding shares have been duly and validly issued, are fully paid and nonassessable. On the Initial Borrowing Date, except as set forth on Annex IX hereto, Holdings does not have outstanding any additional securities convertible into or exchangeable for its capital stock or outstanding any additional rights to subscribe for or to purchase, or any options for the purchase of, or any additional agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. (b) On the Initial Borrowing Date and after giving effect to the Transaction and the other transactions contemplated hereby, the authorized capital stock of the Borrower shall consist of 1,000 shares of common stock, $.01 par value per share, all of which shares shall be issued and outstanding and owned by Holdings. All such outstanding shares have been duly and validly issued and are fully paid and nonassessable. The Borrower does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. 6.17 Subsidiaries. On and as of the Initial Borrowing Date and after ------------ giving effect to the consummation of the Transaction, Holdings has no Subsidiaries other than the Borrower and its Subsidiaries, and the Borrower has no Subsidiaries other than those Subsidiaries listed on Annex V. Annex V correctly sets forth, as of the Initial Borrowing Date -39- and after giving effect to the Transaction, the percentage ownership (direct and indirect) of Holdings in each class of capital stock of each of its Subsidiaries and also identifies the direct owner thereof. All outstanding shares of capital stock of each Subsidiary of the Borrower have been duly and validly issued, are fully paid and nonassessable and have been issued free of preemptive rights. No Subsidiary of the Borrower has outstanding any securities convertible into or exchangeable for its capital stock or outstanding any right to subscribe for or to purchase, or any options or warrants for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of or any calls, commitments or claims of any character relating to, its capital stock or any stock appreciation or similar rights. 6.18 Intellectual Property. Holdings and each of its Subsidiaries owns --------------------- or holds a valid license to use all the patents, trademarks, permits, service marks, trade names, technology, know-how and formulas or other rights with respect to the foregoing, free from restrictions that are adverse to the use thereof, that are used in the operation of the business of Holdings and each of its Subsidiaries as presently conducted, except in the case of any of the foregoing to the extent not reasonably expected to have a Material Adverse Effect. 6.19 Compliance with Statutes. etc. Holdings and each of its ----------------------------- Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including compliance with all applicable Environmental Laws with respect to any Real Property or governing its business and the requirements of any permits issued under such Environmental Laws with respect to any such Real Property or the operations of Holdings or any of its Subsidiaries), except such non-compliance as is not likely to, individually or in the aggregate, have a Material Adverse Effect. 6.20 Environmental Matters. (a) Holdings and each of its Subsidiaries --------------------- have complied with, and on the date of each Credit Event are in compliance with, all applicable Environmental Laws and the requirements of any permits issued under such Environmental Laws. There are no pending or, to the best knowledge of Holdings and the Borrower, past or threatened Environmental Claims against Holdings or any of its Subsidiaries or any Real Property owned or operated by Holdings or any of its Subsidiaries that individually or in the aggregate would reasonably be expected to have a Material Adverse Effect. There are no facts, circumstances, conditions or occurrences on any Real Property owned or operated by Holdings or any of its Subsidiaries or, to the best knowledge of Holdings and the Borrower, on any property adjoining or in the vicinity of any such Real Property that would reasonably be expected (i) to form the basis of an Environmental Claim against Holdings or any of its Subsidiaries or any such Real Property that individually or in the aggregate would reasonably be expected to have a Material Adverse Effect or (ii) to cause any such Real Property to be subject to any restrictions on the ownership, occupancy, -40- use or transferability of such Real Property by Holdings or any of its Subsidiaries under any applicable Environmental Law. (b) Hazardous Materials have not at any time been generated, used, treated or stored on, or transported to or from, any Real Property owned or operated by Holdings or any of its Subsidiaries where such generation, use, treatment or storage has violated or would reasonably be expected to violate any Environmental Law. Hazardous Materials have not at any time been Released on or from any Real Property owned or operated by Holdings or any of its Subsidiaries. There are not now any underground storage tanks located on any Real Property owned or operated by Holdings or any of its Subsidiaries. (c) Notwithstanding anything to the contrary in this Section 6.20, the representations made in this Section 6.20 shall only be untrue if the aggregate effect of all restrictions, failures, noncompliance, Environmental Claims, Releases and presence of underground storage tanks, in each case of the types described above, would reasonably be expected to have a Material Adverse Effect. 6.21 Properties. All Real Property owned or leased by Holdings or any ---------- of its Domestic Subsidiaries as of the Initial Borrowing Date and after giving effect to the Transaction, and the nature of the interest therein, is correctly set forth in Annex III. Holdings and each of its Subsidiaries has good and marketable title to, or a validly subsisting leasehold interest in, all material properties owned or leased by it, including all Real Property reflected in Annex III or in the financial statements referred to in Section 6.10(b), free and clear of all Liens, other than Permitted Liens. 6.22 Labor Relations. Neither Holdings nor any of its Subsidiaries is --------------- engaged in any unfair labor practice that could reasonably be expected to have a Material Adverse Effect. There is (i) no unfair labor practice complaint pending against Holdings or any of its Subsidiaries or, to the best knowledge of Holdings and the Borrower, threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against Holdings or any of its Subsidiaries or, to the best knowledge of Holdings and the Borrower, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against Holdings or any of its Subsidiaries or, to the best knowledge of Holdings and the Borrower, threatened against Holdings or any of its Subsidiaries and (iii) to the best knowledge of Holdings and the Borrower, no union representation question existing with respect to the employees of Holdings or any of its Subsidiaries and, to the best knowledge of Holdings and the Borrower, no union organizing activities are taking place, except (with respect to any matter specified in clause (i), (ii) or (iii) above, either individually or in the aggregate) such as is not reasonably likely to have a Material Adverse Effect. 6.23 Tax Returns and Payments. All Federal, material state and other ------------------------ material returns, statements, forms and reports for taxes (the "Returns") required to be filed -41- by or with respect to the income, properties or operations of Holdings and/or any of its Subsidiaries have been timely filed with the appropriate taxing authority. The Returns accurately reflect all liability for taxes of Holdings and its Subsidiaries, as the case may be, for the periods covered thereby. Holdings and each of its Subsidiaries have paid all taxes payable by them other than taxes which are not yet due and payable, and other than those contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP. Except as disclosed in the financial statements referred to in Section 6.10(b), there is no material action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of Holdings and the Borrower, threatened by any authority regarding any taxes relating to Holdings or any of its Subsidiaries. As of the Initial Borrowing Date, neither Holdings nor any of its Subsidiaries has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of Holdings or any of its Subsidiaries, or is aware of any circumstances that would cause the taxable years or other taxable periods of Holdings or any of its Subsidiaries not to be subject to the normally applicable statute of limitations. Neither Holdings nor any of its Subsidiaries have provided, with respect to themselves or property held by them, any consent under Section 341 of the Code. Neither Holdings nor any of its Subsidiaries has incurred, or will incur, any material tax liability in connection with the Transaction and the other transactions contemplated hereby. SECTION 7. Affirmative Covenants. Holdings and the Borrower hereby --------------------- covenant and agree that on the Effective Date and thereafter for so long as this Agreement is in effect and until the Total Revolving Loan Commitments has terminated, no Letters of Credit (other than Letters of Credit, together with all Fees that have accrued and will accrue thereon through the stated termination date of such Letters of Credit, which have been supported in a manner satisfactory to the respective Letter of Credit Issuer in its sole and absolute discretion) or Notes are outstanding and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations (other than any indemnities described in Section 12.13 hereof which are not then due and payable) incurred hereunder, are paid in full: 7.01 Information Covenants. Holdings will furnish to each Bank: --------------------- (a) Monthly Reports. Within 35 days after the end of each fiscal month --------------- of Holdings, the consolidated balance sheet of Holdings and its Subsidiaries as at the end of such fiscal month and the related consolidated statements of income and retained earnings and of cash flows for such fiscal month and for the elapsed portion of the fiscal year ended with the last day of such fiscal month, setting forth comparative figures for the corresponding month in the prior fiscal year, all of which shall be certified by the chief financial officer or other Authorized Officer of the Borrower, subject to normal year-end audit adjustments and the absence of footnote disclosure. -42- (b) Quarterly Financial Statements. Within 45 days after the close of ------------------------------ each quarterly accounting period in each fiscal year of Holdings, the consolidated balance sheet of Holdings and its Subsidiaries as at the end of such quarterly accounting period and the related consolidated statements of income and retained earnings and of cash flows for such quarterly accounting period and for the elapsed portion of the fiscal year ended with the last day of such quarterly accounting period, all of which shall be in reasonable detail and certified by the chief financial officer or other Authorized Officer of Holdings that they fairly present the financial condition of Holdings and its Subsidiaries as of the dates indicated and the results of their operations and changes in their cash flows for the periods indicated, subject to normal year- end audit adjustments and the absence of footnote disclosure. (c) Annual Financial Statements. Within 90 days after the close of --------------------------- each fiscal year of Holdings, the consolidated balance sheet of Holdings and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for such fiscal year, setting forth comparative budgeted figures for such fiscal year and setting forth comparative consolidated figures for the preceding fiscal year, and, in the case of all such financial statements (but excluding such comparative budgeted figures), certified by Price Waterhouse LLP or such other independent certified public accountants of recognized national standing as shall be reasonably acceptable to the Agent, in each case to the effect that such statements fairly present in all material respects the financial condition of Holdings and its Subsidiaries as of the dates indicated and the results of their operations and cash flows, together with a certificate of such accounting firm stating that in the course of its regular audit of the business of Holdings and its Subsidiaries, which audit was conducted in accordance with generally accepted auditing standards, no Default or Event of Default which has occurred and is continuing has come to their attention insofar as such Default or Event of Default relates to financial and accounting matters or, if such a Default or Event of Default has come to their attention a statement as to the nature thereof. (d) Budgets. etc. Not more than 60 days after the commencement of each ------------- fiscal year of the Borrower, budgets of the Borrower and its Subsidiaries in reasonable detail for each of the four fiscal quarters of such fiscal year as customarily prepared by management for its internal use setting forth, with appropriate discussion, the principal assumptions upon which such budgets are based. Together with each delivery of financial statements pursuant to Section 7.01(b) and (c), a comparison of the current year to date financial results (other than in respect of the balance sheets included therein) against the budgets required to be submitted pursuant to this clause (d) shall be presented. (e) Officer's Certificates. At the time of the delivery of the ---------------------- financial statements provided for in Section 7.01(b) and (c), a certificate of the chief financial officer or other Authorized Of ficer of Holdings to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, -43- which certificate shall set forth the calculations required to establish whether Holdings and its Subsidiaries were in compliance with the provisions of Sections 8.04(d), 8.04(h), 8.05 and 8.08 through and including 8.11, as at the end of such fiscal quarter or year, as the case may be. (f) Notice of Default or Litigation. Promptly, and in any event within ------------------------------- five Business Days (or 10 Business Days in the case of clause (y) below) after any Senior Officer of Holdings or any of its Subsidiaries obtains knowledge thereof, notice of (x) the occurrence of any event which constitutes a Default or an Event of Default, which notice shall specify the nature thereof, the period of existence thereof and what action Holdings or the Borrower proposes to take with respect thereto and shall state that such notice is a "notice of default" and (y) the commencement of, or threat of, or any significant development in, any litigation or governmental proceeding pending against Holdings or any of its Subsidiaries which is likely to have a Material Adverse Effect, or a material adverse effect on the ability of any Credit Party to perform its respective obligations hereunder or under any other Credit Document. (g) Auditors' Reports. Promptly upon receipt thereof, a copy of each ----------------- report or "management letter" submitted to Holdings or any of its Subsidiaries by its independent accountants in connection with any annual, interim or special audit made by them of the books of Holdings or any of its Subsidiaries. (h) Environmental Matters. Promptly after obtaining knowledge of any --------------------- of the following, written notice of: (i) any pending or threatened material Environmental Claim against Holdings or any of its Subsidiaries or any Real Property owned or operated by Holdings or any of its Subsidiaries; (ii) any condition or occurrence on any Real Property owned or operated by Holdings or any of its Subsidiaries that (x) results in material noncompliance by Holdings or any of its Subsidiaries with any applicable Environmental Law or (y) could reasonably be anticipated to form the basis of a material Environmental Claim against Holdings or any of its Subsidiaries or any such Real Property; (iii) any condition or occurrence on any Real Property owned or operated by Holdings or any of its Subsidiaries that could reasonably be anticipated to cause such Real Property to be subject to any material restrictions on the ownership, occupancy, use or transferability by Holdings or its Subsidiary, as the case may be, of its interest in such Real Property under any Environmental Law; and (iv) the taking of any material removal or remedial action in response to the actual or alleged presence of any Hazardous Material on any Real Property owned -44- or operated by Holdings or any of its Subsidiaries where Holdings or any of its Subsidiaries is or is reasonably expected to be responsible for the cost of such action or where the taking of such action could reasonably be expected to materially interfere with the operations of Holdings or any of its Subsidiaries at such Real Property. All such notices shall describe in reasonable detail the nature of the claim, investigation, condition, occurrence or removal or remedial action and Holdings' or the Borrower's response thereto. In addition, Holdings agrees to provide the Banks with copies of all material written communications by Holdings or any of its Subsidiaries with any Person, government or governmental agency relating to any of the matters set forth in clauses (i)-(iv) above, and such detailed reports relating to any of the matters set forth in clauses (i)-(iv) above, as may reasonably be requested by the Agent or the Required Banks. (i) Other Information. Promptly upon transmission thereof, copies of ----------------- any filings and registrations with, and reports to, the SEC by Holdings or any of its Subsidiaries and copies of all financial statements, proxy statements, notices and reports as Holdings or any of its Subsidiaries shall generally send to analysts or the holders of their capital stock in their capacity as holders (in each case to the extent not theretofore delivered to the Banks pursuant to this Agreement) and, with reasonable promptness, such other information or documents (financial or otherwise) as the Agent on its own behalf or on behalf of any Bank may reasonably request from time to time. 7.02 Books. Records and Inspections. Holdings will, and will cause ------------------------------ each of its Subsidiaries to, permit, upon notice to the chief financial officer or other Authorized Officer of Holdings or the Borrower, (x) officers and designated representatives of the Agent or any Bank to visit and inspect any of the properties or assets of Holdings and any of its Subsidiaries in whomsoever's possession, and to examine the books of account of Holdings and any of its Subsidiaries and discuss the affairs, finances and accounts of Holdings and of any of its Subsidiaries with, and be advised as to the same by, their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as the Agent or any Bank may desire and (y) the Agent, at the request of the Required Banks, to conduct, at Holdings' and the Borrower's expense, an audit of the accounts receivable and/or inventories of the Borrower and its Subsidiaries at such times (but no more frequently than once a year unless an Event of Default has occurred and is continuing) as the Required Banks shall reasonably require. 7.03 Insurance. Holdings will, and will cause each of its Subsidiaries --------- to, at all times from and after the Initial Borrowing Date maintain in full force and effect insurance with reputable and solvent insurance carriers in such amounts, covering such risks and liabilities and with such deductibles or self- insured retentions as are in accordance with normal industry practice. At any time that insurance at the levels described in Annex VI is not being maintained by Holdings and its Subsidiaries. Holdings will notify the Banks in -45- writing thereof and, if thereafter notified by the Agent to do so, Holdings will obtain insurance at such levels to the extent then generally available (but in any event within the deductible or self-insured retention limitations set forth in the preceding sentence) or otherwise as are acceptable to the Agent. Holdings will furnish to the Agent on the Initial Borrowing Date and on each date as the Agent or the Required Banks may reasonably request, a summary of the insurance carried in respect of Holdings and its Subsidiaries and the assets of Holdings and its Subsidiaries together with certificates of insurance and other evidence of such insurance, if any, naming the Collateral Agent as an additional insured and/or loss payee. 7.04 Payment of Taxes. Holdings will pay and discharge, and will cause ---------------- each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which material penalties attach thereto, and all lawful claims for sums that have become due and payable which, if unpaid, might become a Lien not otherwise permitted under Section 8.03(a) or charge upon any properties of Holdings or any of its Subsidiaries; provided, that neither Holdings nor any of its Subsidiaries shall -------- be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with GAAP. 7.05 Corporate Franchises. Holdings will do, and will cause each of -------------------- its Subsidiaries to do, or cause to be done, all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises and authority to do business; provided, however, that any transaction -------- ------- permitted by Section 8.02 will not constitute a breach of this Section 7.05. 7.06 Compliance with Statutes. etc. Holdings will, and will cause each ------------------------------ of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls) other than such non-compliance as would not have a Material Adverse Effect or a material adverse effect on the ability of any Credit Party to perform its obligations under any Credit Document to which it is a party. 7.07 Compliance with Environmental Laws. (a) Holdings will pay, and ---------------------------------- will cause each of its Subsidiaries to pay, all costs and expenses incurred by it in keeping in compliance with all Environmental Laws, and will keep or cause to be kept all Real Properties owned or operated by Holdings or any of its Subsidiaries free and clear of any Liens imposed pursuant to such Environmental Laws; and (b) neither Holdings nor any of its Subsidiaries will generate, use, treat, store, release or dispose of, or permit the generation, use, treatment, storage, release or disposal of, Hazardous Materials on any Real -46- Property owned or operated by Holdings or any of its Subsidiaries, or transport or permit the transportation of Hazardous Materials to or from any such Real Property, unless the failure to comply with the requirements specified in clause (a) or (b) above, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. If Holdings or any of its Subsidiaries, or any tenant or occupant of any Real Property, cause or permit any intentional or unintentional act or omission resulting in the presence or Release of any Hazardous Material (except in compliance with applicable Environmental Laws), each of Holdings and the Borrower agrees to undertake, and/or to cause any of its Subsidiaries, tenants or occupants to undertake, at their sole expense, any clean up, removal, remedial or other action required pursuant to Environmental Laws to remove and clean up any Hazardous Materials from any Real Property except where the failure to do so would not be reasonably expected to have a Material Adverse Effect; provided, that neither Holdings nor -------- any of its Subsidiaries shall be required to comply with any such order or directive which is being contested in good faith and by proper proceedings so long as it has maintained adequate reserves with respect to such compliance to the extent required in accordance with GAAP. 7.08 ERISA. As soon as possible and, in any event, within 10 days ------- after Holdings or any Subsidiary of Holdings or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following events to the extent that one or more of such events is reasonably likely to result in a material liability to Holdings or any Subsidiary of Holdings, Holdings will deliver to each of the Banks a certificate of the chief financial officer or other Authorized Officer of Holdings setting forth details as to such occurrence and the action, if any, which Holdings, such Subsidiary or such ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by Holdings, such Subsidiary, such ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator with respect thereto: that a Reportable Event has occurred, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan; that a contribution required to be made to a Plan or Foreign Pension Plan has not been timely made; that a Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability giving rise to a lien under ERISA or the Code; that proceedings may be or have been instituted to terminate or appoint a trustee to administer a Plan; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan; that Holdings, any Subsidiary of Holdings or any ERISA Affiliate will or may incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409, 502(i) or 502(1) of ERISA; or that Holdings or any Subsidiary of Holdings has or may incur any liability under any employee welfare benefit plan (within the meaning of Section -47- 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any employee pension benefit plan (as defined in Section 3(2) of ERISA). At the request of any Bank, Holdings will deliver to such Bank a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service. In addition, at the request of any Bank, copies of annual reports and any notices received by Holdings or any Subsidiary of Holdings or any ERISA Affiliate with respect to any Plan or Foreign Pension Plan shall be delivered to such Bank no later than 10 days after the date of any such request. 7.09 Good Repair. Holdings will, and will cause each of its ----------- Subsidiaries to, ensure that its material properties and equipment used in its business are kept in good repair, working order and condition, normal wear and tear and damage by casualty excepted, and, subject to Section 8.08, that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, to the extent and in the manner useful or customary for companies in similar businesses. 7.10 End of Fiscal Years: Fiscal Quarters. Holdings will, for ------------------------------------ financial reporting purposes, cause (i) each of its, and each of its Subsidiaries', fiscal years to end on September 30 of each year and (ii) each of its, and each of its Subsidiaries', fiscal quarters to end on dates which are consistent with a fiscal year ending on September 30. 7.11 Additional Security: Further Assurances. (a) Holdings will, and --------------------------------------- will cause each of its Domestic Subsidiaries (and to the extent that Section 7.13 is operative, each of its Foreign Subsidiaries) to, grant to the Collateral Agent security interests and mortgages in such assets and properties of Holdings and its Subsidiaries as are not covered by the Security Documents, and as may be requested from time to time by the Agent or the Required Banks (collectively, the "Additional Security Documents"). All such security interests and mortgages shall be granted pursuant to documentation reasonably satisfactory in form and substance to the Agent and shall constitute valid and enforceable perfected security interests and mortgages superior to and prior to the rights of all third Persons and subject to no other Liens except for Permitted Liens. The Additional Security Documents or instruments related thereto shall have been duly recorded or filed in such manner and in such places as are required by law to establish, perfect, preserve and protect the Liens in favor of the Collateral Agent required to be granted pursuant to the Additional Security Documents and all taxes, fees and other charges payable in connection therewith shall have been paid in full. (b) Holdings will, and will cause each of its Subsidiaries to, at the expense of Holdings and the Borrower, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, real property surveys, reports and other assurances or instruments and take -48- such further steps relating to the collateral covered by any of the Security Documents as the Collateral Agent may reasonably require. Furthermore, Holdings shall cause to be delivered to the Collateral Agent such opinions of counsel, title insurance and other related documents as may be reasonably requested by the Agent to assure themselves that this Section 7.11 has been complied with. (c) If the Agent or the Required Banks determine that they are required by law or regulation to have appraisals prepared in respect of the Real Property of Holdings and its Subsidiaries constituting Collateral, the Borrower shall provide to the Agent appraisals which satisfy the applicable requirements of the Real Estate Appraisal Reform Amendments of the Financial Institution Reform, Recovery and Enforcement Act of 1989 and which shall be in form and substance satisfactory to the Agent. (d) Holdings and the Borrower agree that each action required above by this Section 7.11 shall be completed as soon as possible, but in no event later than 90 days after such action is either requested to be taken by the Agent or the Required Banks or required to be taken by Holdings and its Subsidiaries pursuant to the terms of this Section 7.11; provided that in no event shall -------- Holdings or the Borrower be required to take any action, other than using its reasonable efforts, to obtain consents from third parties with respect to its compliance with this Section 7.11. 7.12 Register. The Borrower hereby designates the Agent to serve as -------- the Borrower's agent, solely for purposes of this Section 7.12, to maintain a register (the "Register") on which it will record the Revolving Loan Commitments from time to time of each of the Banks, the Loans made by each of the Banks and each repayment in respect of the principal amount of the Loans of each Bank. Failure to make any such recordation, or any error in such recordation shall not affect the Borrower's obligations in respect of such Loans. With respect to any Bank, the transfer of the Revolving Loan Commitments of such Bank and the rights to the principal of, and interest on, any Revolving Loan made pursuant to such Revolving Loan Commitments shall not be effective until such transfer is recorded on the Register maintained by the Agent with respect to ownership of such Revolving Loan Commitments and Revolving Loans and prior to such recordation all amounts owing to the transferor with respect to such Revolving Loan Commitments and Revolving Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Revolving Loan Commitments and Revolving Loans shall be recorded by the Agent on the Register only upon the acceptance by the Agent of a properly executed and delivered Assignment and Assumption Agreement pursuant to Section 12.04(b). Coincident with the delivery of such an Assignment and Assumption Agreement to the Agent for acceptance and registration of assignment or transfer of all or part of a Revolving Loan, or as soon thereafter as practicable, the assigning or transferor Bank shall surrender the Note evidencing such Loan, and thereupon one or more new Notes in the same aggregate principal amount shall be issued to the assigning or transferor Bank and/or the new Bank. The Borrower agrees to indemnify the Agent from and against any and all losses, claims, -49- damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Agent in performing its duties under this Section 7.12. 7.13 Foreign Subsidiaries Security. If following a change in the ----------------------------- relevant sections of the Code or the regulations, rules, rulings, notices or other official pronouncements issued or promulgated thereunder, counsel for the Borrower reasonably acceptable to the Agent and the Required Banks does not within 30 days after a request from the Agent or the Required Banks deliver evidence, in form and substance mutually satisfactory to the Agent and the Borrower, with respect to any Foreign Subsidiary which has not already had all of its stock pledged pursuant to the Pledge Agreement that (i) a pledge (x) of 66-2/3 % or more of the total combined voting power of all classes of capital stock of such Foreign Subsidiary entitled to vote, and (y) of any promissory note issued by such Foreign Subsidiary to Holdings or any of its Domestic Subsidiaries, (ii) the entering into by such Foreign Subsidiary of a security agreement in substantially the form of the Security Agreement and (iii) the entering into by such Foreign Subsidiary of a guaranty in substantially the form of the Subsidiary Guaranty, in any such case could reasonably be expected to cause (I) the undistributed earnings of such Foreign Subsidiary as determined for Federal income tax purposes to be treated as a deemed dividend to such Foreign Subsidiary's United States parent for Federal income tax purposes or (II) other material adverse federal income tax consequences to the Credit Parties, then in the case of a failure to deliver the evidence described in clause (i) above, that portion of such Foreign Subsidiary's outstanding capital stock or any promissory notes so issued by such Foreign Subsidiary, in each case not theretofore pledged pursuant to the Pledge Agreement shall be pledged to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Pledge Agreement (or another pledge agreement in substantially similar form, if needed), and in the case of a failure to deliver the evidence described in clause (ii) above, such Foreign Subsidiary shall execute and deliver the Security Agreement (or another security agreement in substantially similar form, if needed), granting the Secured Creditors a security interest in all of such Foreign Subsidiary's assets and securing the Obligations of the Borrower under the Credit Documents and under any Interest Rate Protection Agreement or Other Hedging Agreement and, in the event the Subsidiary Guaranty shall have been executed by such Foreign Subsidiary, the obligations of such Foreign Subsidiary thereunder, and in the case of a failure to deliver the evidence described in clause (iii) above, such Foreign Subsidiary shall execute and deliver the Subsidiary Guaranty (or another guaranty in substantially similar form, if needed), guaranteeing the Obligations of the Borrower under the Credit Documents and under any Interest Rate Protection Agreement or Other Hedging Agreement, in each case to the extent that the entering into such Security Agreement or Subsidiary Guaranty is permitted by the laws of the respective foreign jurisdiction and with all documents delivered pursuant to this Section 7.13 to be in form and substance reasonably satisfactory to the Agent and the Required Banks. 7.14 Contributions: Payments. Holdings will contribute as an equity ---------------------- contribution to the capital of the Borrower upon its receipt thereof, any cash proceeds (net of -50- reasonable costs associated with such sale or issuance) received by Holdings from any sale or issuance of its preferred or common equity (including, without limitation, the proceeds of the IPO) or any cash capital contributions received by Holdings, provided that to the extent permitted by Section 8.05(r), Holdings -------- may lend such proceeds to the Borrower through Borrower Subordinated Loans. SECTION 8. Negative Covenants. Holdings and the Borrower hereby ------------------ covenant and agree that as of the Effective Date and thereafter for so long as this Agreement is in effect and until the Total Revolving Loan Commitment has terminated, no Letters of Credit (other than Letters of Credit, together with all Fees that have accrued and will accrue thereon through the stated termination date of such Letters of Credit, which have been supported in a manner satisfactory to the respective Letter of Credit Issuer in its sole and absolute discretion) or Notes are outstanding and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations (other than any indemnities described in Section 12.13 hereof which are not then due and payable) incurred hereunder, are paid in full: 8.01 Changes in Business. (a) Holdings and its Subsidiaries will not ------------------- engage in any business other than the business engaged in by Holdings and its Subsidiaries as of the Initial Borrowing Date and activities directly related thereto, and similar or related businesses. (b) Notwithstanding the foregoing, Holdings will engage in no business other than (i) its ownership of the capital stock of the Borrower, those obligations of officers and employees of Holdings and its Subsidiaries to the extent permitted by Section 8.05(e) and Borrower Subordinated Notes, (ii) having those liabilities which it is responsible for under this Agreement and the other Documents to which it is a party, (iii) the issuance of Permitted Holdings PIK Securities, shares of Holdings Common Stock and options and warrants to purchase Holdings Common Stock, and (iv) activities associated with expenses paid with dividends made by the Borrower pursuant to Sections 8.06(iii) and (iv). Notwithstanding the foregoing, Holdings may engage in those activities that are incidental to (a) the maintenance of its corporate existence in compliance with applicable law, (b) legal, tax and accounting matters in connection with any of the foregoing activities and (c) the entering into, and performing its obligations under, this Agreement and the other Documents to which it is a party. 8.02 Consolidation, Merger, Sale or Purchase of Assets. etc. Holdings ------------------------------------------------------- will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of (or agree to do any of the foregoing at any future time) all or any part of its property or assets (other than inventory in the ordinary course of business through distribution arrangements, vendor financial service programs, consignment or otherwise), or enter into any partnerships, joint ventures or sale-leaseback transactions, or purchase or -51- otherwise acquire (in one or a series of related transactions) any part of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person, except that the following shall be permitted: (a) the Borrower and its Subsidiaries may lease as lessee or lessor or license as licensee or licensor real or personal property in the ordinary course of business and otherwise in compliance with this Agreement, so long as any such lease or license by the Borrower or any of its Subsidiaries in its capacity as lessor or licensor, as the case may be, does not prohibit the granting of a Lien by the Borrower or any of its Subsidiaries pursuant to the Mortgages in the real property covered by such lease or pursuant to the Security Agreement in the personal property covered by such lease or license, as the case may be; (b) Capital Expenditures by the Borrower and its Subsidiaries to the extent not in violation of Section 8.08; (c) the advances, investments and loans permitted pursuant to Section 8.05; (d) the Borrower and its Subsidiaries may sell or discount, in each case without recourse, accounts receivables arising in the ordinary course of business, but only in connection with the compromise or collection thereof; (e) the Borrower and its Subsidiaries may sell or exchange specific items of equipment, so long as the purpose of each such sale or exchange is to acquire (and results within 180 days of such sale or exchange in the acquisition of) replacement items of equipment which are, in the reasonable business judgment of the Borrower and its Subsidiaries, the functional equivalent of the item of equipment so sold or exchanged; (f) the Borrower and its Subsidiaries may, in the ordinary course of business, license as licensee or licensor patents, trademarks, copyrights and know-how to or from third Persons and to one another so long as any such license by the Borrower or any of its Subsidiaries in its capacity as licensor is permitted to be assigned pursuant to the Security Agreement (to the extent that a security interest in such patents, trademarks, copyrights and know-how is granted thereunder) and does not otherwise prohibit the granting of a Lien by the Borrower or any of its Subsidiaries pursuant to the Security Agreement in the intellectual property covered by such license; (g) any Foreign Subsidiary may be merged with and into, or be dissolved or liquidated into, or transfer any of its assets to, any Wholly- Owned Foreign Subsidiary so long as (i) such Wholly-Owned Foreign Subsidiary is the surviving corporation of any such merger, dissolution or liquidation and (ii) in each case at -52- least 65% of the total combined voting power of all classes of capital stock of all first-tier Foreign Subsidiaries are pledged pursuant to the Pledge Agreement; (h) the assets of any Foreign Subsidiary may be transferred to the Borrower or any of its Wholly-Owned Domestic Subsidiaries, and any Foreign Subsidiary may be merged with and into, or be dissolved or liquidated into, the Borrower or any of its Wholly-Owned Domestic Subsidiaries so long as the Borrower or such Wholly-Owned Domestic Subsidiary is the surviving corporation of any such merger, dissolution or liquidation; (i) the Borrower or any of its Wholly-Owned Domestic Subsidiaries may transfer to one or more Wholly-Owned Foreign Subsidiaries those assets theretofore transferred to the Borrower or such Wholly-Owned Domestic Subsidiary by a Foreign Subsidiary (whether by merger, liquidation, dissolution or otherwise) pursuant to clause (h) of this Section 8.02; (j) the Borrower and its Subsidiaries may sell or otherwise transfer inventory to their respective Subsidiaries for resale by such Subsidiaries, and Subsidiaries of the Borrower may sell or otherwise transfer inventory to the Borrower for resale by the Borrower so long as the security interest granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Agreement in the inventory so transferred (or the proceeds thereof, in the case of a transfer to a Foreign Subsidiary) shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such transfer); (k) the Borrower may contribute cash to one or more Wholly-Owned Domestic Subsidiaries formed after the Initial Borrowing Date in accordance with Section 8.14, so long as the aggregate amount of such cash so contributed to all such Domestic Subsidiaries does not exceed $3,000,000; (l) the Borrower and its Domestic Subsidiaries may transfer assets (other than inventory) to Wholly-Owned Foreign Subsidiaries so long as the aggregate fair market value of all such assets so transferred (determined in good faith by the Board of Directors or senior management of the Borrower) to all such Foreign Subsidiaries, when added to (x) the aggregate outstanding principal amount of Intercompany Loans made to Foreign Subsidiaries under Section 8.05(g) and (y) the aggregate amount of contributions, capitalizations and forgiveness theretofore made pursuant to Section 8.05(l), does not exceed S10,000,000; (m) assets of the Borrower and its Domestic Subsidiaries constituting non-U.S. operations may be transferred to Wholly-Owned Foreign Subsidiaries of the Borrower; -53- (n) each of the Borrower and its Subsidiaries may sell assets, provided that (x) the aggregate sale of proceeds from all assets subject to -------- such sales pursuant to this clause (n) shall not exceed $3,000,000 in any fiscal year of the Borrower, (y) any such asset sale is for at least 80% in cash and at fair market value (as determined in good faith by the Board of Directors or senior management of the Borrower) and (z) the Net Proceeds therefrom have either resulted in a permanent reduction to the Total Revolving Loan Commitment as provided in section 3.03(c) or are reinvested to the extent permitted by section 3.03(c). (o) each of the Borrower and its Subsidiaries may sell other assets, provided that the aggregate sale proceeds from all assets subject to such -------- sales pursuant to this clause (o) shall not exceed $250,000 in any fiscal year of the Borrower; (p) so long as no Default or Event of Default then exists or would result therefrom, the Borrower and its Subsidiaries may acquire assets or the capital stock of any Person (any such acquisition permitted by this clause (p), a "Permitted Acquisition"), provided, that (i) such Person (or -------- the assets so acquired) was, immediately prior to such acquisition, engaged (or used) primarily in the businesses permitted pursuant to section 8.01(a), (ii) if such acquisition is structured as a stock acquisition, then either (A) the Person so acquired becomes a Wholly-Owned Subsidiary of the Borrower or (B) such Person is merged with and into the Borrower or a Wholly-Owned Subsidiary of the Borrower (with the Borrower or such Wholly- Owned Subsidiary being the surviving corporation of such merger), and in any case, all of the provisions of section 8.14 have been complied with in respect of such Person, (iii) any Liens or Indebtedness assumed or issued in connection with such acquisition are otherwise permitted under Section 8.03 or 8.04, as the case may be, (iv) the only consideration paid in connection with such Permitted Acquisition consists of cash (including cash constituting the proceeds of Revolving Loans hereunder), Holdings Common Stock (valued based on the then current trading price for such Holdings Common Stock), Permitted Holdings PIK Securities (valued at the aggregate liquidation preference thereof in the case of preferred stock and the aggregate face amount thereof in the case of indebtedness) and/or additional Indebtedness incurred pursuant to section 8.04(p), and (v) (x) any such Permitted Acquisition (or series of related Permitted Acquisitions) involving an expenditure (with the consideration valued as set forth in clause (iv) above) in excess of $15,000,000 and less than or equal to $25,000,000 (with both of the foregoing amounts to be increased, as of any date, by the Cumulative Income and Equity Amount as determined as of such date (after giving effect to any other transactions that have occurred on such date that would reduce the Cumulative Income and Equity Amount)) shall not be consummated without the prior written consent of the Required Banks unless the Pro Forma Leverage Ratio on the date of such acquisition is less than 2.50:1.00 and (y) any such Permitted Acquisition (or -54- series of related Permitted Acquisitions) involving an expenditure (with the consideration valued as set forth in clause (iv) above) in excess of $25,000,000 (plus, as of any date, the Cumulative Income and Equity Amount as determined as of such date (after giving effect to any other transactions that have occurred on such date that would reduce the Cumulative Income and Equity Amount)) shall not be consummated without the prior written consent of the Required Banks; (q) any Domestic Subsidiary of the Borrower may transfer assets (other than inventory) to the Borrower or to any other Wholly-Owned Domestic Subsidiary of the Borrower so long as the security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets so transferred shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such transfer); (r) any Wholly-Owned Domestic Subsidiary of the Borrower may merge with and into, or be dissolved or liquidated into, the Borrower so long as (i) the Borrower is the surviving corporation of such merger, dissolution or liquidation and (ii) the security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets of such Wholly-Owned Domestic Subsidiary shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such merger); (s) any Domestic Subsidiary of the Borrower may merge with and into, or be dissolved or liquidated into, any other Wholly-Owned Domestic Subsidiary of the Borrower so long as (i) such Wholly-Owned Domestic Subsidiary of the Borrower is the surviving corporation of such merger, dissolution or liquidation and (ii) the security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets of such Domestic Subsidiary shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such merger, dissolution or liquidation); (t) the Borrower and its Subsidiaries may, in the ordinary course of business, sell, transfer or otherwise dispose of assets (including, without limitation, patents, trademarks, copyrights and know-how) which, in the reasonable judgment of the Borrower or such Subsidiary, are determined to be uneconomical, negligible or obsolete in the conduct of its business; (u) the Borrower and its Subsidiaries may, in the ordinary course of business, engage in vehicle sale-leaseback transactions so long as the aggregate amount of sales thereunder does not exceed $200,000; -55- (v) the Borrower and its Subsidiaries may effect the Designated Real Property Sale, provided that the Designated Real Property Sale is at fair -------- market value, as determined in good faith by the Board of Directors or senior management of the Borrower; To the extent the Required Banks waive the provisions of this Section 8.02 with respect to the sale or other disposition of any Collateral, or any Collateral is sold or disposed of as permitted by this Section 8.02 (and such Collateral is permitted to be released from the Liens created by the respective Security Document), such Collateral in each case shall be sold or otherwise disposed of free and clear of the Liens created by the Security Documents and the Agent shall take such actions (including, without limitation, directing the Collateral Agent to take such actions) as are appropriate in connection therewith. 8.03 Liens. Holdings will not, and will not permit any of its ----- Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets of any kind (real or personal, tangible or intangible) of Holdings or any of its Subsidiaries, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable or notes with recourse to Holdings or any of its Subsidiaries) or assign any right to receive income, except for the following (collectively, the "Permitted Liens"): (a) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP; (b) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law which were incurred in the ordinary course of business and which have not arisen to secure Indebtedness for borrowed money, such as carriers', warehousemen's and mechanics' Liens, statutory landlord's Liens, and other similar Liens arising in the ordinary course of business, and which either (x) do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Borrower or any of its Subsidiaries or (y) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Lien; (c) Liens created by or pursuant to this Agreement and the Security Documents; -56- (d) Liens in existence on the Effective Date which are listed, and the property subject thereto described, in Annex VIII, without giving effect to any extensions or renewals thereof; (e) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 9.09; (f) Liens incurred or deposits made (x) in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money); and (y) to secure the performance of leases of Real Property, to the extent incurred or made in the ordinary course of business consistent with past practices; (g) licenses, leases or subleases granted to third Persons not interfering in any material respect with the business of the Borrower or any of its Subsidiaries; (h) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (i) Liens arising from precautionary UCC financing statements regarding operating leases permitted by this Agreement; (j) any interest or title of a licensor, lessor or sublessor under any lease permitted by this Agreement; (k) Permitted Encumbrances; (1) Liens arising pursuant to purchase money mortgages, Capital Leases or security interests securing Indebtedness representing the purchase price (or financing of the purchase price within 90 days after the respective purchase) of assets acquired after the Effective Date, provided -------- that (i) any such Liens attach only to the assets so purchased, (ii) the Indebtedness secured by any such Lien does not exceed 100%, nor is less than 70%, of the lesser of the fair market value or the purchase price of the property being purchased at the time of the incurrence of such Indebtedness and (iii) the Indebtedness secured thereby is permitted to be incurred pursuant to Section 8.04(d); -57- (m) Liens on property or assets acquired pursuant to a Permitted Acquisition, or on property or assets of a Subsidiary of the Borrower in existence at the time such Subsidiary is acquired pursuant to a Permitted Acquisition, provided that (i) any Indebtedness that is secured by such -------- Liens is permitted to exist under Section 8.04(j), and (ii) such Liens are not incurred in contemplation of such Permitted Acquisition and do not attach to any other asset of the Borrower or any of its Subsidiaries; (n) Liens securing Indebtedness permitted pursuant to, and subject to the limitations set forth in, clause (x) of Section 8.04(h), so long as any such Lien attaches only to the assets of the respective Foreign Subsidiary which is the obligor under such Indebtedness; and (n) additional Liens incurred by the Borrower and its Subsidiaries so long as the value of the property subject to such Liens, and the Indebtedness and other obligations secured thereby, do not exceed $500,000. 8.04 Indebtedness. Holdings will not, and will not permit any of its ------------ Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement and the other Credit Documents; (b) Existing Indebtedness outstanding on the Effective Date and listed on Annex VII, without giving effect to any subsequent extension, renewal or refinancing thereof; (c) Indebtedness under Interest Rate Protection Agreements entered into to protect the Borrower against fluctuations in interest rates in respect of the Obligations; (d) Capitalized Lease Obligations and Indebtedness of the Borrower and its Subsidiaries incurred pursuant to purchase money Liens, provided, -------- that (x) all such Capitalized Lease Obligations are permitted under Section 8.08 and (y) the sum of (i) the aggregate Capitalized Lease Obligations plus (ii) the aggregate principal amount of such purchase money Indebtedness outstanding at any time during any fiscal year of the Borrower set forth below shall not exceed the amount set forth opposite such fiscal year as set forth below: -58- Fiscal Year Ending Amount ------------------ ------ September 30, 1998 $4,000,000 September 30, 1999 $4,000,000 Thereafter $5,000,000 (e) Indebtedness constituting Intercompany Loans to the extent permitted by Section 8.05(g); (f) Indebtedness of Holdings under the Shareholder Subordinated Notes; (g) Indebtedness under Other Hedging Agreements providing protection against fluctuations in currency values in connection with the Borrower's or any of its Subsidiaries' operations so long as management of the Borrower or such Subsidiary, as the case may be, has determined that the entering into of such Other Hedging Agreements are bona fide hedging ---- ---- activities; (h) Indebtedness (x) of Foreign Subsidiaries under lines of credit extended by third Persons to any such Foreign Subsidiary the proceeds of which Indebtedness are used for such Foreign Subsidiary's working capital purposes, provided that the aggregate principal amount of all such -------- Indebtedness outstanding at any time for all Foreign Subsidiaries shall not exceed $3,000,000 (the "Foreign Subsidiary Working Capital Indebtedness), and (y) consisting of guaranties or similar credit support by the Borrower or any Foreign Subsidiary of any such Foreign Subsidiary Working Capital Indebtedness (including, without limitation, Letters of Credit issued for the account of the Borrower or any such Foreign Subsidiary in favor of lenders in respect of any such Foreign Subsidiary Working Capital Indebtedness); (i) Indebtedness of Foreign Subsidiaries to the Borrower and its Domestic Subsidiaries as a result of any investment made pursuant to section 8.05(o); (j) Indebtedness of a Subsidiary acquired pursuant to a Permitted Acquisition (or Indebtedness assumed at the time of a Permitted Acquisition of an asset securing such Indebtedness), provided that (i) such -------- Indebtedness was not incurred in connection with or in anticipation of such Permitted Acquisition, (ii) such Indebtedness does not constitute debt for borrowed money (other than debt for borrowed money incurred in connection with industrial revenue or industrial development bond financings), it being understood and agreed that Capitalized Lease Obligations and purchase money Indebtedness shall not constitute debt for borrowed money for purposes of this clause (ii), and (iii) at the time of such Permitted Acquisition such Indebtedness does not exceed 10% of the total value of the assets of the Subsidiary so acquired, or of the asset so acquired, as the case may be; -59- (k) Indebtedness consisting of guaranties (x) by the Borrower of Indebtedness, leases and other obligations permitted to be incurred by Domestic Wholly-Owned Subsidiaries, (y) by Domestic Subsidiaries of Indebtedness, leases and other obligations permitted to be incurred by the Borrower or other Domestic Wholly-Owned Subsidiaries and (z) by Foreign Subsidiaries of Indebtedness, leases and other obligations permitted to be incurred by other Foreign Wholly-Owned Subsidiaries; (l) Indebtedness of the Borrower constituting Borrower Subordinated Loans to the extent permitted by Section 8.05(r); (m) Indebtedness of Holdings incurred under Permitted Holdings PIK Securities issued as consideration in connection with a Permitted Acquisition, provided that the aggregate outstanding principal amount of -------- Permitted Holding PIK Securities constituting Indebtedness shall not exceed $10,000,000 plus the amount of interest on such Permitted Holdings PIK Securities paid in kind or through accretion; (n) Indebtedness consisting of take-or-pay supply agreements entered into by the Borrower and its Subsidiaries in the ordinary course of business, consistent with past practices, so long as the aggregate obligations thereunder do not exceed $2,000,000 at any one time; (o) Indebtedness of the Borrower or any of its Domestic Subsidiaries consisting of industrial revenue bond obligations incurred to finance the New Facility, so long as the aggregate principal amount of such Indebtedness does not exceed $6,000,000; and (p) additional Indebtedness of Holdings, the Borrower and the Borrower's Domestic Subsidiaries not otherwise permitted hereunder not exceeding $3,000,000 in aggregate principal amount at any time outstanding. 8.05 Advances, Investments and Loans. Holdings will not, and will not ------------------------------- permit any of its Subsidiaries to, lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or purchase or own a futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, or hold any cash, Cash Equivalents or Foreign Cash Equivalents, except: (a) the Borrower and its Subsidiaries may invest in cash and Cash Equivalents; -60- (b) the Borrower and its Subsidiaries may acquire and hold receivables owing to it, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms of the Borrower or such Subsidiary; (c) the Borrower and its Subsidiaries may acquire and own investments (including debt obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in good faith settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (d) Interest Rate Protection Agreements entered into in compliance with Section 8.04(c) shall be permitted; (e) Holdings may acquire and hold obligations of one or more officers or other employees of Holdings or its Subsidiaries in connection with such officers' or employees' acquisition of shares of Holdings Common Stock so long as no cash is paid by Holdings or any of its Subsidiaries in connection with the acquisition of any such obligations; (f) deposits made in the ordinary course of business consistent with past practices to secure the performance of leases shall be permitted; (g) the Borrower may make intercompany loans and advances to any of its Subsidiaries and any Subsidiary of the Borrower may make intercompany loans and advances to the Borrower or any other Subsidiary of the Borrower (collectively, "Intercompany Loans"), provided, that (w) at no time shall -------- the aggregate out standing principal amount of Intercompany Loans made pursuant to this clause (g) by the Borrower and its Domestic Subsidiaries to Foreign Subsidiaries, when added to the sum of (i) the aggregate fair market value of all assets transferred to Wholly-Owned Foreign Subsidiaries pursuant to Section 8.02(1) and (ii) the amount of contributions, capitalizations and forgiveness theretofore made pursuant to Section 8.05(1), exceed S10,000,000 (determined without regard to any write-downs or write-offs of such loans and advances), (x) each Intercompany Loan made by a Foreign Subsidiary to the Borrower or a Domestic Subsidiary shall contain the subordination provisions set forth on Exhibit L, (y) each Intercompany Loan shall be evidenced by an Intercompany Note and (z) each such Intercompany Note (other than (1) Intercompany Notes issued by Foreign Subsidiaries to the Borrower or Domestic Subsidiaries and (2) Intercompany Notes held by Foreign Subsidiaries) shall be pledged to the Collateral Agent pursuant to the Pledge Agreement; (h) loans and advances by the Borrower and its Subsidiaries to employees of Holdings and its Subsidiaries for moving and travel expenses and other similar -61- expenses, in each case incurred in the ordinary course of business, in an aggregate outstanding principal amount not to exceed $1,500,000 at any time (determined without regard to any write-down or write-offs of such loans and advances) shall be permitted; (i) Holdings may make equity contributions to the capital of the Borrower; (j) Foreign Subsidiaries may invest in Foreign Cash Equivalents; (k) Other Hedging Agreements may be entered into in compliance with Section 8.04(g); (l) the Borrower and its Domestic Subsidiaries may make cash capital contributions to Foreign Subsidiaries, and may capitalize or forgive any Indebtedness owed to them by a Foreign Subsidiary and outstanding under clause (g) of this Section 8.05, provided that the aggregate amount of such -------- contributions, capitalizations and forgiveness made pursuant to this clause (1), when added to the sum of (i) the aggregate fair market value of all assets transferred to Wholly-Owned Foreign Subsidiaries pursuant to Section 8.02(1) and (ii) the aggregate outstanding principal amount of Intercompany Loans made to Foreign Subsidiaries under Section 8.05(g) (determined without regard to any write-downs or write-offs thereof) shall not exceed an amount equal to $10,000,000; (m) Permitted Acquisitions shall be permitted; (n) the Borrower and its Subsidiaries may make investments in their respective Subsidiaries in connection with the transfers of those assets permitted to be transferred pursuant to Sections 8.02(h), (i) and (j), it being understood that the Borrower and its Subsidiaries may convert any investment initially made as an equity investment to intercompany Indebtedness held by the Borrower or such Subsidiary; (o) the Borrower and its Domestic Subsidiaries may make and hold investments in their respective Foreign Subsidiaries to the extent that such investments arise from the sale of inventory in the ordinary course of business by the Borrower or such Domestic Subsidiary to such Foreign Subsidiaries for resale by such Foreign Subsidiaries (including any such investments resulting from the extension of the payment terms with respect to such sales); (p) the Borrower and its Subsidiaries may capitalize one or more foreign sales corporations created in accordance with Section 8.14 with cash contributions in an aggregate amount not to exceed $100,000 for all such foreign sales corporations; -62- (q) the Borrower and its Subsidiaries may make transfers of assets to their respective Subsidiaries in accordance with Section 8.02(h), (i), (j), (k), (1), (m) and (q); (r) Holdings may make intercompany loans to the Borrower on a subordinated basis (collectively, "Borrower Subordinated Loans") so long as all such Borrower Subordinated Loans are evidenced by a Borrower Subordinated Note and the funds used to make such Borrower Subordinated Loans consist of the net proceeds received by Holdings from equity issuances by or capital contributions to Holdings; (s) advances, loans and investments in existence on the Effective Date and listed on Annex X shall be permitted, without giving effect to any additions thereto or replacements thereof (except those additions or replacements which are existing obligations as of the Effective Date); (t) the Borrower and its Subsidiaries may acquire and hold debt and/or equity securities as consideration for a sale of assets pursuant to Section 8.02(n), (o) or (v), to the extent permitted by any such Section; (u) the Borrower and its Subsidiaries may make additional investments in the Permitted Joint Ventures (as additional capital contributions or in exchange for securities issued by such Permitted Joint Ventures), so long as (i) the aggregate additional investments in the Permitted Joint Venture referred to in clause (a) of the definition thereof do not exceed $1,000,000_ and (ii) the aggregate additional investments in the Permitted Joint Venture referred to in clause (b) of the definition thereof do not exceed $500,000; (v) Holdings may repurchase shares of the Holdings Common Stock as and to the extent permitted under Section 8.06; and (w) in addition to investments permitted above in this Section 8.05, so long as no Default or Event of Default then exists or would result therefrom, the Borrower and its Subsidiaries may make additional loans, advances and investments to or in a Person so long as the amount of any such loan, advance or investment (at the time of the making thereof) does not exceed an amount equal to the sum of (A) $4,000,000 less the aggregate amount of such $4,000,000 previously used to make loans, advances and investments pursuant to this clause (u) to the extent same are then still outstanding (determined without regard to any write-downs or write-offs thereof and net of cash repayments of principal in the case of loans and cash equity returns (whether as a dividend or redemption) in the case of equity investments) plus (B) an amount equal to the Cumulative Income and Equity Amount at such time; provided, that (1) any loan, advance or -------- investment made with the Cumulative -63- Income and Equity Amount shall be in or to a Person of which the Borrower owns (directly or indirectly) at least a majority economic and voting interest (including the interest purchased or to be purchased with the respective investment) and (2) neither the Borrower nor any of its Subsidiaries may make or own any investment in Margin Stock. 8.06 Dividends, etc. Holdings will not, and will not permit any --------------- of its Subsidiaries to, declare or pay any dividends (other than dividends payable solely in common stock of Holdings or any such Subsidiary, as the case may be) or return any capital to, its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock, now or hereafter outstanding (or any warrants for or options or stock appreciation rights in respect of any of such shares), or set aside any funds for any of the foregoing purposes, and Holdings will not permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of Holdings or any other Subsidiary, as the case may be, now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by such Person with respect to its capital stock) (all of the fore going "Dividends"), except that: (i) the Transaction shall be permitted; (ii) any Subsidiary of the Borrower may pay Dividends to the Borrower or any Wholly-Owned Subsidiary of the Borrower; (iii) (a) Holdings may redeem or purchase shares of Holdings Common Stock or options to purchase Holdings Common Stock, held by former employees of Holdings or any of its Subsidiaries following the termination of their employment, provided that (w) the only consideration paid by -------- Holdings in respect of such redemptions and/or purchases shall be cash and Shareholder Subordinated Notes, (x) the sum of (A) the aggregate amount paid by Holdings in cash in respect of all such redemptions and/or purchases plus (B) the aggregate amount of all principal and interest payments made on Shareholder Subordinated Notes, shall not exceed $2,000,000 in any fiscal year of Holdings, provided that such amount shall -------- be increased by an amount equal to the proceeds received by Holdings after the Effective Date from the sale or issuance of Holdings Common Stock to management of Holdings or any of its Subsidiaries and (y) at the time of any cash payment permitted to be made pursuant to this Section 8.06(iii), no Default or Event of Default shall then exist or result therefrom; and (b) so long as no Default or Event of Default then exists or would result therefrom, the Borrower may pay cash Dividends to Holdings so long as Holdings promptly uses such proceeds for the purposes described in clause (iii)(a) of this Section 8.06; -64- (iv) the Borrower may pay cash Dividends to Holdings so long as the proceeds thereof are promptly used by Holdings to (x) pay operating expenses in the ordinary course of business (including, without limitation, professional fees and expenses) and other similar corporate overhead costs and expenses or (y) pay salaries or other compensation of employees who perform services for Holdings and the Borrower; (v) the Borrower may pay cash Dividends to Holdings in the amounts and at the times of any payment by Holdings in respect of taxes, provided -------- that (x) the amount of cash Dividends paid pursuant to this clause (v) to enable Holdings to pay federal income taxes at any time shall not exceed the lesser of (A) the amount of such federal income taxes owing by Holdings at such time for the respective period and (B) the amount of such federal income taxes that would be owing by the Borrower and its Subsidiaries on a consolidated basis for such period if determined without regard to Holdings' ownership of the Borrower and (y) any refunds shall promptly be returned by Holdings to the Borrower; (vi) Holdings may pay regularly scheduled Dividends on the Permitted Holdings PIK Securities (to the extent issued as preferred stock) pursuant to the terms thereof solely through the issuance of additional shares of such Permitted Holdings PIK Securities, provided that in lieu of issuing -------- additional shares of such Permitted Holdings PIK Securities as Dividends, Holdings may increase the liquidation preference of the shares of Permitted Holdings PIK Securities in respect of which such Dividends have accrued; and (vii) (a) Holdings may pay cash Dividends in addition to those permitted above in this Section 8.06 in an amount not to exceed $1,000,000 in any fiscal year, plus the Cumulative Income and Equity Amount at the time of the payment of any such Dividend, so long as no Default or Event of Default then exists or would result therefrom, and (b) so long as no Default or Event of Default then exists or would result therefrom, the Borrower may pay cash Dividends to Holdings so long as the cash proceeds thereof are promptly used by Holdings for the purpose described in clause (vii)(a) of this Section 8.06. 8.07 Transactions with Affiliates. Holdings will not, and will not ----------------------------- permit any of its Subsidiaries to, enter into any transaction or series of transactions with any Affiliate other than in the ordinary course of business and on terms and conditions substantially as favorable to Holdings or such Subsidiary as would be obtainable by Holdings or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than an Affiliate; provided, that the following shall in any event be permitted: (i) the - -------- Transaction; (ii) the payment of reasonable out-of-pocket expenses incurred by Bain Capital and/or Related Parties in providing services to the Borrower; and (iii) the payment by the Borrower, in connection with any acquisition, divestiture or financing transaction that is -65- consummated, of a transaction fee to Bain Capital and/or the Bain Affiliates in an aggregate amount (for all such Persons taken together) not to exceed 1% of the aggregate value of any such transaction. 8.08 Capital Expenditures. (a) Holdings will not, and will not permit -------------------- any of its Subsidiaries to, make any Capital Expenditures, except that during any fiscal year the Borrower and its Subsidiaries may make Capital Expenditures so long as the aggregate amount of such Capital Expenditures does not exceed $6,000,000. (b) Notwithstanding the foregoing, in the event that the amount of Capital Expenditures permitted to be made by the Borrower and its Subsidiaries pursuant to clause (a) above in any period (before giving effect to any increase in such permitted expenditure amount pursuant to this clause (b)) is greater than the amount of such Capital Expenditures made by the Borrower and its Subsidiaries during such period, such excess (the "Rollover Amount") may be carried forward and utilized to make Capital Expenditures in succeeding fiscal years, provided that in no event shall the aggregate amount of Capital Expenditures made by the Borrower and its Subsidiaries during any fiscal year pursuant to Section 8.08(a) and this Section 8.08(b) exceed 125% of the amount permitted to be made in such fiscal year pursuant to Section 8.08(a). (c) Notwithstanding the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures (which Capital Expenditures will not be included in any determination under the foregoing clause (a)) with the proceeds of Asset Sales to the extent such proceeds have not resulted in a reduction to the Total Revolving Loan Commitment pursuant to Section 3.03(c). (d) Notwithstanding the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures (which Capital Expenditures will not be included in any determination under the foregoing clause (a)) with the insurance proceeds received by the Borrower or any of its Subsidiaries from any Recovery Event so long as such Capital Expenditures are to replace or restore any properties or assets in respect of which such proceeds were paid within one year following the date of the receipt of such insurance proceeds to the extent such insurance proceeds have not resulted in a reduction to the Total Revolving Loan Commitment pursuant to Section 3.03(e). (e) Notwithstanding the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures at any time in an aggregate amount equal to the Cumulative Income and Equity Amount at such time (which Capital Expenditures will not be included in any determination under the foregoing clause (a)). (f) Notwithstanding the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures (which Capital Expenditures will not be included in any determination under the foregoing clause (a)) consisting of the establishment of and -66- relocation the New Operating Facility, provided that the aggregate amount of -------- Capital Expenditures made pursuant to this Section 8.08(f) shall not exceed $7,500,000. (g) Notwithstanding the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures (which Capital Expenditures will not be included in any determination under the foregoing clause (a)) consisting of the establishment of and relocation to the New Distribution Center, provided that -------- the aggregate amount of Capital Expenditures made pursuant to this Section 8.08(g) shall not exceed $2,500,000. 8.09 Minimum Consolidated EBITDA. The Borrower will not permit --------------------------- Consolidated EBITDA for any Test Period ending on a date set forth below to be less than the amount set forth opposite such date: Minimum Consolidated Date EBITDA ---- -------------------- March 31, 1998 $ 15,700,000 June 30, 1998 15,700,000 September 30, 1998 15,700,000 December 31, 1998 16,400,000 March 31, 1999 16,400,000 June 30, 1999 16,400,000 September 30, 1999 16,400,000 December 31, 1999 17,100,000 March 31, 2000 17,100,000 June 30, 2000 17,100,000 September 30, 2000 17,100,000 December 31, 2000 17,800,000 March 31, 2001 17,800,000 June 30, 2001 17,800,000 September 30, 2001 17,800,000 December 31, 2001 18,500,000 March 31, 2002 18,500,000 June 30, 2002 18,500,000 September 30, 2002 18,500,000 December 31, 2002 19,800,000 March 31, 2003 19,800,000 8.10 Interest Coverage Ratio. The Borrower will not permit the ----------------------- Interest Coverage Ratio for any Test Period to be less than 3.5:1.0. -67- 8.11 Leverage Ratio. The Borrower will not permit the Leverage Ratio -------------- at any time to be more than 3.5.1.0. 8.12 Modifications of Certificate of Incorporation, By-Laws and ---------------------------------------------------------- Certain Other Agreements; Issuance of Capital Stock; etc. Holdings will not, and - --------------------------------------------------------- will not permit any of its Subsidiaries to: (a) amend, modify or change in any way adverse to the interests of the Banks, any Management Agreement, its Certificate of Incorporation (including, without limitation, by the filing or modification of any certificate of designation) or By-Laws, or any agreement entered into by it, with respect to its capital stock (including any Shareholders' Agreement), or enter into any new agreement with respect to its capital stock which would be adverse to the interests of the Banks; or (b) issue any class of capital stock other than (x) in the case of the Borrower and its Subsidiaries, non-redeemable common stock and (y) in the case of Holdings, (1) the issuance of Holdings Common Stock in connection with the IPO, (2) issuances of Permitted Holdings PIK Securities and (3) issuances of Holdings Common Stock where, after giving effect to such issuance, no Event of Default will exist under Section 9.10 and to the extent the proceeds thereof are applied in accordance with Section 7.14. 8.13 Limitation on Certain Restrictions on Subsidiaries. Holdings will -------------------------------------------------- not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Subsidiary to (a) pay dividends or make any other distributions on its capital stock or any other interest or participation in its profits owned by Holdings or any Subsidiary of Holdings, or pay any Indebtedness owed to Holdings or a Subsidiary of Holdings, (b) make loans or advances to Holdings or any of Holdings' Subsidiaries or (c) transfer any of its properties or assets to Holdings or any of Holdings' Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (i) applicable law, (ii) this Agreement and the other Credit Documents, (iii) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of the Borrower or a Subsidiary of the Borrower, (iv) customary provisions restricting assignment of any licensing agreement entered into by the Borrower or a Subsidiary of the Borrower in the ordinary course of business, (v) customary provisions restricting the transfer of assets subject to Liens permitted under Sections 8.03(1) and (m) and (vi) any document or instrument evidencing Foreign Subsidiary Working Capital Indebtedness so long as such encumbrance or restriction only applies to the Foreign Subsidiary incurring such Indebtedness. 8.14 Limitation on the Creation of Subsidiaries. Notwithstanding ------------------------------------------ anything to the contrary contained in this Agreement, Holdings will not, and will not permit any of its Subsidiaries to, establish, create or acquire after the Effective Date any Subsidiary; -68- provided that the Borrower and its Wholly-Owned Subsidiaries shall be permitted - -------- to establish or create (x) Subsidiaries as a result of investments made pursuant to Section 8.05 and (y) Wholly-Owned Subsidiaries so long as (i) at least 30 days' prior written notice thereof (or such lesser notice as is acceptable to the Agent) is given to the Agent, (ii) the capital stock of such new Subsidiary is pledged pursuant to, and to the extent required by, this Agreement and the Pledge Agreement and the certificates, if any, representing such stock, together with stock powers duly executed in blank, are delivered to the Collateral Agent, (iii) such new Subsidiary (other than a Foreign Subsidiary except to the extent otherwise required pursuant to Section 7.13) executes a counterpart of the Subsidiary Guaranty, the Pledge Agreement and the Security Agreement, and (iv) to the extent requested by the Agent or the Required Banks, takes all actions required pursuant to Section 7.11. In addition, each new Wholly-Owned Subsidiary that is required to execute any Credit Document shall execute and deliver, or cause to be executed and delivered, all other relevant documentation of the type described in Section 5 as such new Subsidiary would have had to deliver if such new Subsidiary were a Credit Party on the Effective Date. SECTION 9. Events of Default. Upon the occurrence of any of the ----------------- following specified events (each, an "Event of Default"): 9.01 Payments. The Borrower shall (i) default in the payment when due -------- of any principal of the Loans or (ii) default, and such default shall continue for three or more days, in the payment when due of any Unpaid Drawing, any interest on the Loans or any Fees or any other amounts owing hereunder or under any other Credit Document; or 9.02 Representations. etc. Any representation, warranty or statement --------------------- made by Holdings, the Borrower or any other Credit Party herein or in any other Credit Document or in any statement or certificate delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 9.03 Covenants. Any Credit Party shall (a) default in the due --------- performance or observance by it of any term, covenant or agreement contained in Sections 7.11, 7.14 or 8, or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 9.01, 9.02 or clause (a) of this Section 9.03) contained in this Agreement and such default shall continue unremedied for a period of at least 30 days after notice to the defaulting party by the Agent or the Required Banks; or 9.04 Default Under Other Agreements. (a) Holdings or any of its ----------------------------- Subsidiaries shall (i) default in any payment with respect to any Indebtedness (other than the Obligations) beyond the period of grace, if any, provided in the instrument or agreement under which Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or -69- condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause any such Indebtedness to become due prior to its stated maturity; or (b) any Indebtedness (other than the Obligations) of Holdings or any of its Subsidiaries shall be declared to be due and payable, or shall be required to be prepaid other than by a regularly scheduled required prepayment or as a mandatory prepayment (unless such required prepayment or mandatory prepayment results from a default thereunder or an event of the type that constitute an Event of Default), prior to the stated maturity thereof; provided, that it shall not constitute an Event of Default pursuant to -------- clause (a) or (b) of this Section 9.04 unless the principal amount of any one issue of such Indebtedness, or the aggregate amount of all such Indebtedness referred to in clauses (a) and (b) above, exceeds $1,500,000 at any one time; or 9.05 Bankruptcy. etc. Holdings or any of its Subsidiaries shall ----------------- commence a voluntary case concerning itself under Title 11 of the United States Code entitied "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against Holdings or any of its Subsidiaries and the petition is not controverted within 10 days, or is not dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of Holdings or any of its Subsidiaries; or Holdings or any of its Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Holdings or any of its Subsidiaries; or there is commenced against Holdings or any of its Subsidiaries any such proceeding which remains undismissed for a period of 60 days; or Holdings or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or Holdings or any of its Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or Holdings or any of its Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by Holdings or any of its Subsidiaries for the purpose of effecting any of the foregoing; or 9.06 ERISA. (a) Any Plan shall fail to satisfy the minimum funding ------- standard required for any plan year or part thereof or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code, any Plan shall have had or is likely to have a trustee appointed to administer such Plan, any Plan is, shall have been or is likely to be terminated or the subject of termination proceedings under ERISA, any Plan shall have an Unfunded Current Liability, a contribution required to be made to a Plan or a Foreign Pension Plan has not been timely made, Holdings or any Subsidiary of Holdings or any ERISA Affiliate has incurred or is likely to incur a liability to or on account of a Plan under Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971, 4975 -70- or 4980 of the Code, or Holdings or any Subsidiary of Holdings has incurred or is likely to incur liabilities pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) which provide benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or employee pension benefit plans (as defined in Section 3(2) of ERISA) or Foreign Pension Plans; (b) there shall result from any such event or events the imposition of a lien, the granting of a security interest, or a liability or a material risk of incurring a liability; and (c) which lien, security interest or liability which arises from such event or events will have a Material Adverse Effect; or 9.07 Security Documents. (a) Except in each case to the extent ------------------ resulting from the failure of the Collateral Agent to retain possession of the applicable Pledged Securities, any Security Document shall cease to be in full force and effect, or shall cease to give the Collateral Agent the Liens, rights, powers and privileges purported to be created thereby in favor of the Collateral Agent, or (b) any Credit Party shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any such Security Document and such default shall continue beyond any cure or grace period specifically applicable thereto pursuant to the terms of such Security Document; or 9.08 Guaranties. The Guaranties or any provision thereof shall cease ---------- to be in full force and effect, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under any Guaranty or any Guarantor shall default in the due performance or observance of any material term, covenant or agreement on its part to be performed or observed pursuant to any Guaranty; or 9.09 Judgments. One or more judgments or decrees shall be entered --------- against Holdings or any of its Subsidiaries involving a liability (not paid or not fully covered by insurance) in excess of S1,500,000 for all such judgments and decrees and all such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; or 9.10 Ownership. A Change of Control Event shall have occurred; then, --------- and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Agent shall, upon the written request of the Required Banks, by written notice to the Borrower, take any or all of the following actions, without prejudice to the rights of the Agent or any Bank to enforce its claims against any Guarantor or the Borrower, except as otherwise specifically provided for in this Agreement (provided, that if an Event of Default specified -------- in Section 9.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice by the Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Revolving Loan Commitment terminated, whereupon the Revolving Loan Commitment of each Bank shall forthwith terminate immediately and any -71- Commitment Fees shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans and all Obligations owing hereunder (including Unpaid Drawings) to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; (iii) enforce, as Collateral Agent (or direct the Collateral Agent to enforce), any or all of the Liens and security interests created pursuant to the Security Documents; (iv) terminate any Letter of Credit which may be terminated in accordance with its terms; and (v) direct the Borrower to pay (and the Borrower hereby agrees upon receipt of such notice, or upon the occurrence of any Event of Default specified in Section 9.05, to pay) to the Collateral Agent at the Payment Office such additional amounts of cash, to be held as security for the Borrower's reimbursement obligations in respect of Letters of Credit then outstanding, equal to the aggregate Stated Amount of all Letters of Credit then outstanding. SECTION 10. Definitions. As used herein, the following terms shall ----------- have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: "Acquired Entity or Business" shall have the meaning set forth in the definition of "Consolidated Net Income." "Additional Security Documents" shall have the meaning provided in Section 7.11. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 5% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Agent" shall have the meaning provided in the first paragraph of this Agreement and shall include any successor to the Agent appointed pursuant to Section 11.10. "Agreement" shall mean this Credit Agreement, as the same may be from time to time modified, amended and/or supplemented. "Applicable Base Rate Margin" shall mean, during any Applicable Period, the respective percentage per annum set forth in clause (A), (B), (C), (D) or (E) below if, -72- but only if, as of the Test Date with respect to such Applicable Period the condition set forth in clause (A), (B), (C), (D) or (E) as the case may be, below is met: (A) 1.000% if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be 3.25:1.00 or greater; (B) 0.750% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 3.25:1.00 and none of the condition set forth in clauses (C), (D) and (E) below are satisfied; (C) 0.500% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 3.00:1.00 and neither of the conditions set forth in clauses (D) or (E) below is satisfied; (D) 0.250% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 2.50:1.00 and the condition set forth in clause (E) below is not satisfied; or (E) 0% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 2.25:1.00. Notwithstanding anything to the contrary contained above in this definition, (i) except as provided in clause (ii) below, the Applicable Base Rate Margin shall be 0% until the first Start Date to occur after July 31, 1998, and (ii) the Applicable Base Rate Margin shall be 1.000% at any time when (x) an Event of Default shall exist or (y) financial statements have not been delivered when required pursuant to Section 7.01(b) or (c), as the case may be. "Applicable Commitment Fee Percentage" shall mean, during any Applicable Period, the respective percentage per annum set forth in clause (A), (B), (C), (D), (E) or (F) below if, but only if, as of the Test Date with respect to such Applicable Period the condition set forth in clause (A), (B), (C), (D), (E) or (F) below, as the case may be, is met: (A) 0.500% if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be 3.00:1.00 or greater; (B) 0.375% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 3.00:1.00 and none of the conditions set forth in clause (C), (D), (E) or (F) below are satisfied; -73- (C) 0.350% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 2.25:1.00 and none of the conditions set forth in clause (D), (E) or (F) below are satisfied; (D) 0.300% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 2.00:1.00 and neither of the conditions set forth in clause (E) or (F) below is satisfied; (E) 0.250% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 1.75:1.00 and the condition set forth in clause (F) below is not satisfied; (F) 0.200% if, but only if, as of the Test Date the Leverage ratio for the Test Period ended on such Test Date shall be less than 1.50:1.00. Notwithstanding anything to the contrary contained above in this definition, (i) except as provided in clause (ii) below, the Applicable Commitment Fee Percentage shall be 0.300% until the first Start Date to occur after July 31, 1998, and (ii) the Applicable Commitment Fee Percentage shall be 0.500% at all times when (x) an Event of Default shall exist or (y) financial statements have not been delivered when required pursuant to Section 7.01(b) or (c), as the case may be. "Applicable Eurodollar Margin" shall mean, during any Applicable Period, the respective percentage per annum set forth in clause (A), (B), (C), (D), (E), (E:), (G) or (H) below if, but only if, as of the Test Date with respect to such Applicable Period the condition set forth in clause (A), (B), (C), (D), (E), (F), (G) or (H) as the case may be, below is met: (A) 2.000% if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be 3.25:1.00 or greater; (B) 1.750% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 3.25:1.00 and none of the conditions set forth in clause (C), (D), (E), (F), (G) or (H) below are satisfied; (C) 1.500% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 3.00:1.00 and none of the conditions set forth in clause (D), (E), (F), (G) or (H) below are satisfied; (D) 1.250% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 2.50:1.00 and none of the conditions set forth in clause (E), (E:), (G) or (H) below are satisfied; -74- (E) 1.000% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 2.25:1.00 and none of the conditions set forth in clause (F), (G), or (H) below are satisfied; (F) 0.875% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 2.00: 1.00 and neither of the conditions set forth in clause (G) or (H) below is satisfied; (G) 0.750% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 1.75:1.00 and the condition set forth in clause (H) below is not satisfied; (H) 0.500% if, but only if, as of the Test Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 1.50: 1.00. Notwithstanding anything to the contrary contained above in this definition, (i) except as provided in clause (ii) below, the Applicable Eurodollar Margin shall be 0.875% until the first Start Date to occur after July 31, 1998, and (iii) the Applicable Eurodollar Margin shall be 2.000% at any time when (x) an Event of Default shall exist or (y) financial statements have not been delivered when required pursuant to Section 7.01(b) or (c), as the case may be. "Applicable Period" shall mean each period which shall commence on a date on which the financial statements are delivered pursuant to Section 7.01(b) or (c), as the case may be, and which shall end on the earlier of (i) the date of actual delivery of the next financial statements pursuant to Section 7.01(b) or (c), as the case may be, and (ii) the latest date on which the next financial statements are required to be delivered pursuant to Section 7.01(b) or (c), as the case may be. "Asset Sale" shall mean any sale, transfer or other disposition by Holdings or any of its Subsidiaries to any Person other than the Borrower or any Wholly-Owned Subsidiary of the Borrower of any asset (including, without limitation, any capital stock or other securities of another Person, but excluding the sale by such Person of its own capital stock) of Holdings or such Subsidiary other than (i) sales, transfers or other dispositions of inventory made in the ordinary course of business and (ii) sales, transfers or other dispositions of assets pursuant to Section 8.02(d), (e), (f), (o), (t), (u) or (v) or Section 8.05(u). "Assignment and Assumption Agreement" shall mean the Assignment and Assumption Agreement substantially in the form of Exhibit I (appropriately completed). "Authorized Officer" shall mean the Chief Executive Officer, President, Chief Financial Officer, Treasurer, Controller or Secretary or any other senior officer of -75- Holdings or the Borrower designated as such in writing to the Agent by Holdings or the Borrower, in each case to the extent reasonably acceptable to the Agent. "Bain Affiliates" shall mean any Affiliate of Bain Capital, provided that for purposes of the definition of "Change of Control Event", the term Bain Affiliate shall not include (x) any portfolio company of either Bain Capital or any Affiliate of Bain Capital or (y) any officer or director of Holdings or any of its Subsidiaries that is not also a partner or stockholder of Bain Capital. "Bain Capital" shall mean Bain Capital, Inc. a Delaware corporation. "Bank" shall have the meaning provided in the first paragraph of this Agreement. "Bank Default" shall mean (i) the refusal (which has not been retracted) of a Bank to make available its portion of any Borrowing or to fund its portion of any unreimbursed payment under Section 2.04(c) or (ii) a Bank having notified the Agent and/or the Borrower that it does not intend to comply with the obligations under Section 1.01(a), 1.01(c) or 2.04(c), in the case of either clause (i) or (ii) above as a result of the appointment of a receiver or conservator with respect to such Bank at the direction or request of any regulatory agency or authority. "Bankruptcy Code" shall have the meaning provided in Section 9.05. "Base Rate" at any time shall mean the higher of (x) the rate which is 1/2 of 1% in excess of the Federal Funds Rate and (y) the Prime Lending Rate. "Base Rate Loan" shall mean each Loan bearing interest at the rates provided in Section 1.08(a). "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Borrower Subordinated Loans" shall have the meaning provided in Section 8.05(r). "Borrower Subordinated Note" shall mean an unsecured junior subordinated note issued by the Borrower (and not guaranteed or supported in any way by any Subsidiary of the Borrower) in the form of Exhibit M, as amended, modified or supplemented from time to time in accordance with the terms hereof and thereof. "Borrowing" shall mean (i) the incurrence of Swingline Loans from BTCo on a given date and (ii) the incurrence of one Type of Revolving Loan by the Borrower -76- from all of the Banks on a pro rata basis on a given date (or resulting from --- ---- conversions on a given date), having in the case of Eurodollar Loans the same Interest Period; provided, that Base Rate Loans incurred pursuant to Section -------- 1.10(b) shall be considered part of any related Borrowing of Eurodollar Loans. "BTCo" shall mean Bankers Trust Company, in its individual capacity, and any successor corporation thereto by merger, consolidation or otherwise. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and- between banks in U.S. dollar deposits in the interbank Eurodollar market. "Capital Expenditures" shall mean, with respect to any Person, without duplication, all expenditures by such Person which should be capitalized in accordance with GAAP, including, without duplication, all such expenditures with respect to fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which should be capitalized in accordance with GAAP), and the amount of all Capitalized Lease Obligations incurred by such Person. "Capital Lease," as applied to any Person, shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" shall mean all obligations under Capital Leases of the Borrower or any of its Subsidiaries in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Cash Equivalents" shall mean (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided, that the full faith and credit of the United -------- States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (ii) U.S. dollar denominated time deposits, certificates of deposit and bankers acceptances of (x) any Bank or (y) any bank whose short-term commercial paper rating from Standard & Poor's Corporation ("S&P") is at least A-1 or the equivalent thereof or from Moody's Investors Service, Inc. ("Moody's") is at least P-1 or the equivalent thereof (any such bank or Bank, an "Approved Bank"), in each case with maturities of not more than twelve months from the date of acquisition, (iii) commercial paper issued by any Approved Bank or by the parent company of any Approved Bank and commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commer- -77- cial paper rating of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, or guaranteed by any industrial company with a long term unsecured debt rating of at least A or A2, or the equivalent of each thereof, from S&P or Moody's, as the case may be, and in each case maturing within twelve months after the date of acquisition, (iv) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within twelve months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's and (v) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (i) through (iv) above. "Change of Control Event" shall mean (a) Holdings shall cease to own directly 100% on a fully diluted basis of the economic and voting interest in the Borrower's capital stock, (b) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as in effect on the Effective Date), other than Bain Capital and/or the Bain Affiliates, shall (i) have acquired beneficial ownership of 30% or more on a fully diluted basis of the voting and/or economic interest in Holdings' capital stock or (ii) obtained the power (whether or not exercised) to elect a majority of Holdings' directors or (c) the Board of Directors of Holdings shall cease to consist of a majority of Continuing Directors. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all of the Collateral as defined in each of the Security Documents. "Collateral Agent" shall mean the Agent acting as collateral agent for the Secured Creditors. "Collective Bargaining Agreements" shall have the meaning provided in Section 5.14(b). "Commitment Fee" shall have the meaning provided in Section 3.01(a). "Consolidated Debt" shall mean, at any time, all Indebtedness of the Borrower and its Subsidiaries determined on a consolidated basis, provided that -------- for purposes of this definition, (i) the amount of Indebtedness in respect of Interest Rate Protection Agreements shall be at any time the unrealized net loss portion, if any, of the Borrower and/or its Subsidiaries thereunder on a marked-to-market basis determined no -78- more than one month prior to such time and (ii) to the extent that any Foreign Subsidiary Working Capital Indebtedness is supported by a Letter of Credit, the amount of such arrangement that shall constitute Consolidated Debt shall be the greater of the outstanding principal amount of such Indebtedness and the stated amount of such Letter of Credit. "Consolidated EBIT" shall mean, for any period, Consolidated Net Income, before (i) total interest expense (inclusive of amortization of deferred financing fees, premiums on Interest Rate Protection Agreements and any other original issue discount) of the Borrower and its Subsidiaries determined on a consolidated basis, (ii) the write-off of inventory step-up and in-process research and development costs in accordance with purchase accounting, (iii) any non-cash charges deducted in determining Consolidated Net Income for such period and related to the issuance by Holdings of stock, warrants or options to management (or any exercise of any such warrants or options), (iv) a one-time payment of $1,700,000 to Frank W. Gay, II, Chief Executive Officer of the Borrower, in connection with and at the time of the consummation of the IPO, (v) provisions for taxes based on income and foreign withholding taxes, (vi) giving effect to any extraordinary gains or losses but with giving effect to gains or losses from sales of assets sold in the ordinary course of business, (vii) any non-cash charges related to the write-up of samples in accordance with purchase accounting, (viii) any management fees paid to Bain Capital or any Bain Affiliates on or prior to the Initial Borrowing Date (including, without limitation, up to an aggregate amount of $1,000,000 paid to Bain Capital and the Bain Affiliates in connection with the termination of the Borrower's management agreement with Bain Capital and the provision of advisory services to the Borrower) and (ix) Restructuring Expenditures to the extent deducted in determining Consolidated Net Income for such period, provided that the aggregate amount of Restructuring Expenditures added back pursuant to this clause (ix) for all periods shall not exceed $1,000,000. "Consolidated EBITDA" shall mean, for any period, Consolidated EBIT, adjusted by adding thereto the amount of all depreciation expense and amortization expense that were deducted in determining Consolidated EBIT for such period. "Consolidated Interest Expense" shall mean, for any period, total interest expense (including that attributable to Capital Leases in accordance with GAAP) of the Borrower and its Subsidiaries determined on a consolidated basis with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs or benefits under Interest Rate Protection Agreements, but excluding, however, amortization of any payments made to obtain any Interest Rate Protection Agreements and deferred financing costs and any interest expense on deferred compensation arrangements to the extent included in total interest expense. "Consolidated Net Income" shall mean, for any period, the net income (or loss), after provision for taxes, of the Borrower and its Subsidiaries on a consolidated basis -79- for such period taken as a single accounting period but excluding any unrealized losses and gains for such period resulting from mark-to-market of Other Hedging Agreements; provided that (x) for purposes of Section 8.11 and the definitions -------- of Applicable Base Rate Margin, Applicable Commitment Fee Percentage and Applicable Eurodollar Margin there shall be included (to the extent not already included) in determining Consolidated Net Income for any period the net income (or loss) of any Person, business, property or asset acquired during such period pursuant to Section 8.02(p) and not subsequently sold or otherwise disposed of by the Borrower or one of its Subsidiaries during such period (each such Person, business, property or asset acquired and not subsequently disposed of during such period, an "Acquired Entity or Business"), in each case based on the actual net income (or loss) of such Acquired Entity or Business for the entire period (including the portion thereof occurring prior to such acquisition) and (y) for purposes of calculating Consolidated Net Income for any period, Consolidated Net Income shall be adjusted for factually supportable and identifiable pro forma cost savings for such period determined in accordance with GAAP and concurred in by the Borrower's independent accountants that are directly attributable to the acquisition of an Acquired Entity or Business pursuant to a Permitted Acquisition. "Contingent Obligations" shall mean as to any Person any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to 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) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof; provided, however, that -------- ------- the term Contingent Obligation shall not include endorsements of instruments for deposit or collection or standard contractual indemnities (including without limitation indemnities entered into in connection with the IPO Documents) entered into, in each case in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Continuing Directors" shall mean the directors of Holdings on the Effective Date and each other director if such director's nomination for the election to the Board of Directors of Holdings is recommended by a majority of the then Continuing Directors. -80- "Credit Documents" shall mean this Agreement, the Notes, the Guaranties and each Security Document. "Credit Event" shall mean the making of a Loan (other than a Revolving Loan made pursuant to a Mandatory Borrowing) or the issuance of a Letter of Credit. "Credit Party" shall mean Holdings, the Borrower and each Subsidiary Guarantor. "Cumulative Consolidated Net Income" shall mean, at any time for the determination thereof, Consolidated Net Income for the period (taken as one accounting period) commencing on January 1, 1998 and ending on the last day of the Borrower's fiscal quarter then last ended. "Cumulative Income and Equity Amount" shall mean, at any time for the determination thereof: (A) the product of (i) 0.25 multiplied by (ii) Cumulative Consolidated Net Income at such time, plus (B) the net proceeds received by Holdings after the Initial Borrowing Date from any issuance of Holdings Common Stock (other than proceeds received from the IPO), to the extent contributed to the Borrower in accordance with Section 7.14, minus (C) (1) the aggregate amount theretofore expended for Permitted Acquisitions in reliance on the parenthetical in clause (v)(x) of Section 8.02(p), (11) the aggregate amount of Capital Expenditures theretofore made by the Borrower and its Subsidiaries pursuant to Section 8.08(e), (111) the aggregate amount of investments made pursuant to Section 8.05(w) in excess of $4,000,000, and (IV) the aggregate amount of cash Dividends theretofore paid pursuant to Section 8.06(vii) in excess of $1,000,000 in any fiscal year of the Borrower, it being understood that the Cumulative Income and Equity Amount shall be reduced at the time of, and after giving effect to, any of the events described in preceding clauses (1), (II), (III) and (IV). "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Bank" shall mean any Bank with respect to which a Bank Default is in effect. -81- "Designated Real Property Sale" shall mean sale by the Borrower and/or any of its Subsidiaries of the Real Property owned by them as of the Initial Borrowing Date and located in Ogden, Utah. "Dividends shall have the meaning provided in Section 8.06. "Documents" shall mean the Credit Documents, the IPO Documents and the Refinancing Documents. "Domestic Subsidiary" shall mean each Subsidiary of the Borrower which is not a Foreign Subsidiary. "Effective Date" shall have the meaning provided in Section 12.10. "Eligible Transferee" shall mean and include a commercial bank, investment company, financial institution or other "accredited investor" (as defined in Regulation D of the Securities Act). "Employment Agreements" shall have the meaning provided in Section 5.14(f). "End Date" shall mean the last day of any Applicable Period. "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of non-compliance or violation, investigations or proceedings relating in any way to any violation (or alleged violation) by Holdings or any of its Subsidiaries under any Environmental Law (hereafter "Claims") or any permit issued to Holdings or any of its Subsidiaries under any such law, including, without limitation, (a) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "Environmental Law" shall mean any federal, state or local statute, law, rule, regulation, ordinance, code, policy or rule of common law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment (for purposes of this definition (collectively, "Laws")), relating to the environment or Hazardous Materials or health and safety to the extent health and safety issues arise under the Occupational Safety and Health Act of 1970, as amended, or any such similar Laws. -82- "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. Section references to ERISA are to ERISA as in effect at the date of this Agreement and any subsequent provisions of ERISA amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with Holdings or any Subsidiary of Holdings would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Eurodollar Loans" shall mean each Loan bearing interest at the rates provided in Section 1.08(b). "Eurodollar Rate" shall mean, with respect to each Interest Period for a Eurodollar Loan, (i) the arithmetic average (rounded to the nearest 1/100 of 1%) of the offered quotation to first-class banks in the interbank Eurodollar market by the Agent for U.S. dollar deposits of amounts in same day funds comparable to the outstanding principal amount of the Eurodollar Loan of the Agent for which an interest rate is then being deter mined with maturities comparable to the Interest Period to be applicable to such Eurodollar Loan, determined as of 10:00 A.M. (New York time) on the date which is two Business Days prior to the commencement of such Interest Period divided (and rounded upward to the next whole multiple of 1/16 of 1 %) by (ii) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D). "Event of Default" shall have the meaning provided in Section 9. "Existing Credit Agreement" shall mean the Revolving Credit and Term Loan Agreement, dated as of January 31, 1995, among Holdings, the Borrower, various Subsidiaries of the Borrower and Jackson National Life Insurance Company, as amended, modified or supplemented prior to the Effective Date. "Existing Indebtedness" shall have the meaning provided in Section 6.12. "Existing Indebtedness Agreements" shall have the meaning provided in Section 5.14(c). "Facing Fee" shall have the meaning provided in Section 3.01(c). "Federal Funds Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight -83- Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 3.01. "Foreign Cash Equivalents" shall mean certificates of deposit or bankers acceptances of any bank organized under the laws of Canada, Japan or any country that is a member of the European Economic Community whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof, in each case with maturities of not more than twelve months from the date of acquisition. "Foreign Pension Plan" shall mean any plan, fund (including, without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by Holdings or any one or more of its Subsidiaries primarily for the benefit of employees of Holdings or such Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "Foreign Subsidiary" shall mean each Subsidiary of the Borrower that is incorporated under the laws of any jurisdiction other than the United States of America, any State thereof, or any territory thereof. "Foreign Subsidiary Working Capital Indebtedness" shall have the meaning provided in Section 8.04(h). "GAAP" shall mean generally accepted accounting principles in the United States of America, as promulgated by the American Institute of Certified Public Accountants and its committees, as in effect from time to time; it being understood and agreed that determinations in accordance with GAAP for purposes of Section 8, including defined terms as used therein, are subject (to the extent provided therein) to Section 12.07(a). "Guaranteed Creditors" shall mean and include each of the Agent, the Collateral Agent, the Banks and each Person (other than any Credit Party) party to an Interest Rate Protection Agreement or Other Hedging Agreement to the extent such party constitutes a Secured Creditor under the Security Documents. -84- "Guaranteed Obligations" shall mean (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of the principal and interest on each Note issued by the Borrower to each Bank, and Loans made, under this Agreement and all reimbursement obligations and Unpaid Drawings with respect to Letters of Credit, together with all the other obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities (including, without limitation, indemnities, fees and interest thereon) of the Borrower to such Bank now existing or hereafter incurred under, arising out of or in connection with this Agreement or any other Credit Document and the due performance and compliance with all the terms, conditions and agreements contained in the Credit Documents by the Borrower and (ii) the full and prompt payment when due (whether by acceleration or otherwise) of all obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) of the Borrower owing under any such Interest Rate Protection Agreement or Other Hedging Agreement entered into by the Borrower or any of its Subsidiaries with any Bank or any affiliate thereof (even if such Bank subsequently ceases to be a Bank under this Agreement for any reason) so long as such Bank or affiliate participates in such Interest Rate Protection Agreement or Other Hedging Agreement, and their subsequent assigns, if any, whether now in existence or hereafter arising, and the due performance and compliance with all terms, conditions and agreements contained therein. "Guarantor" shall mean Holdings and each Subsidiary Guarantor. "Guaranty" shall mean and include each of the Holdings Guaranty and the Subsidiary Guaranty. "Hazardous Materials" shall mean (a) any petrochemical or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; and (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "restricted hazardous materials," "extremely hazardous wastes," "restrictive hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants," or words of similar meaning and regulatory effect. "Holdings" shall have the meaning provided in the first paragraph of this Agreement. "Holdings Common Stock" shall have the meaning provided in Section 6.16. "Holdings Guaranty" shall mean the guaranty of Holdings pursuant to Section 13. -85- "Indebtedness" of any Person shall mean without duplication (i) all indebtedness of such Person for borrowed money, (ii) the deferred purchase price of assets or services payable to the sellers thereof or any of such seller's assignees which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person but excluding deferred rent as determined in accordance with GAAP, (iii) the face amount of all letters of credit issued for the account of such Person and, without duplication, all unpaid drafts drawn thereunder, (iv) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (v) all Capitalized Lease Obligations of such Person, (vi) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, i.e., take-or-pay and similar ---- obligations, (vii) all obligations under Interest Rate Protection Agreements and Other Hedging Agreements and (viii) all Contingent Obligations of such Person, provided, that Indebtedness shall not include trade payables and accrued - -------- expenses, in each case arising in the ordinary course of business. "Initial Borrowing Date" shall mean the date on which the initial Loans are incurred hereunder. "Intercompany Loan" shall have the meaning provided in Section 8.05(g). "Intercompany Notes" shall mean promissory notes, in the form of Exhibit J, evidencing Intercompany Loans. "Interest Coverage Ratio" shall mean, for any period, the ratio of Consolidated EBITDA to Consolidated Interest Expense for such period; provided -------- that for purposes of Section 8.10, Consolidated Interest Expense for each Test Period ending prior to June 30, 1999 shall mean the product of (x) Consolidated Interest Expense from the Initial Borrowing Date to, and including the last day of such Test Period and (y) a fraction, the numerator of which is 365 and the denominator of which is the number of days elapsed from the Initial Borrowing Date to and including the last day of such Test Period. "Interest Period," with respect to any Eurodollar Loan, shall mean the interest period applicable thereto, as determined pursuant to Section 1.09. "Interest Rate Protection Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedging agreement or other similar agreement or arrangement. "IPO" shall have the meaning provided in Section 5.09. "IPO Documents" shall mean the Registration Statement relating to the registration of the Holdings Common Stock, and all other documents or agreements related -86- to the consummation of the IPO, including, without limitation, all underwriting or similar agreements and all documents filed with the SEC. "L/C Supportable Indebtedness" shall mean (i) Foreign Subsidiary Working Capital Indebtedness, (ii) obligations of the Borrower or its Subsidiaries incurred in the ordinary course of business with respect to insurance obligations and workers' compensation, surety bonds and other similar statutory obligations and (iii) such other obligations of the Borrower or any of its Subsidiaries as are reasonably acceptable to the Agent and the respective Letter of Credit Issuer and otherwise permitted to exist pursuant to the terms of this Agreement. "Leasehold" of any Person shall mean all of the right, title and interest of such Person as lessee or licensee in, to and under leases or licenses of land, improvements and/or fixtures. "Letter of Credit" shall have the meaning provided in Section 2.01(a). "Letter of Credit Fee" shall have the meaning provided in Section 3.01(b). "Letter of Credit Issuer" shall mean BTCo, and any Bank which at the request of the Borrower and with the consent of the Agent agrees, in such Bank's sole discretion, to become a Letter of Credit Issuer for the purpose of issuing Letters of Credit pursuant to Section 2. "Letter of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall have the meaning provided in Section 2.02(a). "Leverage Ratio" shall mean, at any time, the ratio of Consolidated Debt at such time to Consolidated EBITDA for the Test Period then last ended. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the UCC or any similar recording or notice statute, and any lease having substantially the same effect as the foregoing). "Loan" shall mean each and every Loan made by any Bank hereunder, including Revolving Loans or Swingline Loans. -87- "Management Agreements" shall have the meaning provided in Section 5.14(e). "Mandatory Borrowing" shall have the meaning provided in Section 1.01(c). "Margin Stock" shall have the meaning provided in Regulation U. "Material Adverse Effect" shall mean a material adverse effect on the business, properties, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower, Holdings and its Subsidiaries taken as a whole or the Borrower and its Subsidiaries taken as a whole. "Material Contracts" shall have the meaning provided in Section 5.14(h). "Maturity Date" shall mean January 31, 2003. "Maximum Swingline Amount" shall mean $5,000,000. "Minimum Borrowing Amount" shall mean (i) for Base Rate Loans (other than Swingline Loans), $250,000; (ii) for Eurodollar Loans, $500,000; and (iii) for Swingline Loans, $100,000. "Mortgage" shall have the meaning provided in Section 5.13(a). "Mortgage Policies" shall have the meaning provided in Section 5.13(b). "Mortgaged Properties" shall mean and include (i) all Real Properties owned and leased by Holdings and its Domestic Subsidiaries to the extent designated as such on Annex 111 and (ii) each Real Property subjected to a mortgage in favor of the Collateral-Agent for the benefit of the Secured Creditors pursuant to Section 7.11. "NAIC" shall have the meaning provided in Section 1.10(c). "Net Proceeds" shall mean, with respect to any Asset Sale, the Proceeds resulting therefrom net of (a) cash expenses of sale (including brokerage fees, if any, transfer taxes and payment of principal, premium and interest of Indebtedness other than the Loans required to be repaid as a result of such Asset Sale) and (b) incremental income taxes paid or payable as a result thereof. "New Distribution Center" shall mean a central distribution center to be established by the Borrower after the Effective Date. -88- "New Operating Facility" shall mean an operating facility to be constructed by the Borrower after the Effective Date which operating facility shall replace certain other operating facilities maintained by the Borrower and its Subsidiaries as of the Effective Date. "Non-Defaulting Bank" shall mean each Bank other than a Defaulting Bank. "Note" shall mean each Revolving Note and the Swingline Note. "Notice of Borrowing" shall have the meaning provided in Section 1.03. "Notice of Conversion" shall have the meaning provided in Section 1.06. "Notice Office" shall mean the office of the Agent located at One Bankers Trust Plaza, New York, New York 10006 or such other office as the Agent may designate to Holdings, the Borrower and the Banks from time to time. "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to the Agent, the Collateral Agent or any Bank pursuant to the terms of this Agreement or any other Credit Document. "Other Hedging Agreements" shall mean any foreign exchange contracts, currency swap agreements or other similar agreements or arrangements designed to protect against fluctuations in currency values. "Participant" shall have the meaning provided in Section 2.04(a). "Payment Office" shall mean the office of the Agent located at One Bankers Trust Plaza, New York, New York 10006 or such other office as the Agent may designate to Holdings, the Borrower and the Banks from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Pension Plan Refund" shall mean any cash payments (net of reasonable costs associated therewith, including income, excise and other taxes payable thereon) received by Holdings and/or any of its Subsidiaries from any return of any surplus assets from any single Plan or Foreign Pension Plan, other than any return of amounts representing overestimates of any amounts due under any single Plan or Foreign Pension Plan. "Percentage" shall mean at any time for each Bank, the percentage obtained by dividing such Bank's Revolving Loan Commitment at such time by the Total Revolving -89- Loan Commitment at such time; provided, that if the Total Revolving Loan -------- Commitment has been terminated, the Percentage of each Bank shall be determined by dividing such Bank's Revolving Loan Commitment immediately prior to such termination by the Total Revolving Loan Commitment immediately prior to such termination. "Permitted Acquisition" shall have the meaning provided in Section 8.02(p). "Permitted Covenant" shall mean (i) any periodic reporting covenant, (ii) any covenant restricting payments by Holdings with respect to any securities of Holdings which are junior to the Permitted Holdings PIK Securities, (iii) any covenant the default of which can only result in an increase in the amount of any redemption price, repayment amount, dividend rate or interest rate, (iv) any covenant the default of which gives rise only to rights or remedies which are subject to subordination terms reasonably acceptable to the Agent, (v) any covenant providing board observance rights with respect to Holdings' board of directors and (vi) any other covenant that does not adversely affect the interests of the Banks (as reasonably determined by the Agent). "Permitted Encumbrances" shall mean (i) those liens, encumbrances and other matters affecting title to any Mortgaged Property listed in the mortgage title insurance policies in respect thereof and found, on the date of delivery of such mortgage title insurance policies to the Agent in accordance with the terms hereof, reasonably acceptable by the Agent, (ii) as to any particular Mortgaged Property at any time, such easements, encroachments, covenants, rights of way, minor defects, irregularities or encumbrances on title which do not, in the reasonable opinion of the Agent, materially impair such Mortgaged Property for the purpose for which it is held by the mortgagor thereof, or the lien held by the Collateral Agent, (iii) municipal and zoning ordinances which are not violated in any material respect by the existing improvements and the present use made by the mortgagor thereof of the Premises (as defined in the respective Mortgage), (iv) general real estate taxes and assessments not yet delinquent, and (v) such other items with respect to Real Property as the Agent may consent to (such consent not to be unreasonably withheld). "Permitted Holdings PIK Securities" shall mean any preferred stock or subordinated promissory note of Holdings (or any security of Holdings that is convertible or exchangeable into any preferred stock or subordinated promissory note of Holdings), so long as the terms of any such preferred stock, subordinated promissory note or security of Holdings (i) do not provide any collateral security, (ii) do not provide any guaranty or other support by the Borrower or any Subsidiaries of the Borrower, (iii) do not contain any mandatory put, redemption, repayment, sinking fund or other similar provision occurring before the sixth anniversary of the Effective Date, (iv) do not require the cash payment of dividends or interest before the sixth anniversary of the Effective Date, (v) do not contain any covenants other than any Permitted Covenant, (vi) do not grant the holders thereof any voting rights except for (x) voting rights required to be granted to such holders under -90- applicable law and (y) limited customary voting rights on fundamental matters such as mergers, consolidations, sales of substantial assets, or liquidations involving Holdings, and (vii) are otherwise reasonably satisfactory to the Agent. "Permitted Joint Ventures" shall mean (a) the joint venture transaction to which the Borrower is a party on the Effective Date with Eastman Chemical and (b) the joint venture transaction to which the Borrower intends, as of the Effective Date, to enter into with certain Affiliates of GNC Singapore. "Permitted Liens" shall have the meaning provided in Section 8.03. "Person" shall mean any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean any multiemployer or single-employer plan as defined in Section 4001 of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) Holdings, any of its Subsidiaries or any ERISA Affiliate and each such plan for the five calendar year period immediately following the latest date on which Holdings, any of its Subsidiaries or any ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Pledge Agreement" shall have the meaning provided in Section 5.11(a). "Pledged Securities" shall mean all the Pledged Securities as defined in the Pledge Agreement. "Prime Lending Rate" shall mean the rate which BTCo announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. BTCo may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Proceeds" shall mean, with respect to any Asset Sale, the aggregate cash payments (including any cash received by way of deferred payment pursuant to a note receivable issued in connection with such Asset Sale, other than the portion of such deferred payment constituting interest, but only as and when so received) received by Holdings and/or any of its Subsidiaries from such Asset Sale. "Pro Forma Leverage Ratio" shall mean, at any time for the determination thereof, the ratio of (x) Consolidated Debt at such time to (y) Consolidated EBITDA for the Test Period then last ended, with such Pro Forma Leverage Ratio to be determined on -91- a pro forma basis as if the respective Permitted Acquisition or Asset Sale (and --- ----- the incurrence, assumption and/or repayment of any Indebtedness in connection with such Permitted Acquisition or Asset Sale), as the case may be, had occurred on the first day of such Test Period (and such Indebtedness, if any, had remained outstanding (or had not been outstanding, as the case may be) throughout such Test Period). On the date of a Permitted Acquisition or Asset Sale pursuant to which the Pro Forma Leverage Ratio is to be calculated, the Borrower shall deliver to the Agent a certificate of the Borrower's chief financial officer setting forth in reasonable detail the pro forma calculations --- ----- required to establish the Pro Forma Leverage Ratio (with such pro forma --- ----- calculations to be made on a basis reasonably satisfactory to the Agent and to assume that the interest expense attributable to any Indebtedness (whether existing or being incurred) bearing a floating interest rate shall be computed as if the rate in effect on the date of such Permitted Acquisition or Asset Sale (taking into account any Interest Rate Protection Agreement applicable to such Indebtedness if such Interest Rate Protection Agreement has a remaining term in excess of 12 months) had been the applicable rate for the entire period). In calculating the Pro Forma Leverage Ratio in connection with any Permitted Acquisition, it is understood that Consolidated EBITDA shall include the results of operations of the Person or assets acquired pursuant to such Permitted Acquisition on a pro forma basis as if such acquisition had occurred on the --- ----- first day of the respective Test Period. "Projections" shall have the meaning provided in Section 5.17. "Quarterly Payment Date" shall mean the last Business Day of each January, April, July and October. "Real Property" of any Person shall mean all of the right, title and interest of such Person in and to land, improvements and fixtures, including Leaseholds. "Recovery Event" shall mean the receipt by Holdings or any of its Subsidiaries of any insurance or condemnation proceeds payable (i) by reason of any theft, physical destruction or damage or any other similar event with respect to any properties or assets of Holdings or any of its Subsidiaries, (ii) by reason any condemnation, taking, seizing or similar event with respect to any properties or assets of Holdings or any of its Subsidiaries and (iii) under any policy of insurance required to be maintained under Section 7.03. "Refinancing" shall mean the refinancing by the Borrower and the termination by the Borrower in full of all commitments under the Existing Credit Agreement, together with the payment of all loans, accrued interest, premiums, fees, commissions, expenses and other amounts owing in connection with the refinancing of the Existing Credit Agreement. -92- "Refinancing Documents" shall mean each of the agreements, documents and instruments entered into in connection with the Refinancing. "Register" shall have the meaning provided in Section 7.12. "Registration Statement" shall mean Holdings' Registration Statement on Form S-1 in the form delivered to the Banks pursuant to Section 5.09 as amended from time to time. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation G" shall mean Regulation G of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or any portion thereof establishing margin requirements. "Regulation T" shall mean Regulation T of the Board of Governors of the Federal Reserve System as from to time in effect and any successor to all or any portion thereof establishing margin requirements. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Regulation X" shall mean Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or any portion thereof establishing margin requirements. "Related Party" shall mean any Affiliate of Bain Capital on the Effective Date, provided that for purposes of the definition of "Change of -------- Control Event," the term Related Party shall not include (x) any portfolio company of Bain Capital or any Affiliate of Bain Capital or (y) any officer or director of Holdings or any of its Subsidiaries if not also a partner or stockholder of Bain Capital on the Effective Date. "Release" means disposing, discharging, injecting, spilling, pumping, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing, pouring and the like, into or upon any land or water or air, or otherwise entering into the environment. "Replaced Bank" shall have the meaning provided in Section 1.13. "Replacement Bank" shall have the meaning provided in Section 1.13. -93- "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27, or .28 of PBGC Regulation Section 4043. "Required Banks" shall mean Non-Defaulting Banks the sum of whose Revolving Loan Commitments (or, if after the Total Revolving Loan Commitment has been terminated, outstanding Revolving Loans and Percentages of outstanding Swingline Loans and Letter of Credit Outstandings) constitute greater than 50% of the Total Revolving Loan Commitment less the aggregate Revolving Loan Commitments of Defaulting Banks (or, if after the Total Revolving Loan Commitment has been terminated, the total outstanding Revolving Loans of Non- Defaulting Banks and the aggregate Percentages of all Non-Defaulting Banks of the total outstanding Swingline Loans and Letter of Credit Outstandings at such time). "Restructuring Expenditures" shall mean nonrecurring expenditures and charges arising out of the establishment of and relocation to the New Distribution Center and/or the New Operating Facility. "Returns" shall have the meaning provided in Section 6.23. "Revolving Loan" shall have the meaning provided in Section 1.01(a). "Revolving Loan Commitment" shall mean, with respect to each Bank, the amount set forth opposite such Bank's name in Annex I as the same may be reduced from time to time pursuant to Section 3.02, 3.03 and/or 9 or otherwise modified pursuant to Section 1.13 and/or 12.04(b). "Revolving Note" shall have the meaning provided in Section 1.05(a). "Rollover Amount" shall have the meaning provided in Section 8.08(b). "Schedule Commitment Reduction" shall have the meaning provided in Section 3.03(b). "SEC" shall mean the Securities and Exchange Commission or any successor thereto. "Section 4.04(b)(ii) Certificate" shall have the meaning provided in Section 4.04(b)(ii). "Secured Creditors" shall have the meaning provided in the respective Security Documents. -94- "Security Agreement" shall have the meaning provided in Section 5.11(b). "Security Agreement Collateral" shall mean all "Collateral" as defined in the Security Agreement. "Security Documents" shall mean and include the Security Agreement, the Pledge Agreement, each Mortgage, each Additional Security Document, if any and each other document or instrument entered into pursuant to Sections 5.11, 7.11 and 7.13, if any, in each case as and when executed and delivered in accordance with the terms of this Agreement and as the same may be amended, modified or supplemented from time to time in accordance with the terms thereof and hereof. "Senior Officer" shall mean Chief Executive Officer, President, Chief Financial Officer, Treasurer, Controller or Secretary or any other senior officer of Holdings or any of its Subsidiaries with knowledge of, or responsibility for, the financial affairs of such Person. "Shareholder Subordinated Note" shall mean an unsecured junior subordinated note issued by Holdings (and not guaranteed or supported in any way by the Borrower or any of its Subsidiaries) in the form of Exhibit L, as the same may be amended, modified or supplemented from time to time pursuant to the terms hereof and thereof. "Shareholders' Agreements" shall have the meaning set forth in Section 5.14(d). "Start Date" shall mean the first day of any Applicable Period. "Stated Amount" of each Letter of Credit shall mean at any time the maximum amount available to be drawn thereunder (regardless of whether any conditions for drawing could then be met). "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any 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 owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries, has more than a 50% equity interest at the time. "Subsidiary Guarantor" shall mean each Subsidiary of the Borrower (other than a Foreign Subsidiary except to the extent otherwise provided in Section 7.13). -95- "Subsidiary Guaranty" shall have the meaning provided in Section 5.12. "Swingline Expiry Date" shall mean the date which is five Business Days prior to the Maturity Date. "Swingline Loan" shall have the meaning provided in Section 1.01(b). "Swingline Note" shall have the meaning provided in Section 1.05(a). "Syndication Date" shall mean that date upon which the Agent determines (and notifies the Borrower and the Banks) that the primary syndication (and resulting addition of Persons as Banks pursuant to Section 12.04(b)) has been completed. "Tax Allocation Agreements" shall have the meaning provided in Section 5.14(g). "Taxes" shall have the meaning provided in Section 4.04. "Test Date" shall mean, with respect to any Applicable Period, the last day of the most recent fiscal quarter or fiscal year, as the case may be, ended immediately prior to the Start Date with respect to such Applicable Period. "Test Period" shall mean the four consecutive fiscal quarters of the Borrower then last ended. "Total Revolving Loan Commitment" shall mean the sum of the Revolving Loan Commitments of each of the Banks. "Total Unutilized Revolving Loan Commitment" shall mean, at any time, (i) the Total Revolving Loan Commitment at such time less (ii) the sum of the aggregate principal amount of all Revolving Loans and Swingline Loans at such time plus the Letter of Credit Outstandings at such time. "Transaction" shall mean, collectively, (i) the IPO, (ii) the Refinancing, (iii) the occurrence of Credit Events hereunder on the Initial Borrowing Date, (iv) such other transactions as contemplated by the Documents and (v) the payment of fees and expenses in connection with the foregoing. "Type" shall mean any type of Loan determined with respect to the interest option applicable thereto, i.e., a Base Rate Loan or a Eurodollar Loan. ---- "UCC" shall mean the Uniform Commercial Code as in effect from time to time in the relevant jurisdiction. -96- "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the actuarial present value of the accumulated plan benefits under the Plan as of the close of its most recent plan year exceeds the fair market value of the assets allocable thereto, each determined in accordance with Statement of Financial Accounting Standards No. 35, based upon the actuarial assumptions used by the Plan's actuary in the most recent annual valuation of the Plan. "Unpaid Drawing" shall have the meaning provided in Section 2.03(a). "Unutilized Revolving Loan Commitment" with respect to any Bank at any time shall mean such Bank's Revolving Loan Commitment at such time less the sum ---- of (x) the aggregate outstanding principal amount of all Revolving Loans made by such Bank and (y) such Bank's Percentage of the Letter of Credit Outstandings at such time. "U.S. Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States of America. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock (other than director's qualifying shares and/or other nominal amounts of shares required to be held other than by such Person under applicable law) is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time. "Written," "written" or "in writing" shall mean any form of written communication or a communication by means of telex, facsimile device, telegraph or cable. SECTION 11. The Agent. --------- 11.01 Appointment. Each Bank hereby irrevocably designates and ----------- appoints BTCo as Agent of such Bank (such term to include for purposes of this Section 11, BTCo acting as Collateral Agent) to act as specified herein and in the other Credit Documents, and each such Bank hereby irrevocably authorizes BTCo as the Agent to take such action on its behalf under the provisions of this Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. The Agent agrees to act as such upon the express conditions contained in this Section 11. Notwithstanding any provision to the contrary elsewhere in this Agreement or in any other Credit Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein or in the other Credit Documents, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement -97- or otherwise exist against the Agent. The provisions of this Section 11 are solely for the benefit of the Agent and the Banks, and neither Holdings nor any of its Subsidiaries shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and the Agent does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for Holdings or any of its Subsidiaries. 11.02 Delegation of Duties. The Agent may execute any of its duties -------------------- under this Agreement or any other Credit Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care except to the extent otherwise required by Section 11.03. 11.03 Exculpatory Provisions. Neither the Agent nor any of its ---------------------- officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person in its capacity as Agent under or in connection with this Agreement or the other Credit Documents (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by Holdings, any of its Subsidiaries or any of their respective officers contained in this Agreement or the other Credit Documents, any other Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Document or for any failure of Holdings or any of its Subsidiaries or any of their respective officers to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or the other Documents, or to inspect the properties, books or records of Holdings or any of its Subsidiaries. The Agent shall not be responsible to any Bank for the effectiveness, genuineness, validity, enforceability, collectability or sufficiency of this Agreement or any other Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Agent to the Banks or by or on behalf of Holdings or any of its Subsidiaries to the Agent or any Bank or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. 11.04 Reliance by Agent. The Agent shall be entitled to rely, and ----------------- shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telex or teletype message, statement, order -98- or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to Holdings or any of its Subsidiaries), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Credit Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Credit Documents in accordance with a request of the Required Banks (or all of the Banks, to the extent required by this Agreement), and such request and any acting taken or failure to act pursuant thereto shall be binding upon all the Banks. 11.05 Notice of Default. The Agent shall not be deemed to have ----------------- knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has actually received notice from a Bank, Holdings or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Banks. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks; provided, that, unless and unless the Agent shall have received such directions, - -------- the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 11.06 Non-Reliance on Agent and Other Banks. Each Bank expressly ------------------------------------- acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of Holdings or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other condition, prospects and creditworthiness of Holdings and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other condition, prospects and credit worthiness of Holdings and its Subsidiaries. The Agent shall not have any duty or respon -99- sibility to provide any Bank with any credit or other information concerning the business, operations, assets, property, financial and other condition, prospects or creditworthiness of Holdings or any of its Subsidiaries which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 11.07 Indemnification. The Banks agree to indemnify the Agent in its --------------- capacity as such ratably according to their respective "percentages" as used in determining the Required Banks at such time or, if the Revolving Loan Commitments have terminated and all Loans have been repaid in full, as determined immediately prior to such termination and repayment (with such "percentages" to be determined as if there are no Defaulting Banks), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Agent in its capacity as such in any way relating to or arising out of this Agreement or any other Credit Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by Holdings or any of its Subsidiaries; provided, that no Bank shall be -------- liable to the Agent for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting primarily from the gross negligence or willful misconduct of the Agent. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent be insufficient or become impaired (other than as a result of the gross negligence or willful misconduct of the Agent), the Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 11.07 shall survive the payment of all Obligations. 11.08 Agent in its Individual Capacity. The Agent and its affiliates -------------------------------- may make loans to, accept deposits from and generally engage in any kind of business with Holdings and its Subsidiaries as though the Agent were not the Agent hereunder. With respect to the Loans made by it and all Obligations owing to it, the Agent shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not the Agent and the terms "Bank" and "Banks" shall include the Agent in its individual capacity. The Agent and/or its affiliates may own stock of Holdings or any Subsidiary of Holdings and may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with Holdings or any Affiliate of Holdings as if it were not performing the duties specified herein, and may accept fees and other consideration from any Credit Party for services in connection with this Agreement and otherwise without having to account for the same to the Banks. 11.09 Holders. The Agent may deem and treat the payee of any Note as ------- the owner thereof for all purposes hereof unless and until a written notice of the assign- -100- ment, transfer or endorsement thereof, as the case may be, shall have been filed with the Agent. Any request, authority or consent of any Person or entity who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. 11.10 Resignation of the Agent: Successor Agent. The Agent may resign ----------------------------------------- as the Agent upon 20 days' notice to the Banks and, unless a Default of the type referred to in Section 9.05 has occurred and is continuing, to the Borrower. Upon the resignation of the Agent, the Required Banks shall appoint from among the Banks a successor Agent which is a bank or a trust company for the Banks subject, to the extent that no payment Default or Event of Default has occurred and is then continuing, to prior approval by the Borrower (such approval not to be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall include such successor agent effective upon its appointment, and the resigning Agent's rights, powers and duties as the Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. If a successor Agent shall not have been so appointed within such 20 day period after the date such notice of resignation was given by the Agent, the Agent's resignation shall become effective and the Banks shall thereafter perform all duties of the Agent hereunder and/or under any other Credit Documents until such time, if any, as the Required Banks appoint a successor Agent as provided above. After the resignation of the Agent hereunder, the provisions of this Section 11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 12. Miscellaneous. ------------- 12.01 Payment of Expenses. etc. The Borrower hereby agrees to: (i) ------------------------ whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Agent (including, without limitation, the reasonable fees and disbursements of White & Case and local counsel) in connection with the negotiation, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto and in connection with the Agent's syndication efforts with respect to this Agreement; (ii) pay all reasonable out-of-pocket costs and expenses of the Agent and each of the Banks in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein and, after an Event of Default shall have occurred and be continuing, the protection of the rights of the Agent and each of the Banks thereunder (including, without limitation, the reasonable fees and disbursements of counsel (including in-house counsel) for the Agent and for each of the Banks); (iii) pay and hold each of the Banks harmless from and against any and all present and~ future stamp and other similar taxes with respect to the foregoing matters and save each of the Banks harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other -101- than to the extent attributable to such Bank) to pay such taxes; and (iv) indemnify the Agent, the Collateral Agent and each Bank, its officers, directors, trustees, employees, representatives and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, (a) any investigation, litigation or other proceeding (whether or not the Agent, the Collateral Agent or any Bank is a party thereto and whether or not any such investigation, litigation or other proceeding is between or among the Agent, the Collateral Agent, any Bank, any Credit Party or any third Person or otherwise) related to the entering into and/or performance of this Agreement or any other Document or the use of the proceeds of any Loans hereunder or the Transaction or the con summation of any other transactions contemplated in any Document (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified), or (b) the actual or alleged presence of Hazardous Materials in the air, surface water or groundwater or on the surface or subsurface of any Real Property or any Environmental Claim, in each case, including, without limitation, the reasonable fees and disbursements of counsel and independent consultants incurred in connection with any such investigation, litigation or other proceeding. 12.02 Right of Setoff. Collateral Matters. (a) In addition to any ----------------------------------- rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to Holdings or any of its Subsidiaries or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Bank (including, without limitation, by branches and agencies of such Bank wherever located) to or for the credit or the account of Holdings or any of its Subsidiaries against and on account of the Obligations of Holdings or any of its Subsidiaries to such Bank under this Agreement or under any of the other Credit Documents, including, without 1lmitadon, all interests in Obligations of Holdings or any of its Subsidiaries purchased by such Bank pursuant to Section 12.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not such Bank shall have made any demand hereunder and although said Obligations shall be contingent or unmatured. (b) NOTWITHSTANDING THE FOREGOING SUBSECTION (a), AT ANY TIME THAT THE LOANS OR ANY OTHER OBLIGATION SHALL BE SECURED BY REAL PROPERTY LOCATED IN CALIFORNIA, NO BANK SHALL EXERCISE A RIGHT OF SETOFF, BANKER'S LIEN OR COUNTERCLAIM OR TAKE ANY COURT OR ADMINISTRATIVE ACTION OR INSTITUTE ANY PROCEEDING TO ENFORCE ANY PROVISION OF THIS AGREEMENT OR ANY NOTE THAT IS NOT TAKEN BY THE REQUIRED BANKS OR APPROVED IN WRITING BY THE -102- REQUIRED BANKS IF SUCH SETOFF OR ACTION OR PROCEEDING WOULD OR MIGHT (PURSUANT TO SECTIONS 580a, 580b, 580d AND 726 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE OR SECTION 2924 OF THE CALIFORNIA CIVIL CODE, IF APPLICABLE, OR OTHERWISE) AFFECT OR IMPAIR THE VALIDITY, PRIORITY OR ENFORCEABILITY OF THE LIENS GRANTED TO THE COLLATERAL AGENT PURSUANT TO THE SECURITY DOCUMENTS OR THE ENFORCEABILITY OF THE NOTES AND OTHER OBLIGATIONS HEREUNDER, AND ANY ATTEMPTED EXERCISE BY ANY BANK OF ANY SUCH RIGHT WITHOUT OBTAINING SUCH CONSENT OF THE REQUIRED BANKS SHALL BE NULL AND VOID. THIS SUBSECTION (b) SHALL BE SOLELY FOR THE BENEFIT OF EACH OF THE BANKS HEREUNDER. 12.03 Notices. Except as otherwise expressly provided herein, all ------- notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered, if to any Credit Party, at the address specified opposite its signature below or in the other relevant Credit Documents, as the case may be; if to any Bank, at its address specified for such Bank on Annex 11; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telegraphed, telexed, telecopied or cabled or sent by overnight courier, and shall be effective when received. 12.04 Benefit of Agreement. (a) This Agreement shall be binding upon -------------------- and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, no Credit Party may assign or -------- ------- transfer any of its rights, obligations or interest hereunder or under any other Credit Document without the prior written consent of all of the Banks and, provided further, that no Bank may assign or transfer all or any portion of its - ---------------- Revolving Loan Commitment and/or its outstanding Revolving Loans except as provided in Section 12.04(b) and, provided further, that although any Bank may ---------------- grant participations in its rights hereunder in accordance with this Section, such Bank shall remain a ~Bank" for all purposes hereunder and the participant shall not constitute a "Bank" hereunder and, provided further, that no Bank ---------------- shall grant any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the final scheduled maturity of any Loan, Note or Letter of Credit (unless such Letter of Credit is not extended beyond the Maturity Date) in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of applicability of any post default increase in interest rates) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Revolving Loan Commitment shall not constitute a change in the terms of such participation, and that an increase in any Revolving Loan Commitment or Loan shall be -103- permitted without the consent of any participant if the participant's participation is not increased as a result thereof), (ii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or (iii) release all or substantially all of the Collateral under all of the Security Documents (except as expressly provided in the Credit Documents) supporting the Loans hereunder in which such participant is participating. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation. (b) Notwithstanding the foregoing, any Bank (or any Bank together with one or more other Banks) may (x) assign all or a portion of its Revolving Loan Commitment (and related outstanding Obligations hereunder) to its parent company and/or any affiliate of such Bank which is at least 50% owned by such Bank or its parent company or to one or more Banks or (y) assign all, or if less than all, a portion equal to at least $5,000,000 in the aggregate for the assigning Bank or assigning Banks, of such Revolving Loan Commitments hereunder to one or more Eligible Transferees, each of which assignees shall become a party to this Agreement as a Bank by execution of an Assignment and Assumption Agreement, provided that (i) at such time Annex I shall be deemed modified to reflect the - -------- Revolving Loan Commitments of such new Bank and of the existing Banks, (ii) upon surrender of the old Notes, new Notes will be issued, at the Borrower's expense, to such new Bank and to the assigning Bank, such new Notes to be in conformity with the requirements of Section 1.05 (with appropriate modifications) to the extent needed to reflect the revised Revolving Loan Commitments, (iii) the consent of the Agent shall be required in connection with any such assignment pursuant to clause (y) of this Section 12.04(b) (which consent shall not be unreasonably withheld or delayed) and (iv) the Agent shall receive at the time of each such assignment, from the assigning or assignee Bank, the payment of a non-refundable assignment fee of $3,500 and, provided further, that such ---------------- transfer or assignment will not be effective until recorded by the Agent on the Register pursuant to Section 7.12 hereof. To the extent of any assignment pursuant to this Section 12.04(b), the assigning Bank shall be relieved of its obligations hereunder with respect to its assigned commitments. At the time of each assignment pursuant to this Section 12.04(b) to a Person which is not already a Bank hereunder and which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, the respective assignee Bank shall provide to the Borrower and the Agent the appropriate Internal Revenue Service Forms (and, if applicable a Section 4.04(b)(ii) Certificate) described in Section 4.04(b). To the extent that an assignment of all or any portion of a Bank's Revolving Loan Commitment and related outstanding Obligations pursuant to Section 1.13 or this Section 12.04(b) would, at the time of such assignment, result in increased costs under Section 1.10, 1.11, 2.05 or 4.04 from those being charged by the respective assigning Bank prior to such assignment, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any -104- other increased costs of the type described above resulting from changes after the date of the respective assignment). (c) Nothing in this Agreement shall prevent or prohibit any Bank from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank. 12.05 No Waiver: Remedies Cumulative. No failure or delay on the part ------------------------------ of the Agent or any Bank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between any Credit Party and the Agent or any Bank shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Agent or any Bank would otherwise have. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent or the Banks to any other or further action in any circumstances without notice or demand. 12.06 Payments Pro Rata. (a) The Agent agrees that promptly after its ----------------- receipt of each payment from or on behalf of any Credit Party in respect of any Obligations of such Credit Party, it shall, except as otherwise provided in this Agreement, distribute such payment to the Banks (other than any Bank that has consented in writing to waive its pro rata share of such payment) pro rata based --- ---- --- ---- upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Banks agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans, Unpaid Drawings or Fees, of a sum which with respect to the related sum or sums received by other Banks is in a greater proportion than the total of such Obligation then owed and due to such Bank bears to the total of such Obligation then owed and due to all of the Banks immediately prior to such receipt, then such Bank receiving such excess payment shall purchase for cash without recourse or warranty from the other Banks an interest in the Obligations of the respective Credit Party to such Banks in such amount as shall result in a proportional participation by all of the Banks in such amount; provided, that if -------- all or any portion of such excess amount is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. -105- 12.07 Calculations: Computations. (a) The financial statements to be -------------------------- furnished to the Banks pursuant hereto shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by Holdings or the Borrower to the Banks); provided, that except as otherwise specifically -------- provided herein, all computations determining compliance with Sections 3.03 and 8, including definitions used therein, shall utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the September 30, 1997 financial statements delivered to the Banks pursuant to Section 6.10(b), but shall not give effect to (i) purchase accounting adjustments required or permitted by APB 16 and its interpretations (including non-cash write-ups and non-cash charges relating to inventory, fixed assets and in-process research and development, in each case arising in connection with any Permitted Acquisitions) and APB 17 and its interpretations (including non-cash charges relating to intangibles and goodwill arising in connection with any Permitted Acquisitions), (ii) those fees paid to Bain Capital and/or Related Parties pursuant to Sections 8.07(i) and 8.07(iii) and (iii) those fees paid on or about the Initial Borrowing Date to the Agent and the Banks in connection with this Agreement. (b) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days. 12.08 Governing Law: Submission to Jurisdiction: Venue. (a) THIS ----------------------------------------------- AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, each Credit Party hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Credit Party hereby further irrevocably waives any claim that any such courts lack jurisdiction over such Credit Party, and agrees not to plead or claim, in any legal action or proceeding with respect to this Agreement or any other Credit Document brought in any of the aforesaid courts, that any such court lacks jurisdiction over such Credit Party. Each Credit Party irrevocably consents to the service of process in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Credit Party, at its address for notices pursuant to Section 12.03, such service to become effective 30 days after such mailing. Each Credit Party hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other Credit Document that service of process was in any way invalid~or ineffective. Nothing herein shall affect the right of the Agent, any Bank or the holder of any Note to serve process in -106- any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Credit Party in any other jurisdiction. (b) Each Credit Party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 12.09 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts executed by all the parties hereto shall be lodged with Holdings, the Borrower and the Agent. 12.10 Effectiveness. This Agreement shall become effective on the date ------------- (the "Effective Date") on which Holdings, the Borrower and each of the Banks shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered the same to the Agent at the Notice Office or, in the case of the Banks, shall have given to the Agent telephonic (confirmed in writing), written, telex or facsimile notice (actually received) at such office that the same has been signed and mailed to it. The Agent will give Holdings, the Borrower and each Bank prompt written notice of the occurrence of the Effective Date. 12.11 Headings Descriptive. The headings of the several sections and -------------------- subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 12.12 Amendment or Waiver: etc. (a) Neither this Agreement nor any ------------------------ other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the respective Credit Parties party thereto and the Required Banks, provided that no such change, waiver, discharge or termination -------- shall, without the consent of each Bank (other than a Defaulting Bank) (with Obligations being directly affected in the case of following clause (i)), (i) extend the final scheduled maturity of any Loan or Note or extend the stated maturity of any Letter of Credit beyond the Maturity Date, or reduce the rate or extend the time of payment of interest or Fees thereon, or reduce the principal amount thereof (it being understood that any amendment or modification to the financial definitions in this Agreement shall not constitute a reduction in any rate of interest or fees for the purposes of this clause (i)), (ii) release all or substantially~all of the Collateral (except as expressly provided in the Security Documents) under all the Security Documents, (iii) amend, modify or waive any provision of this Section 12.12, (iv) reduce the percentage -107- specified in the definition of Required Banks (it being understood that, with the consent of the Required Banks, additional extensions of credit pursuant to this Agreement may be included in the determination of the Required Banks on substantially the same basis as the Revolving Loan Commitments are included on the Effective Date) or (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement; provided further, ---------------- that no such change, waiver, discharge or termination shall (1) increase the Revolving Loan Commitment of any Bank over the amount thereof then in effect without the consent of such Bank (it being understood that waivers or modifications of conditions precedent, covenants, Defaults or Events of Default or of a mandatory reduction in the Total Revolving Loan Commitment shall not constitute an increase of the Revolving Loan Commitment of any Bank, and that an increase in the available portion of any Revolving Loan Commitment of any Bank shall not constitute an increase in the Revolving Loan Commitment of such Bank), (2) without the consent of BTCo and each other Letter of Credit Issuer, amend, modify or waive any provision of Section 2 or alter its rights or obligations with respect to Letters of Credit, (3) without the consent of BTCo, alter its rights or obligations with respect to Swingline Loans, (4) without the consent of the Agent, amend, modify or waive any provision of Section 11 as same applies to the Agent or any other provision as same relates to the rights or obligations of the Agent or (5) without the consent of the Collateral Agent, amend, modify or waive any provision relating to the rights or obligations of the Collateral Agent. (b) If, in connection with any proposed change, waiver, discharge or termination to any of the provisions of this Agreement as contemplated by clause (a)(i) through (v), inclusive, of the first proviso to Section 12.12(a), the consent of the Required Banks is obtained but the consent of one or more of such other Banks whose consent is required is not obtained, then the Borrower shall have the right, so long as all non-consenting banks whose individual consent is required are treated as described in either clause (A) or (B) below, to either (A) replace each such non-consenting Bank or Banks with one or more Replacement Banks pursuant to Section 1.13 so long as at the time of such replace ment, each such Replacement Bank consents to the proposed change, waiver, discharge or termination or (B) terminate such non-consenting Bank's Revolving Loan Commitments and repay in full its outstanding Revolving Loans, in accordance with Sections 3.02(b) and/or 4.01(b), provided that, unless the -------- Revolving Loan Commitments terminated and Revolving Loans repaid pursuant to preceding clause (B) are immediately replaced in full at such time through the addition of new Banks or the increase of the Revolving Loan Commitments and/or outstanding Revolving Loans of existing Banks (who in each case must specifically consent thereto), then in the case of any action pursuant to preceding clause (B) the Required Banks (determined before giving effect to the proposed action) shall specifically consent thereto, provided further, that the ---------------- Borrower shall not have the right to replace a Bank solely as a result of the exercise of such Bank's rights (and the withholding of any required consent by such Bank) pursuant to the second proviso to Section 12.12(a). -108- I2.13 Survival. All indemnities set forth herein including, without -------- limitation, in Section 1.10, 1.11, 2.05, 4.04, 11.07 or 12.01, shall survive the execution and delivery of this Agreement and the making and repayment of the Loans. 12.14 Domicile of Loans. Each Bank may transfer and carry its Loans ----------------- at, to or for the account of any branch office, subsidiary or affiliate of such Bank; provided, that the Borrower shall not be responsible for costs arising -------- under Section 1.10, 1.11, 2.05 or 4.04 resulting from any such transfer (other than a transfer pursuant to Section 1.12) to the extent such costs would not otherwise be applicable to such Bank in the absence of such transfer. 12.15 Confidentiality. (a) Each of the Banks agrees that it will use --------------- its best efforts not to disclose without the prior consent of the Borrower (other than to its employees, auditors, counsel or other professional advisors, to affiliates or to another Bank if the Bank or such Bank's holding or parent company in its sole discretion determines that any such party should have access to such information) any information with respect to Holdings, the Borrower or any of its Subsidiaries which is furnished pursuant to this Agreement; provided, that any Bank may disclose any such information (a) as has become - -------- generally available to the public or has become available to such Bank on a non- confidential basis, (b) as may be required or appropriate in any report, statement or testimony submitted to any municipal, state or Federal regulatory body having or claiming to have jurisdiction over such Bank or to the Federal Reserve Board, the Federal Deposit Insurance Corporation, the NAIC or similar organizations (whether in the United States or elsewhere) or their successors, (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (d) in order to comply with any law, order, regulation or ruling applicable to such Bank, and (e) to any prospective transferee in connection with any contemplated transfer of any of the Notes or any interest therein by such Bank; provided, that such prospective transferee -------- agrees to be bound by the provisions of this Section 12.15 to the same extent as such Bank. (b) Each of Holdings and the Borrower hereby acknowledges and agrees that each Bank may share with any of its affiliates any information related to Holdings or any of its Subsidiaries (including, without limitation, any nonpublic customer information regarding the creditworthiness of Holdings and its Subsidiaries, provided that such Persons shall be subject to the provisions of this Section 12.15 to the same extent as such Bank). 12.16 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY -------------------- IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. -109- SECTION 13. Holdings Guaranty. ----------------- 13.01 The Guaranty. In order to induce the Banks to enter into this ------------ Agreement and to extend credit hereunder and in recognition of the direct benefits to be received by Holdings from the proceeds of the Loans and the issuance of the Letters of Credit, Holdings hereby agrees with the Banks as follows: Holdings hereby unconditionally and irrevocably guarantees as primary obligor and not merely as surety the full and prompt payment when due, whether upon maturity, acceleration or otherwise, of any and all of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors. If any or all of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors becomes due and pay able hereunder, Holdings unconditionally promises to pay such indebtedness to the Agent and/or the Banks, or order, on demand, together with any and all expenses which may be incurred by the Agent or the Banks in collecting any of the Guaranteed Obligations. If claim is ever made upon any Guaranteed Creditor for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any of the aforesaid payees repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over such payee or any of its property or (ii) any settlement or compromise of any such claim effected by such payee with any such claimant (including the Borrower), then and in such event Holdings agrees that any such judgment, decree, order, settlement or compromise shall be binding upon Holdings, notwithstanding any revocation of this Guaranty other instrument evidencing any liability of the Borrower, and Holdings shall be and remain liable to the aforesaid payees hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such payee. 13.02 Bankruptcy. Additionally, Holdings unconditionally and ---------- irrevocably guarantees the payment of any and all of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors whether or not due or payable by the Borrower upon the occurrence of any of the events specified in Section 9.05, and unconditionally promises to pay such indebtedness to the Guaranteed Creditors, or order, on demand, in lawful money of the United States. 13.03 Nature of Liability. The liability of Holdings hereunder is ------------------- exclusive and independent of any security for or other guaranty of the Guaranteed Obligations of the Borrower whether executed by Holdings, any other guarantor or by any other party, and the liability of Holdings hereunder is not affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, or (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Guaranteed Obligations of the Borrower, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower, or`(e) any payment made to any Guaranteed Creditor on the Guaranteed Obligations which any such Guaranteed Creditor repays to the Borrower pursuant to court order in any bankruptcy, reorganization, arrange -110- ment, moratorium or other debtor relief proceeding, and Holdings waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding. 13.04 Independent Obligation. The obligations of Holdings hereunder ---------------------- are independent of the obligations of any other guarantor, any other party or the Borrower, and a separate action or actions may be brought and prosecuted against Holdings whether or not action is brought against any other guarantor, any other party or the Borrower and whether or not any other guarantor, any other party or the Borrower be joined in any such action or actions. Holdings waives, to the full extent permitted by law, the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof. Any payment by the Borrower or other circumstance which operates to toll any statute of limitations as to the Borrower shall operate to toll the statute of limitations as to any Guarantor. 13.05 Authorization. Holdings authorizes the Guaranteed Creditors ------------- without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to: (a) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew, increase, accelerate or alter, any of the Guaranteed Obligations (including any increase or decrease in the rate of interest thereon), any security therefor, or any liability incurred directly or indirectly in respect thereof, and the Guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (b) take and hold security for the payment of the Guaranteed Obligations and sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (c) exercise or refrain from exercising any rights against the Borrower or others or otherwise act or refrain from acting; (d) release or substitute any one or more endorsers, guarantors, the Borrower or other obligors; (e) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to its creditors other than the Guaranteed Creditors; -111- (f) apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower to the Guaranteed Creditors regardless of what liability or liabilities of Holdings or the Borrower remain unpaid; (g) consent to or waive any breach of, or any act, omission or default under, this Agreement or any of the instruments or agreements referred to herein, or otherwise amend, modify or supplement this Agreement or any of such other instruments or agreements; and/or (h) take any other action which would, under otherwise applicable principles of common law, give rise to a legal or equitable discharge of Holdings from its liabilities under this Guaranty. 13.06 Reliance. It is not necessary for any Guaranteed Creditor to -------- inquire into the capacity or powers of the Borrower or the officers, directors, partners or agents acting or purporting to act on their behalf, and any Guaranteed Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 13.07 Subordination. Any of the indebtedness of the Borrower relating ------------- to the Guaranteed Obligations now or hereafter owing to Holdings is hereby subordinated to the Guaranteed Obligations of the Borrower owing to the Guaranteed Creditors; and if the Agent so requests at a time when an Event of Default exists, all such indebtedness relating to the Guaranteed Obligations of the Borrower to Holdings shall be collected, enforced and received by Holdings for the benefit of the Guaranteed Creditors and be paid over to the Agent on behalf of the Guaranteed Creditors on account of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors, but without affecting or impairing in any manner the liability of Holdings under the other provisions of this Guaranty. Prior to the transfer by Holdings of any note or negotiable instrument evidencing any of the indebtedness relating to the Guaranteed Obligations of the Borrower to Holdings, Holdings shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. Without limiting the generality of the foregoing, Holdings hereby agrees with the Guaranteed Creditors that it will not exercise any right of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the Bankruptcy Code or otherwise) until all Guaranteed Obligations have been irrevocably paid in full in cash. 13.08 Waiver. (a) Holdings waives any right (except as shall be ------ required by applicable statute and cannot be waived) to require any Guaranteed Creditor to (i) proceed against the Borrower, any other guarantor or any other party, (ii) proceed against or exhaust any security held from the Borrower, any other guarantor or any other party or (iii) pursue any other remedy in any Guaranteed Creditor's power whatsoever. Holdings waives any defense based on or arising out of any defense of the Borrower, any other guarantor or any other party, other than payment in full of the Guaranteed Obligations, based on or -112- arising out of the disability of the Borrower, any other guarantor or any other party, or the validity, legality or unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full of the Guaranteed Obligations. The Guaranteed Creditors may, at their election, foreclose on any security held by the Agent, the Collateral Agent or any other Guaranteed Creditor by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable (to the extent such sale is permitted by applicable law), or exercise any other right or remedy the Guaranteed Creditors may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of Holdings hereunder except to the extent the Guaranteed Obligations have been paid. Holdings waives any defense arising out of any such election by the Guaranteed Creditors, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Holdings against the Borrower or any other party or any security. (b) Holdings waives all presentments, demands for performance, protests and notices, including without limitation notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Guaranteed Obligations. Holdings assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which Holdings assumes and incurs hereunder, and agrees that the Agent and the Banks shall have no duty to advise Holdings of information known to them regarding such circumstances or risks. (c) Holdings hereby acknowledges and affirms that it understands that to the extent the Guaranteed Obligations are secured by real property located in the State of California, Holdings shall be liable for the full amount of its liability hereunder notwithstanding foreclosure on such real property by trustee sale or any other reason impairing Holdings' or any secured creditor's right to proceed against the Borrower or any other guarantor of the Guaranteed Obligations. (d) Holdings hereby waives, to the fullest extent permitted by applicable law, all rights and benefits under Sections 580a, 580b, 580d and 726 of the California Code of Civil Procedure. Holdings hereby further waives, to the fullest extent permitted by applicable law, without limiting the generality of the foregoing or any other provision hereof, all rights and benefits which might otherwise be available to Holdings under Sections 2787 through 2855, inclusive, 2899 and 3433 of the California Civil Code. (e) Holdings further understands, is aware and hereby acknowledges that if the Guaranteed Creditors elect to nonjudicially foreclose on any real property security located in the State of California any right of subrogation of Holdings against any Credit Party may be impaired or extinguished and that as a result of such impairment or extin- -113- guishment of subrogation rights, Holdings may have a defense to a deficiency judgment arising out of the operation of Section 580d of the California Code of Civil Procedure and related principles of estoppel. Holdings waives all rights and defenses arising out of an election of remedies by the Guaranteed Creditors, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a Guaranteed Obligation, has destroyed the guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise. 13.09 Nature of Liability. It is the desire and intent of Holdings and ------------------- the Guaranteed Creditors that this Guaranty shall be enforced against Holdings to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If, however, and to the extent that, the obligations of Holdings under this Guaranty shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers), then the amount of the Guaranteed Obligations of Holdings shall be deemed to be reduced and Holdings shall pay the maximum amount of the Guaranteed Obligations which would be permissible under applicable law. * * * -114- IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date first above written. Address: - ------- 1400 Kearns Boulevard NUTRACEUTICAL INTERNATIONAL 2nd Floor CORPORATION Park City, Utah 84060 Attention: Chief Financial Officer Telephone: (801) 655-6000 By /s/ Frank W. Gav. II -------------------------- Telecopier: (801) 655-6080 Title: Chief Executive Officer 1400 Kearns Boulevard NUTRACEUTICAL CORPORATION 2nd Floor Park City, Utah 84060 Attention: Chief Financial Officer Telephone: (801) 655-6000 By /s/ Frank W. Gav. II -------------------------- Telecopier: (801) 655-6080 Title: Chief Executive Officer BANKERS TRUST COMPANY, individually and as Agent By /s/ Gina S. Thompson --------------------------- Title: Vice President EX-21.1 3 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 List of Subsidiaries of Nutraceutical International Corporation The following is a list of the corporations that are subsidiaries of Nutraceutical International Corporation. The common stock of all the corporations listed below is wholly owned, directly or indirectly, by the corporation. If indented, the corporation is a wholly-owned subsidiary of the corporation under which it is listed unless otherwise noted.
Name of Corporation Jurisdiction of Incorporation - ------------------- ----------------------------- Nutraceutical International Corporation Delaware (f/k/a Nutraceutical Corporation) Nutraceutical Corporation Delaware (f/k/a Nutraceutical Newco, Inc.) Action Labs, Inc. Delaware Au Naturel, Inc. Delaware Makers of KAL, B.V. Netherlands Makers of KAL, Inc. Delaware Monarch Nutritional Delaware Laboratories, Inc. NaturalMax, Inc. Delaware NutraForce (Canada) Canada International, Inc. Premier One Products, Inc. Delaware Solaray, Inc. Utah VegLife, Inc. Delaware
EX-23.1 4 CONSENT OF PRICEWATERHOUSECOOPERS, LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (333-49885 and 333-49887) of Nutraceutical International Corporation of our report dated November 17, 1998 appearing on page F-2 of this Form 10-K. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah December 29, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF NUTRACEUTICAL INTERNATIONAL CORPORATION AS OF, AND FOR THE YEAR ENDED, SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1998 OCT-01-1997 SEP-30-1998 1,967 0 10,173 1,024 23,935 37,801 19,078 (8,308) 104,308 13,754 0 0 0 118 51,504 104,308 104,688 104,688 57,750 57,750 33,759 223 3,971 9,208 3,509 5,699 0 (3,129) 0 2,570 0.24 0.22
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