-----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, Dgjr8Cgd5UdYJEtplOijg8PTAM8KBVr3sjgxZF0UdnInGudG782Bfedxxs354OU7 D1dqLBPtbL4ZEuc4fjhzOg== 0000800459-02-000023.txt : 20020917 0000800459-02-000023.hdr.sgml : 20020917 20020917150149 ACCESSION NUMBER: 0000800459-02-000023 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARMAN INTERNATIONAL INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000800459 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 112534306 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09764 FILM NUMBER: 02765866 BUSINESS ADDRESS: STREET 1: 1101 PENNSYLVANIA AVENUE N W STREET 2: STE 1010 CITY: WASHINGTON STATE: DC ZIP: 20004 BUSINESS PHONE: 2023931101 MAIL ADDRESS: STREET 1: 1101 PENNSYLVANIA AVENUE NW STREET 2: SUITE 1010 CITY: WASHINGTON STATE: DC ZIP: 20004 10-K 1 a10k02.txt ANNUAL REPORT ON FORM 10-K Securities and Exchange Commission Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended June 30, 2002 Commission file number 1-9764 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED (Exact name of Registrant as specified in its charter) Delaware 11-2534306 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1101 Pennsylvania Ave., N.W., Ste. 1010, Washington, D.C. 20004 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (202) 393-1101 Securities registered pursuant to section 12(b) of the Act Title of Each Class Name of Exchange on Which Registered Common Stock, par value $.01 per share New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None 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 (229.405 of this chapter) 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. X The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of September 3, was $1,555,769,535. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 32,489,230 shares of Common Stock, par value $.01 per share, as of September 3, 2002. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended June 30, 2002, are incorporated by reference in Part I, Item 1, and Part II, Items 5, 7 and 8. Portions of the Registrant's definitive Proxy Statement relating to the 2002 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10 (as related to Directors), 11, 12, and 13. Page 1 THIS PAGE LEFT BLANK INTENTIONALLY 2 TABLE OF CONTENTS Page PART I Item 1. Business......................................... 5 Item 2. Properties....................................... 24 Item 3. Legal Proceedings................................ 27 Item 4. Submission of Matters to a Vote of Security Holders................................. 27 Executive Officers of the Registrant............. 27 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.......................................... 28 Item 6. Selected Financial Data.......................... 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................... 30 Item 8. Consolidated Financial Statements and Supplementary Data........................... 31 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............................. 31 PART III Item 10. Directors and Executive Officers of the Registrant.................................... 31 Item 11. Executive Compensation............................ 32 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................... 32 Item 13. Certain Relationships and Related Transactions...................................... 32 Item 14. Controls and Procedures........................... 32 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 33 List of Financial Statements and Financial Statement Schedules..................... 43 Independent Auditor's Report...................... 45 Index to Exhibits................................. 49 3 THIS PAGE LEFT BLANK INTENTIONALLY 4 PART I ITEM 1. BUSINESS Overview Harman International is a worldwide leader in the manufacture of high quality high-fidelity audio products and audio systems for consumer and professional use, and of integrated infotainment systems for many of the major automotive makers in the world. For over 50 years, we have developed, both internally and through a series of strategic acquisitions, a broad range of product offerings sold under renowned brand names in our principal markets. The Company has also developed a substantial and experienced digital engineering capability. We believe that our JBL, Infinity, Harman/Kardon, Mark Levinson and Becker brand names are well-known worldwide for premium quality and performance. We have built these brands by developing our world-class engineering, manufacturing and marketing competence and have employed those resources to establish worldwide leadership in these fields. We organize our businesses by the end-user markets they serve. Our Consumer Systems Group designs, manufactures, and markets loudspeakers, audio electronics and infotainments systems for vehicles and designs, manufactures, and markets loudspeakers and electronics for home audio, video and computer applications. Our Professional Group designs, manufactures, and markets loudspeakers, microphones, electronics, and systems used by audio professionals in concert halls, stadiums, airports and other buildings and recording, broadcast, cinema and music reproduction applications. We believe significant growth opportunities exist with our automotive original equipment manufacturer customers through higher penetration levels within existing models, increases in the number of models offering our audio systems, supply agreements with additional automakers and increases in per-vehicle content through the provision of integrated infotainment systems and new hardware and software licensing agreements. We have already received purchase commitments for integrated infotainment systems to be installed in 2002 and 2003 model year vehicles manufactured by Mercedes-Benz, Audi, BMW and Porsche. We began shipping integrated infotainment systems for the BMW 7 Series in November 2001 and for the Mercedes-Benz E Class 5 in February 2002. We expect production of integrated infotainment systems for the Audi A8 and certain Porsche models to begin during fiscal 2003. Our primary manufacturing facilities are located in California, Indiana, Utah, Kentucky, Germany, the United Kingdom, Mexico, France, Austria, Sweden, China and Hungary. Harman International Industries, Incorporated is a Delaware corporation formed in 1980. Consumer Systems Group Our Consumer Systems Group designs, manufactures, and markets loudspeakers, audio electronics and infotainments systems for vehicles and designs, manufactures, and markets loudspeakers and electronics for home audio, video and computer applications. These products and systems are marketed under brand names including JBL, Infinity, Harman/Kardon, Lexicon, Becker, Mark Levinson, Proceed, Revel and AudioAccess. We believe that we have a unique portfolio of brand names and range of product offerings in the consumer audio market, and that the JBL, Infinity and Harman/Kardon brands are recognized throughout the world for superior sound quality and excellent value. High-end products bearing the Lexicon, Mark Levinson, Proceed and Revel brands are acclaimed for their state-of-the-art sound reproduction. The Consumer Systems Group offers premium, branded audio systems to retail automobile purchasers through engineering and supply agreements with original equipment manufacturers, including DaimlerChrysler, BMW, Toyota, Lexus, Mitsubishi, Porsche, Land Rover, Saab, Peugeot and Ferrari, complemented by non-branded loudspeaker supply agreements with other automakers including Audi, Volvo, VW, Ford, Renault and Fiat. The Consumer Systems Group also supplies car audio, video and navigation systems. We have also developed integrated infotainment systems, which manage the car audio, video and navigation provided by the Company, and climate control, telecommunications and internet access functions, provided by third parties. We have already received purchase commitments for integrated infotainment systems to be installed in 2002 and 2003 model year vehicles manufactured by Mercedes-Benz, Audi, BMW and Porsche. We began shipping integrated infotainment systems for the BMW 7 Series in November 2001 and for the Mercedes-Benz E Class in February 2002. We expect production of integrated infotainment systems for the Audi A8 and 6 certain Porsche models to begin during fiscal 2003. DaimlerChrysler, our largest automotive customer, offers Infinity branded car audio systems in the majority of its Chrysler, Dodge and Jeep lines. Mitsubishi also offers Infinity branded car audio systems. In addition, JBL branded audio systems are produced for Toyota, Peugeot and Hyundai. BMW and Saab offer our Harman/Kardon systems and Lexus offers our high- end Mark Levinson audio systems. Our Harman Becker head units and navigation systems and non-branded loudspeaker systems are installed in a substantial number of Mercedes-Benz, BMW and Porsche automobiles. The Consumer System Group offers its home and automotive aftermarket audio and electronic products primarily through audio/video specialty stores and certain well-respected audio/video chain stores, such as Circuit City, Best Buy and Tweeter in North America and MediaMarkt in Europe. These products include audio/video receivers, amplifiers, DVD and CD players in addition to different types of loudspeakers and navigation devices for cars. Our dealers are knowledgeable about the features and capabilities of audio and video products and emphasize high-quality systems to consumers. Sales and marketing activities for these products include dealer education programs, point-of-sale displays, participation in consumer audio trade shows, comprehensive product literature and mass- media advertising. We currently offer home consumer products under the Harman/Kardon, JBL, Mark Levinson, Infinity, Lexicon and Revel brands. The Consumer Systems Group also offers branded audio products to personal computer users through supply agreements and licenses with Dell and Apple. We believe that these audio systems enhance the appeal and capability of the personal computer as an entertainment device. Professional Group Our Professional Group designs, manufactures, and markets loudspeakers and electronics used by audio professionals in concert halls, stadiums, airports and other buildings and recording, broadcast, cinema and music reproduction applications. We provide high quality products to the sound reinforcement, music instrument support, and broadcast and recording segments of the professional audio market. We offer complete systems solutions for professional installations and users around the world. The professional group includes the JBL Professional, Soundcraft, Crown, DOD, Digitech, dbx, AKG, Lexicon, BSS and Studer brands. 7 We believe that our Professional Group is uniquely equipped to provide turnkey systems solutions for professional audio applications that offer the customer improved performance, reliability, ease of installation and reduced cost. Professional applications of Harman products include stadiums, opera houses, concert halls, recording studios, broadcast studios, theaters, houses of worship and cinemas. Touring performing artists also use our professional products. Sound systems incorporating components manufactured by JBL, Crown, Lexicon, AKG, Studer and Soundcraft are in use around the world in such places as the Grand Ole Opry in Nashville, the Kennedy Center in Washington, D.C., Pacific Bell Park in San Francisco, Experience Music Project in Seattle, the Great Hall of the People in Beijing, China, the Royal Danish Theater in Copenhagen and the Sydney Opera House in Sydney, Australia. Our professional equipment is used on tour by performing artists throughout the world. The Company's professional audio products are marketed worldwide through professional sound equipment dealers, including sound system contractors that directly assist major users. The Company's sales and marketing group for its professional products is separate and independent of its consumer product sales group. Professional audio sales and marketing activities include dealer education programs, point- of-sale displays, participation in professional audio trade shows and professional audio media advertising. We believe that JBL Professional is a leader in the sound reinforcement and cinema markets serving customers such as AMC Theatres, Loew's Cineplex, Edwards Cinemas and United Artist Theaters. Stadiums, concert halls, houses of worship and major concert tours rely on sound reinforcement products from the professional group, such as JBL loudspeakers, JBL, Crown and BSS amplifiers, BSS loudspeaker system management products, AKG microphones, DOD and dbx signal processing equipment, and Soundcraft mixing consoles, to produce high quality sound. Our AKG business manufactures high quality microphones and headphones. Our expertise in the design and manufacture of miniature transducers for special microphone applications has led to market opportunities in the mobile telecommunications equipment and hands- free automotive communications markets, as well as for its traditional professional audio activities. We manufacture the earpiece and mouthpiece transducer capsules for mobile telephone manufacturers including Nokia, Kyocera, Ericsson and Sony. We also manufacture 8 miniature transducers for hands-free communications applications in Mercedes-Benz automobiles and in General Motors automobiles that are equipped with the OnStar system. Professional customers in the recording and broadcast market include radio and television stations, recording studios, postproduction houses, digital editing suites, and home studios such as Lucasfilm's Skywalker Ranch, Polygram Records and Walt Disney Imagineering, and are primarily served by our Studer, JBL, Crown, Lexicon, Soundcraft, AMEK, and AKG divisions. Our JBL, Crown, DOD, Lexicon and Digitech businesses also serve the music instrument support segment of the professional audio market. JBL manufactures and markets loudspeakers, monitors and amplifiers. Crown manufactures professional amplifiers. DOD, Digitech and dbx sell sound effects and other signal processors, portable mixing consoles and guitar amplifiers. The music instrument support market also provides portable digital signal processing components, guitar amplifiers and portable loudspeaker systems used by touring performers. Music instrument support products are sold through music retail stores such as Guitar Center and Sam Ash. Products Consumer Products. We believe that we are a leading global manufacturer of premium branded automotive audio systems offered by automakers as an option to their customers. In our offering of loudspeakers, head units, amplifiers and infotainment systems through automobile manufacturers, we leverage our expertise in the design and manufacture of high-quality loudspeakers, radios and other electronics, as well as the reputation for quality associated with our JBL, Infinity, Harman/Kardon, Mark Levinson and Becker brand names. Our engineers are engaged by the automobile manufacturers early in the vehicle cabin design process to develop systems that optimize acoustic performance and minimize weight and space requirements. We have developed the technical competencies to offer multimedia systems to automobile manufacturers integrating audio, video, navigation, telematics, internet access, and security. Our Infinity-branded car audio systems are offered by DaimlerChrysler's Chrysler, Dodge and Jeep lines as well as by Mitsubishi. Toyota, Peugeot and Hyundai offer JBL branded audio systems. BMW, Jaguar and Saab offer our Harman/Kardon branded 9 systems and our Mark Levinson branded systems are offered by Lexus. We also supply Harman Becker head units, navigation systems and other electronics to DaimlerChrysler, BMW, Audi, Porsche and Renault. We manufacture loudspeakers under the JBL, Infinity and Revel brand names for the consumer home audio market. These loudspeaker lines include models designed for two-channel stereo and multi-channel surround sound applications in the home in a wide range of choices, including floorstanding, bookshelf, powered, low frequency, in-wall, wireless and all-weather, in styles and finishes ranging from high gloss lacquers to genuine wood veneers. The JBL and Infinity product lines also include car loudspeakers, amplifiers and crossover products sold in the aftermarket. We offer a broad range of consumer audio electronics. Our Harman/Kardon home electronics line includes audio-video receivers featuring Dolby Digital and DTS surround sound processing capabilities and multi-channel amplifiers, multi-disc DVD players and CD recorders. Becker manufactures and sells Traffic Pro radio navigation systems and Becker On-Line Pro systems, which provide radio, navigation, telephone and internet access. We design and manufacture high-end electronics, including amplifiers, pre-amplifiers, digital signal processors, compact disc players and transports, DVD transports, amplifiers and surround sound processors that we market under the renowned Mark Levinson and Proceed brands. AudioAccess products provide in-home, multisource, multi-zone sound system controls, serving home theater and multi-room applications. Revel loudspeaker systems are designed to complement the superior performance of Madrigal's electronic brands for both music and home theater applications. We also believe that we are a leader in the design and manufacture of high-quality home theater surround sound processors and amplifiers under the Lexicon name. Lexicon was a pioneer in the development of digital signal processors for the professional audio market and has successfully transferred its professional audio expertise to produce excellent products sold to consumers. Harman/Kardon branded premium audio systems are offered with personal computers manufactured by Apple and Dell. We participate in this market through design and brand name licensing as well as direct sourcing. These audio systems enhance the appeal and capability of the 10 personal computer as an entertainment device. Professional Products. Our professional products include loudspeaker and audio equipment that are marketed under many of the most respected brand names in the industry, including JBL Professional, Soundcraft, Crown, Lexicon, DOD, Digitech, AKG, BSS, dbx, and Studer. The professional market is increasingly involved in digital technology. We believe that our Professional Group is a leader in this market. Our Professional Group derives value from its ability to share research and development, engineering talent and other digital resources among its divisions. Our Soundcraft, Studer, Crown, Lexicon and Harman Music Group businesses each have substantial digital engineering resources and work together to achieve common goals by sharing resources and technical expertise. The Professional Group's loudspeaker products are well known for high quality and superior sound. The JBL Professional portfolio of products includes studio monitors, loudspeaker systems, power amplifiers, sound reinforcement systems, bi-radial horns, theater systems, surround systems and industrial loudspeakers. We believe that we are a leading manufacturer and marketer of audio electronics equipment for professional use. Such products are marketed on a worldwide basis under various trade names, including Soundcraft, Crown, Lexicon, DOD, Digitech, AKG, BSS, dbx and Studer, and are often sold in conjunction with our professional loudspeakers. Our Soundcraft lines of high-quality sound mixing consoles extend from automated multi-track consoles for professional recording studios to compact professional mixers for personal recording and home studios. Soundcraft products span four main market areas: sound reinforcement, recording studios, broadcast studios and musical instrument dealers. The Harman Music Group product line is marketed under the DOD, dbx, and DigiTech brand names, and is sold primarily to professional audio and musical instrument dealers. Harman Music Group products include signal processing equipment, equalizers, mixers and special effects devices. We believe that we are also a leading manufacturer of high-quality microphones and headphones. The AKG product line includes 11 microphones, audio headphones, surround-sound headphones and other professional audio products marketed under the AKG brand name. AKG has leveraged its engineering and manufacturing expertise to enter the telecommunications market, supplying miniature transducers to mobile phone makers Nokia, Ericsson, Kyocera and Sony, as well as the automotive hands-free communications market, supplying microphone arrays to Mercedes-Benz and General Motors. We believe that our Crown business is a leading professional amplifier manufacturer and enhances our ability to provide complete systems solutions to the professional audio market. Our Lexicon digital signal processing products are used in live sound applications and in recording studios to produce sound effects and refine final mixes. Our Studer Professional Audio recording and broadcast products are recognized for their high quality and reliability. Products include analog and digital mixing consoles, switching systems, digital audio workstations and turnkey broadcasting studio installations. Operating and Geographic Segment Information The Company is organized into segments by the end-user markets they serve - consumer and professional. Financial information about the Company's operating and geographic segments required to be included in this report is incorporated by reference to Note 9 of Notes to Consolidated Financial Statements contained in the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002. Manufacturing The Company believes that its manufacturing capabilities are essential to maintaining and improving product quality and performance. Other than certain Harman/Kardon electronic components, the Company manufacturers most of the products it sells. We believe that our facilities in California, Indiana, Kentucky, Mexico, Germany, and Hungary that manufacture loudspeakers and electronics for infotainment systems are world class. In each of these facilities, the Company has shifted from traditional manual assembly lines to software- driven, highly-automated lines designed to provide improved efficiency and flexibility. The Company's loudspeaker manufacturing capabilities include the production of high-gloss lacquer and wooden veneer loudspeaker 12 enclosures, wire milling, voice coil winding and the use of computer controlled lathes and other machine tools to produce precision components. The Company's high degree of manufacturing integration enables it to maintain consistent quality levels, resulting in reliable, high- performance products. The Company capitalizes on opportunities to transfer technology and materials developments across product lines to maximize the utility of engineering, design, development and procurement resources. The Company's principal domestic manufacturing facility in Northridge, California, manufactures JBL and Infinity loudspeakers and audio electronics for home, car and professional applications. The Company manufactures loudspeakers and assembles sound systems for the OEM automotive market in Martinsville, Indiana. Harman Music Group manufactures professional electronics products at its facility in Salt Lake City, Utah. Crown International manufactures professional amplifiers at its Elkhart, Indiana facility. The Company's newest manufacturing facilities are located in Franklin, Kentucky and in Tijuana and Juarez, Mexico. The Kentucky facility manufactures automotive audio systems for Toyota and the Tijuana, Mexico facility manufactures loudspeaker cabinets for JBL and Infinity. The Juarez facility manufactures automotive audio systems for Chrysler. The Company has a strong manufacturing presence in Europe. European automotive loudspeaker and electronics manufacturing includes the production of loudspeakers and amplifiers in the United Kingdom, Germany, Sweden, France and Hungary. Infotainment systems, car radios, navigation systems, amplifiers and other electronics are manufactured in Germany. The Company manufactures cabinet enclosures and assembles complete JBL and Infinity loudspeakers in Denmark. European professional electronics manufacturing includes Soundcraft in the United Kingdom (mixing consoles), Studer in Switzerland (professional recording and broadcast equipment) and AKG in Austria (microphones and headphones). The Company also has engineering and design facilities in the U.S. and Germany. Suppliers Several independent suppliers manufacture products designed by Harman Kardon. The loss of any one of these suppliers would not have a material impact on the consolidated earnings or consolidated financial position of the Company. 13 The Company utilizes certain third-party suppliers to manufacture loudspeakers sold to personal computer manufacturers. Production difficulties at these third-party suppliers would not have a material impact on the consolidated earnings of the Company. The Company uses externally-sourced microchips in many of its products. A significant disruption in our microchip supply chain and an inability to obtain alternative sources would have a material impact on the consolidated sales and earnings of the Company. Trademarks and Patents The Company markets its products under numerous trademarks, including JBL, Infinity, Harman Kardon, Citation, Crown, Audax, Becker, Soundcraft, Spirit, AMEK, DOD, DigiTech, Lexicon, AKG, Studer, BSS, Sound-Web, dbx, AudioAccess, Mark Levinson, Madrigal Imaging, Proceed, Revel, VMAx, EON, Harman, and Control. The Company's registrations cover use of its trademarks in connection with various products, such as loudspeakers, speaker systems, speaker system components and other electrical and electronic devices. These trademarks are registered or otherwise protected in substantially all major industrialized countries. As of June 30, 2002, the Company held approximately 674 United States and foreign patents covering various products, product designs and circuits, and had approximately 888 patent applications pending around the world. The Company vigorously protects and enforces its trademark and patent rights. Seasonality The Company experiences seasonal fluctuations in sales and earnings. The first fiscal quarter is the generally the weakest due to the automotive model changeovers and the summer holidays in Europe. Variations in seasonal demands among end-user markets may cause operating results to vary from quarter to quarter. Customers Sales to DaimlerChrysler for fiscal year 2002 accounted for 20.6 percent of the Company's consolidated net sales. At June 30, 2002, accounts receivable due from DaimlerChrysler was 19 percent of consolidated accounts receivable. The loss of sales to DaimlerChrysler would have a 14 material adverse effect on the consolidated sales, earnings and financial position of the Company. Backlog Orders Because the Company's practice is to produce automotive products and systems on a just-in-time basis and maintain sufficient inventories of finished goods to fill orders promptly, the level of backlog is not considered to be an important index of the Company's future performance. The Company's order backlog was approximately $23.9 million at June 30, 2002. Warranties Harman warrants its home products to be free from defects in materials and workmanship for a period ranging from 90 days to five years from the date of purchase, depending on the product. The warranty is a limited warranty, and it imposes certain shipping costs on the customer and excludes deficiencies in appearance except for those evident when the product is delivered. Harman dealers normally perform warranty service for loudspeakers in the field, using parts supplied on an exchange basis by the Company. Warranties in international markets are generally similar to those in the domestic market. Competition The audio industry is fragmented and competitive with many manufacturers, large and small, domestic and international, offering audio products that vary widely in price and quality and are distributed through a variety of channels. Consumer products are offered through channels including audio specialty stores, discount stores, department stores, mail order firms and internet merchants. Consumer products are also offered as OEM options on automobiles and personal computers through the automotive and computer dealer channels. Professional products are offered through music instrument retailers, professional audio dealers, contractors and installers and on a contract bid basis. The Company concentrates on the higher-quality, higher-priced segments of the audio market. The Company competes based upon its strong brand names, the breadth of its product lines, and its comprehensive marketing, engineering and manufacturing resources. The Company believes that it currently has a significant share of the consumer market for loudspeakers (home, automotive and computer), 15 primarily as a result of the strength of its brand names. We believe JBL and Infinity are two of the most recognized loudspeaker brands in the world. The development of our high-end loudspeaker brand, Revel, over the past several years, has extended our market position and complemented our Mark Levinson and Proceed high-end electronics lines. The Company's principal competitors in the consumer loudspeaker market include Bose, Boston Acoustics, B&W, KEF, Celestion, Paradigm, Klipsch, Cambridge SoundWorks and Polk Audio. Competition in the consumer electronic components segment remains intense, with this market dominated by large Asian competitors. The short life cycle of products and a need for continuous design and development efforts characterize this segment. The Company's competitive strategy is to compete in the higher-quality segments of this market and to continue to emphasize the Company's ability to provide systems solutions to customers, including a combination of loudspeakers and electronics products, providing integrated surround sound and home theater systems. The Company's principal electronics competitors include Marantz, Kenwood, Sony, Denon, Onkyo, Nakamichi, Pioneer and Yamaha. The Company competes in the high-end consumer electronics market with its Mark Levinson, Lexicon and Proceed brands. Principal competitors in this high-end market include Krell, McIntosh, Audio Research, Meridian, Linn and Accuphase. In the personal computer audio market, the Company's Harman/Kardon products are offered on systems sold by Apple and Dell. Principal competitors in this segment include Boston Acoustics, Creative Labs, Altec-Lansing and LabTec. In the OEM automotive market, the Company's principal competitors include Bose, Pioneer and Foster Electric in the loudspeaker systems segment and Alpine, Bosch, Panasonic, Siemens, Delphi, Visteon, Denso and Mannesman in the electronics segment. The Company is the only supplier of branded audio systems to Chrysler, Jeep and Mitsubishi automobiles in the United States, and also supplies branded audio systems to Toyota, Lexus, BMW, Saab and Peugeot. The Company also supplies non-branded loudspeaker systems to Chrysler, Mercedes-Benz, Volkswagen, Audi, Porsche, Volvo, Ford of Europe and Fiat. The Company is a primary supplier of radio head units to Mercedes-Benz, BMW and Porsche, and also supplies TV tuners, navigation systems and other electronics to Mercedes-Benz, BMW, Porsche, Audi, and Renault. The Company competes based upon the strength of its brand name recognition and the quality of its products together with its technical 16 expertise in designing loudspeaker systems, electronics, navigation systems, man-machine interfaces and complete multimedia systems to fit the acoustic properties of each automobile model. The market for professional sound systems is highly competitive. We believe the Company has historically held a leading market position in the professional loudspeaker market and has complemented its professional loudspeaker line by adding digital professional electronics products and broadcast and recording equipment. The Company competes using its ability to provide systems solutions to meet the complete audio requirements of its professional customers. Harman offers products for most professional audio applications. The Company competes in the sound reinforcement market using many of its brand names, including JBL Professional, AKG, Crown, Soundcraft, and BSS. Principal competitors in the sound reinforcement market include the Electro Voice division of Telex, Eastern Acoustic Works/Mackie, QSC, Sennheiser, Tannoy, Peavey, Shure, Audio Technica, Fender, Marshall, Sony and Yamaha. The Professional Group competes in the broadcast and recording areas with its Studer, AKG, Soundcraft, and Lexicon brands. Principal recording and broadcast competitors include Sony, Yamaha, Neve, Sennheiser, Denon, SSL, Shure, Tascam, Alesis and Audio Technica. In the music instrument market, competitors for the Company's JBL, DOD, Digitech, dbx, Lexicon, and Spirit products include Yamaha, Peavey, Rane, Roland, Alesis, Marshall, Fender, Sony, Mackie and T.C. Electronics. The Professional Group also competes in the industrial and architectural sound market. Competitors within this market include Siemens, Peavey, and Tannoy. Environmental Matters The Company is subject to various federal, state, local and international environmental laws and regulations, including those governing the use, discharge and disposal of hazardous materials. The Company's manufacturing facilities are believed to be in substantial compliance with current laws and regulations. The cost of compliance with current environmental laws and regulations has not been, and is not expected to be, material. 17 Research and Development The Company's expenditures for research and development were $109.9 million, $88.7 million and $76.2 million for the fiscal years ending June 30, 2002, 2001 and 2000, respectively. Number of Employees As of June 30, 2002, the Company had 10,389 full-time employees, including 3,346 domestic employees and 7,043 international employees, compared to 10,676 total employees at June 30, 2001. Forward Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and 21E of the Exchange Act of 1934. You should not place undue reliance on these statements. Forward- looking statements include information concerning possible or assumed future results of operations, capital expenditures, the outcome of pending legal proceedings and claims, including environmental matters, goals and objectives for future operations, including descriptions of our business strategies and purchase commitments from customers, among other things. These statements are typically identified by words such as "believe", "anticipate", "expect", "plan", "intend", "estimate", and similar expressions. We base these statements on particular assumptions that we have made in light of our industry experience, as well as our perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read and consider the information in this report, you should understand that these statements are not guarantees of performance or results. In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in, or incorporated by reference into, this report will in fact transpire. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. Some of those factors are described below. 18 Failure to maintain relationships with our largest customer and failure by our customers to continue to purchase expected quantities of our products due to changes in market conditions could have an adverse effect on our operations. Sales to DaimlerChrysler accounted for 20.6% of our consolidated net sales for the fiscal year ended June 30, 2002. We anticipate that DaimlerChrysler will continue to account for a significant portion of our sales for the foreseeable future; however, DaimlerChrysler is not obligated to any long-term purchase of our products. The loss of sales to DaimlerChrysler could have a material adverse effect on our consolidated sales, earnings and financial position. A decrease in discretionary spending would likely reduce our sales. Our sales are dependent to a substantial extent on discretionary spending by consumers, which may be adversely impacted by economic conditions affecting disposable consumer income and retail sales. In addition, our sales of audio products to the automotive OEM market are dependent on the overall success of the automobile industry, as well as the willingness, in many instances, of automobile purchasers to pay for the option of a premium branded automotive audio system. Our business could be adversely affected if we are unable to obtain raw materials and components from our suppliers on favorable terms. We are dependent upon certain unaffiliated domestic and foreign suppliers for various components, parts, raw materials and certain finished products. Some of our suppliers produce products that compete with our products. Although we believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on our business because other suppliers would be able to fulfill our requirements, the loss of certain suppliers could, in the short term, adversely affect our business until alternative suppliers are able to ship adequate amounts of raw materials or components to us. We have begun using multiple vendors and have limited our reliance on any single supplier. We may lose market share if we are unable to compete successfully against our current and future competitors. The high fidelity audio products market is fragmented, highly competitive, rapidly changing and characterized by price competition. 19 Many manufacturers, large and small, domestic and foreign, offer audio systems that vary widely in price and quality and are marketed through a variety of channels, including audio specialty stores, discount stores, department stores and mail order firms. Some of our competitors have financial and other resources greater than ours. We cannot assure you that we will continue to compete effectively against existing or new competitors that may enter our markets. We also compete indirectly with automobile manufacturers that may improve the quality of original equipment sound systems, reducing demand for our aftermarket mobile audio products, or change the designs of their cars to make installation of our aftermarket products more difficult or expensive. Our products may not satisfy shifting consumer demand or compete successfully with competitors' products. Our business is based on the demand for audio products and our ability to introduce distinctive new products that anticipate changing consumer demands and capitalize upon emerging technologies. If we fail to introduce new products, misinterpret consumer preferences or fail to respond to changes in the marketplace, consumer demand for our products could decrease and our brand image could suffer. In addition, our competitors may introduce superior designs or business strategies, undermining our distinctive image and our products' desirability. If any of these events occur, our sales could decline. Currency fluctuations may reduce the profits on our foreign sales or increase our costs, either of which could adversely affect our financial results. A significant amount of our assets and operations are located outside the United States. Consequently, we are subject to fluctuations in foreign currency exchange rates. Translation losses as a result of currency fluctuations may adversely affect the profits on our foreign sales and have a negative impact on our financial results. In addition, we purchase certain foreign-made products. Although we hedge a portion of our foreign currency exposure and, due to the multiple currencies involved in our business, foreign currency positions partially offset and are netted against one another to reduce exposure, we cannot assure you that fluctuations in foreign currency exchange rates will not make these products more expensive to purchase. Any increase in our costs of purchasing these products could negatively impact our financial results to the extent we are not able to pass those increased costs on to our customers. 20 If we do not continue to develop, introduce and achieve market acceptance of new and enhanced products, our sales may decrease. In order to increase sales in current markets and gain footholds in new markets, we must maintain and improve existing products, while successfully developing and introducing new products. Our new and enhanced products must respond to technological developments and changing consumer preferences. We may experience difficulties that delay or prevent the development, introduction or market acceptance of new or enhanced products. Furthermore, despite extensive testing, we may be unable to detect and correct defects in our products before we ship them to our customers. Delays or defects in new product introduction may result in loss of sales or delays in market acceptance. Even after we introduce them, our new or enhanced products may not satisfy consumer preferences and product failures may cause consumers to reject our products. As a result, these products may not achieve market acceptance. In addition, our competitors' new products and product enhancements may cause consumers to defer or forego purchases of our products. Our operations could be harmed by factors including political instability, natural disasters, fluctuations in currency exchange rates and changes in regulations that govern international transactions. The risks inherent in international trade may reduce our international sales and harm our business and the businesses of our distributors and suppliers. These risks include: -changes in tariff regulations; -political instability, war, terrorism and other political risks; -foreign currency exchange rate fluctuations; -establishing and maintaining relationships with local distributors and dealers; -lengthy shipping times and accounts receivable payment cycles; -import and export licensing requirements; -compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and regulatory requirements; -greater difficulty in safeguarding intellectual property than in the U.S.; and -difficulty in staffing and managing geographically diverse operations. 21 These and other risks may increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products. If we are unable to enforce or defend our ownership and use of our intellectual property, our business may decline. Our future success will depend, in substantial part, on our intellectual property. We seek to protect our intellectual property rights, but our actions may not adequately protect the rights covered by our patents, patent applications, trademarks and other proprietary rights, and prosecution of our claims could be time consuming and costly. In addition, the intellectual property laws of some foreign countries do not protect our proprietary rights as do the laws of the U.S. Despite our efforts to protect our proprietary information, third parties may obtain, disclose or use our proprietary information without our authorization, which could adversely affect our business. From time to time, third parties have alleged that we infringe their proprietary rights. These claims or similar future claims could subject us to significant liability for damages, result in the invalidation of our proprietary rights, limit our ability to use infringing intellectual property or force us to license third- party technology rather than dispute the merits of any infringement claim. Even if we prevail, any associated litigation could be time consuming and expensive and could result in the diversion of our time and resources. Covenants in our debt agreements could restrict our operations. The instruments governing our senior notes and our revolving credit facility contain certain provisions that could restrict our operating and financing activities. They restrict our ability to, among other things: -create or assume liens; -enter into sale-leaseback transactions; and -engage in mergers or consolidations. Because of the restrictions on our ability to create or assume liens, we may have difficulty securing additional financing in the form of additional indebtedness. In addition, our revolving credit facility contains other and more restrictive covenants, including financial covenants that will require us to achieve specified financial and operating results and maintain compliance with specified financial ratios. We may have to curtail some of our operations to maintain 22 compliance with these covenants. If we fail to comply with the covenants contained in our debt agreements, the related debt incurred under those agreements could be declared immediately due and payable, which could also trigger a default under other agreements. Our ability to meet the covenants or requirements in our credit facilities and the indentures relating to our outstanding senior notes may be affected by events beyond our control, and we cannot assure you that we will satisfy these covenants and requirements. A breach of these covenants or our inability to comply with the financial ratios, tests or other restrictions could result in an event of default under our revolving credit facility. Additionally, an event of default under our revolving credit facility is also an event of default under the indentures governing our senior notes. Upon the occurrence of an event of default under our revolving credit facility, the lenders and/or the note holders could elect to declare all amounts outstanding under our revolving credit facility and/or one or both of the indentures, together with accrued interest, to be immediately due and payable. If the payment of our indebtedness was accelerated, there can be no assurance that we will be able to make those payments or borrow sufficient funds from alternative sources to make those payments. Even if we were to obtain additional financing, that financing may be on unfavorable terms. Harman International is a holding company with no operations of its own and therefore our cash flow and ability to service debt are dependent upon distributions from our subsidiaries. Harman International's ability to service its debt and pay dividends is dependent upon the operating earnings of its subsidiaries. The distribution of those earnings, or advances or other distributions of funds by those subsidiaries to Harman International, all of which could be subject to statutory or contractual restrictions, are contingent upon the subsidiaries' earnings and are subject to various business considerations. 23 ITEM 2. PROPERTIES We believe that our manufacturing capabilities are essential to maintaining and improving product quality and performance. We manufacture most of the products that we sell other than some of our Harman Kardon electronic components. We also manufacture certain products for other loudspeaker companies as an original equipment manufacturer. Our principal manufacturing facilities are located in California, Indiana, Utah, Kentucky, Germany, the United Kingdom, Denmark, Mexico, France, Austria and Hungary. These facilities are described in the table below. 24
Square Owned or Percentage Location Footage Leased Utilization Segments - -------------------------- ---------- ---------- ------------- -------------- Northridge, California 569,000 Leased 94% Consumer, Professional Ittersbach, Germany 550,000 Owned 80% Consumer 17,000 Leased 100% Worth-Schaitt, Germany 377,500 Owned 50% Consumer Martinsville, Indiana 206,000 Owned 100% Consumer Ringkobing, Denmark 256,000 Owned 90% Consumer 12,000 Leased 90% Straubing, Germany 230,000 Leased 95% Consumer Elkhart, Indiana 222,700 Owned 100% Professional 7,000 Leased 100% Tijuana, Mexico 198,000 Leased 100% Consumer Potters Bar, UK 160,000 Leased 100% Professional Vienna, Austria 154,000 Leased 100% Professional Chateau du Loir, France 151,000 Owned 100% Consumer Juarez, Mexico 145,000 Leased 80% Consumer Sandy, Utah 122,000 Leased 100% Professional Szekesfehervar, Hungary 115,000 Owned 100% Consumer Franklin, KY 110,000 Leased 100% Consumer Bridgend, U.K. 108,000 Leased 100% Consumer Regensdorf, Switzerland 107,600 Leased 100% Professional
The company considers its properties to be suitable and adequate for its present needs. 25 THIS PAGE LEFT BLANK INTENTIONALLY 26 ITEM 3. LEGAL PROCEEDINGS There are various other legal claims pending against the Company, but in the opinion of management, liabilities, if any, arising from such claims will not have a material effect upon the consolidated financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Officers are elected annually by the Board of Directors and hold office at the pleasure of the Board of Directors until the next annual selection of officers or until their successors are elected and qualified. The current executive officers of the corporation, their ages at August 1, 2002 and their business experience during the past five years are set forth below. Sidney Harman, Ph.D. - 83 Executive Chairman, July 2000 - present Chairman of the Board, Chief Executive Officer and Director, 1980 - July 2000 Bernard A. Girod - 60 Vice Chairman and Chief Executive Officer, July 2000 - present Chief Executive Officer, November 1998 - present President, March 1994 - November 1998 Director, July 1993 - present Gregory P. Stapleton - 55 President and Chief Operating Officer, July 2000 to present Chief Operating Officer, November 1998 - present President of the Harman OEM Group, October 1987 - November 1998 Director, November 1987 - present Frank Meredith - 45 Executive Vice President and Chief Financial Officer, July 2000 - present Chief Financial Officer of the Company, February 1997 - present Secretary, November 1998 - present 27 William S. Palin - 60 Vice President - Controller, March 1994 - present Sandra B. Robinson - 43 Vice President - Financial Operations, November 1992 - present Edwin C. Summers - 55 Vice President and General Counsel, July 1998 - present Vice President, General Counsel and Secretary, First Alliance Corporation, 1996 - July 1998 Floyd E. Toole, Ph.D., 64 Vice President - Acoustics, November 1991 - present PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by Part II, Item 5 is incorporated by reference to the information under the caption "Shareholder Information" on page 48 of the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2002. 28 ITEM 6. SELECTED FINANCIAL DATA Five-Year Summary (in thousands, except per share data, for the fiscal years ended June 30)
2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Net sales $ 1,826,188 $ 1,716,547 $ 1,677,939 $ 1,500,135 $ 1,513,255 Operating income 103,221 71,228 121,722 38,663 100,325 Income before taxes 80,177 45,099 102,829 14,447 75,707 Net income 57,513 32,364 72,838 11,723 50,243 Diluted EPS 1.70 0.96 2.06 0.32 1.33 Total assets 1,480,280 1,159,385 1,137,505 1,065,755 1,130,684 Total debt 474,679 368,760 277,324 311,575 333,640 Shareholders' equity 526,629 422,942 486,333 468,187 511,899 Dividends per share 0.10 0.10 0.10 0.10 0.10
Per-share data has been restated to reflect the two-for-one stock split in August 2000. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Part II, Item 7 is incorporated by reference to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2002. 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Securities and Exchange Commission requires that registrants include information about potential effects of changes in interest rates and currency exchange rates in their financial statements. The qualitative information required by Part II, Item 7A is incorporated by reference to the information under the captions "Interest Rate Sensitivity" and "Foreign Currency" in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 13 "Derivatives" in the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2002. Interest Rate Risk The Company has used interest rate swaps to convert the interest rate on a majority of its borrowings from fixed rates to variable rates. Including the impact of the swaps, about 22% of the Company's borrowings were on a fixed rate basis as of June 30, 2002; the remaining balance is subject to changes in U.S short-term interest rates. In addition, the Company had $86 million in equipment operating leases that are subject to fluctuations in U.S. short-term interest rates. To assess exposure to interest rate changes, the Company has performed a sensitivity analysis assuming a hypothetical 100 basis point increase in interest rates across all maturities. This analysis indicates that such market movements would reduce fiscal 2002 net income, based on June 2002 positions, by approximately $2.3 million. Based on June 2001 positions, the effect on fiscal 2001 net income of such an increase in interest rates was estimated to be $1.4 million. Foreign Currency Risk The Company is exposed to market risks arising from changes in foreign exchange rates, principally the change in the value of the euro versus the U.S. dollar. The Company estimates the effect on projected 2003 net income, based upon a recent estimate of foreign exchange transactional exposure, of a uniform strengthening or uniform weakening of the transaction currency pairs of 10 percent will decrease net income by $9 million or will increase net income by $9 million. As of June 30, 2002, the Company 30 had hedged a portion of its estimated foreign currency transactions using forward exchange contracts. The Company estimates the effect on projected 2003 net income, based upon a recent estimate of foreign exchange translation exposure (translating the operating performance of our foreign subsidiaries into U.S. dollars), of a uniform strengthening or weakening of the U.S. dollar by 10 percent to decrease net income $5.9 million or to increase net income $5.9 million. The Company and its subsidiaries' net unhedged exposure in assets and liabilities denominated in currencies other than their relevant functional currencies as of June 30, 2002 and 2001 was not material to the consolidated financial position of the Company. Actual gains and losses in the future may differ materially from the hypothetical gains and losses discussed above based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and the Company's actual exposure and hedging transactions. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Part II, Item 8 is incorporated by reference to the information under the caption "Consolidated Financial Statements" in the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2002. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 with respect to the Company's directors is incorporated by reference to the information included under the caption "Election of Directors" in the Company's Proxy Statement for 31 its 2002 Annual Meeting of Stockholders. Information required by Item 10 with respect to the Company's executive officers is included in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference to the information provided under the caption "Compensation of Executive Officers" in the Company's Proxy Statement for its 2002 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 is incorporated by reference to the information provided under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the Company's Proxy Statement for its 2002 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference to the information provided under the caption "Option Purchases" in the Company's Proxy Statement for its 2002 Annual Meeting of Stockholders. ITEM 14. CONTROLS AND PROCEDURES There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to management's most recent evaluation of its internal controls. 32 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) 1. Financial statements required to be filed hereunder are indexed on page 43 hereof. 2. Financial statement schedules required to be filed hereunder are indexed on page 43 hereof. 3. The exhibits required to be filed hereunder are indexed on pages 49 through 54 hereof. b) Reports on Form 8-K None. 33 THIS PAGE LEFT BLANK INTENTIONALLY 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant): HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED By: (Signature and Title) /s/ Bernard A. Girod --------------------------------------------------- Bernard A. Girod, Vice Chairman and Chief Executive Officer Date: September 17, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Sidney Harman Executive Chairman September 17, 2002 - -------------------------- of the Board ------------------- Sidney Harman of Directors /s/ Bernard A. Girod Vice Chairman, Chief September 17, 2002 - -------------------------- Executive Officer and ------------------- Bernard A. Girod Director /s/ Gregory P. Stapleton President, Chief Operating September 17, 2002 - -------------------------- Officer and Director ------------------- Gregory P. Stapleton /s/ Frank Meredith Executive Vice President September 17, 2002 - -------------------------- and Chief Financial ------------------- Frank Meredith Officer (Principal Accounting Officer) /s/ Shirley M. Hufstedler Director September 17, 2002 - -------------------------- ------------------- Shirley M. Hufstedler /s/ Ann McLaughlin Korologos Director September 17, 2002 - -------------------------- ------------------- Ann McLaughlin Korologos /s/ Edward H. Meyer Director September 17, 2002 - -------------------------- ------------------- Edward H. Meyer /s/ Stanley A. Weiss Director September 17, 2002 - -------------------------- ------------------- Stanley A. Weiss 35 THIS PAGE LEFT BLANK INTENTIONALLY 36 CERTIFICATIONS I, Sidney Harman, certify that: 1. I have reviewed this annual report on Form 10-K of Harman International Industries, Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 17, 2002 /s/ Sidney Harman ------------------------------- Sidney Harman Executive Chairman of the Board 37 THIS PAGE LEFT BLANK INTENTIONALLY 38 CERTIFICATIONS I, Bernard A. Girod, certify that: 1. I have reviewed this annual report on Form 10-K of Harman International Industries, Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 17, 2002 /s/ Bernard A. Girod ------------------------------ Bernard A. Girod Vice Chairman of the Board and Chief Executive Officer 39 THIS PAGE LEFT BLANK INTENTIONALLY 40 CERTIFICATIONS I, Frank Meredith, certify that: 1. I have reviewed this annual report on Form 10-K of Harman International Industries, Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 17, 2002 /s/ Frank Meredith ---------------------------- Frank Meredith Executive Vice President and Chief Financial Officer 41 THIS PAGE LEFT BLANK INTENTIONALLY 42 LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Index to Item 14(a) Page Reference ------------------------ Annual Report to Form 10-K Shareholders ------------------------ Consolidated Financial Data (page 30 through 48 of the 2002 Annual Report to Shareholders herein incorporated by reference as Exhibit 13.1): Financial Table of Contents ............................................. 16 Independent Auditors' Reports...................................................45............. 29 Consolidated Balance Sheets as of June 30, 2002 and June 30, 2001 ...................................... 30 Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000 ......................................... 31 Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000 ......................................... 32 Consolidated Statements of Shareholders' Equity for the years ended June 30, 2002, 2001 and 2000 ......................................... 33 Notes to Consolidated Financial Statements .............................. 34 Schedules for the years ended June 30, 2002, 2001 and 2000: II Valuation and Qualifying Accounts and Reserves .............................47 All other schedules have been omitted because they are not applicable, not required, or the information has been otherwise supplied in the financial statements or notes to the financial statements. 43 THIS PAGE LEFT BLANK INTENTIONALLY 44 Independent Auditors' Report The Board of Directors Harman International Industries, Incorporated: Under the date of August 14, 2002, we reported on the consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three-year period ended June 30, 2002, as contained in the 2002 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated into by reference in the annual report on Form 10-K for the year ended June 30, 2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG - ----------------------- Los Angeles, California August 14, 2002 45 THIS PAGE LEFT BLANK INTENTIONALLY 46 Schedule II HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED Valuation and Qualifying Accounts and Reserves Years Ended June 30, 2002, 2001 and 2000 ($000's omitted)
- ----------------------------------------------------------------------------------------------------------- Charged Balance at Charged to To Other Balance Beginning Costs and Accounts Deductions at End Classification of Period Expenses Describe Describe of Period - ---------------------------------------------------------------------------------------- Year Ended June 30, 2000 Allowance for doubtful accounts $ 8,732 $ 6,902 $ (394) (1) $ 3,480 (2) $ 11,760 Year Ended June 30, 2001 Allowance for doubtful accounts $ 11,760 $ 5,721 $ (824) (1) $ 2,200 (2) $ 14,457 Year Ended June 30, 2002 Allowance for doubtful accounts $ 14,457 $ 7,049 $ 1,037 (1) $ 4,332 (2) $ 18,211
(1) Net effect of acquisitions, dispositions and foreign currency translation. (2) Deductions for accounts receivable written off net of recoveries. 47 THIS PAGE LEFT BLANK INTENTIONALLY 48 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED INDEX TO EXHIBITS The following exhibits are filed as part of this report. Where such filing is made by incorporation by reference to a previously filed statement or report, such statement or report is identified in parenthesis. There are omitted from the exhibits filed with this Annual Report on Form 10-K certain promissory notes and other instruments and agreements with respect to long-term debt of the Company, none of which authorizes securities in a total amount that exceeds 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company hereby agrees to file with the Securities and Exchange Commission copies of all such omitted promissory notes and other instruments and agreements as the Commission requests. Exhibit Page No. Description No. 3.1, 4.1 Restated Certificate of Incorporation filed with the Delaware Secretary of State on October 7, 1986, as amended by the Certificates of Amendment filed with the Delaware Secretary of State on November 13, 1986, November 9, 1993 and on December 14, 2000. (Filed as Exhibit 3.1, 4.1 to the Annual Report on Form 10-K for the fiscal year-ended June 30, 2001, and hereby incorporated by reference) ............................................. IBR 3.2,4.2 By-Laws of Harman International Industries, Incorporated, as amended December 13, 1999. (Filed as Exhibit 3.2,4.5 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000, and hereby incorporated by reference). IBR 49 4.3 Rights Agreement (including a Form of Certificate of Designation of Series A Junior Participating Preferred Stock as Exhibit A thereto, a Form Right Certificate as Exhibit B thereto and a Summary of Rights to Purchase of Preferred Stock as Exhibit C thereto) (Incorporated by reference to the Form 8-A filed by the Company on December 16, 1999)................. IBR 4.4 Certificate of Designation of Series A Junior Participating Preferred Stock of Harman International Industries, Incorporated, dated January 11, 2000. (Filed as Exhibit 4.3 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000, and hereby incorporated by reference)............ IBR 4.5 Amended and Restated Indenture, dated July 7, 1997 between Harman International Industries, Incorporated and PNC Bank, National Association, as trustee. (Filed as Exhibit 10.63 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and hereby incorporated by reference)...................... IBR 4.6 Indenture, dated as of February 19, 2002, between Harman International Industries, Incorporated and J.P. Morgan Trust Company, National Association, as trustee. (Filed as Exhibit 4.5 to the Registration Statement on Form S-4 (File No. 333-83688) filed with the Commission on March 4, 2002, and hereby incorporated by reference).... IBR 50 10.1 Lease dated as of June 18, 1987 between Harman International Industries Business Campus Joint Venture and JBL Inc., as amended. (Filed as Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1987, and hereby incorporated by reference) ............................................. IBR 10.2 Guaranty dated as of June 18, 1987 by Harman International Industries, Inc. of Lease dated as of June 18, 1987 between Harman International Industries Business Campus Joint Venture and JBL Inc., as amended. (Filed as Exhibit 10.2 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1987 , and hereby incorporated by reference) ............................................. IBR 10.3 Harman International Industries, Inc. 1987 Executive Incentive Plan (adopted December 8, 1987). (Filed as Exhibit 10.18 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1988, and hereby incorporated by reference) ......................... IBR 10.4 Lease Agreement dated April 28, 1988, by and between Harman International Business Campus Joint Venture and Harman Electronics, Inc. (Filed as Exhibit 10.23 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1988, and hereby incorporated by refercence)..................... IBR 10.5 Harman International Industries, Incorporated Retirement Savings Plan, Amended and Restated effective as of June 27, 2000 (Filed as Exhibit 10.26 to the Annual Report on Form 10-K for the fiscal year-ended June 30, 2001, and hereby incorporated by reference * ............................................... IBR 10.6 Amended and Restated Harman International Industries, Incorporated Supplemental Executive Retirement Plan dated October 1, 1999. (Filed as Exhibit 10.27 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-09764), and hereby incorporated by reference) * .............................. IBR 51 10.7 Harman International Industries, Incorporated 1992 Incentive Plan, as amended. (Filed as Exhibit B to the Company's Definitive Proxy Statement filed on September 15, 1999 (File No. 1-09764), and hereby incorporated by reference) * .............................. IBR 10.8 Harman International Industries, Inc. Deferred Compensation Plan, effective June 1, 1997. (Filed Form S-8 Registration Statement on June 9, 1997 (Reg. No. 333-28793), and hereby incorporated by reference) * .............................................. IBR 10.9 First Amendment to Harman International Industries, Inc. Deferred Compensation Plan dated October 1, 1999. (Filed as Exhibit 10.46 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000, and hereby incorporated by reference) * .............. IBR 10.10 Multi-Currency, Multi-Option Credit Agreement dated August 14, 2002, among Harman International Industries, Incorporated and the several lenders from time to time parties thereto ............................................ 55 10.11 First Amendment to the Lease Agreement by and between Harman International Business Campus Joint Venture and Harman Electronics, Inc. dated October 1995. (Filed as Exhibit 10.57 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and hereby incorporated by reference) .............................................. IBR 10.12 First Amendment to the Lease Agreement by and between Harman International Business Campus Joint Venture and JBL, Inc. dated October 1995. (Filed as Exhibit 10.58 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and hereby incorporated by reference) ...................... IBR 52 10.13 Employment Agreement between the Company and William Palin dated April 4, 2001. (Filed as Exhibit 10.69 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, and hereby incorporated by reference) * ........................ IBR 10.14 Equipment Financing Agreement between the Company and State Street Bank and Trust dated September 30, 1999. (Filed as Exhibit 10.67 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, and hereby incorporated by reference) ................................. IBR 10.15 Participation Agreement among the Company, State Street Bank and Trust, Four Winds Funding Corporation, Commerzbank, Bank of Tokyo - Mitsubishi Trust Company and BTM Capital dated September 30, 1999. (Filed as Exhibit 10.68 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 , and hereby incorporated by reference) ................................. IBR 10.16 Harman International Industries, Incorporated, Key Executive Officers Incentive Plan. (Filed as Exhibit A to the Definitive Proxy Statement for the Company's 2000 Annual Stockholder's Agreement and hereby incorporated by reference) * .................... IBR 10.71 Form of Severance Agreement between the Company and each of Sidney Harman, Bernard Girod, Gregory Stapleton and Frank Meredith. (Filed as Exhibit 10.71 to the Annual Report on Form 10-K for the year ended June 30, 2000, and hereby incorporated by reference) * ........................ IBR 10.72 Benefit Agreement under the Supplemental Executive Retirement Plan between Bernard A. Girod and Harman International Industries, Inc., dated June 22, 2001. (Filed as Exhibit 10.72 to the Annual Report on Form 10-K for the year ended June 30, 2000, and hereby incorporated by reference) * ............................... IBR 53 10.73 Benefit Agreement under the Supplemental Executive Retirement Plan between Gregory Stapleton and Harman International Industries, Inc., dated June 20, 2001. (Filed as Exhibit 10.73 to the Annual Report on Form 10-K for the year ended June 30, 2000, and hereby incorporated by reference) * ............................... IBR 10.74 Benefit Agreement under the Supplemental Executive Retirement Plan between Frank Meredith and Harman International Industries, Inc., dated June 21, 2000. (Filed as Exhibit 10.74 to the Annual Report on Form 10-K for the year ended June 30, 2000, and hereby incorporated by reference) * ................................ IBR 13.1 Pages 17 through inside back cover of Harman International Industries, Incorporated Annual Report to Shareholders for the fiscal year ended June 30, 2002 ............................................... 57 21.1 Subsidiaries of the Company ................................. 59 23.1 Consent of Independent Auditors ............................. 65 99.1 Certification of Sidney Harman, Bernard Girod, and Frank Meredith filed pursuant to 18 U.S.C., 1350, as adopted pursuant to section 906 of the Sarbanes - Oxley Act of 2002 ........................................... 69 __________________________ * Management contract or compensatory plan or arrangement to be filed as an exhibit to this form pursuant to Item 14 (c). 54 EXHIBIT 10.10 55 THIS PAGE LEFT BLANK INTENTIONALLY 56 EXHIBIT 13.1 57 THIS PAGE LEFT BLANK INTENTIONALLY 58 EXHIBIT 21.1 59 THIS PAGE LEFT BLANK INTENTIONALLY 60 Subsidiaries Name of Entity Jurisdiction AKG Acoustics GmbH Austria AKG Acoustics GmbH Germany AKG Acoustics Limited United Kingdom Amek Systems and Controls Ltd. United Kingdom Amek Technology Group Limited United Kingdom Audax of America, Inc. Delaware Becker of North America, Inc. Delaware Becker Service und Verwaltungs GmbH Germany BSS Audio United Kingdom C-Audio United Kingdom CAA AG Germany Crown Audio, Inc. Delaware Digital Audio Research Limited United Kingdom Epicure Products, Inc. Delaware Fosgate, Inc. Delaware Harman Audio United Kingdom Harman Audio de Mexico, S.A. de C.V. Mexico Harman Audio Outlet, Inc. Delaware Harman Becker Automotive Systems (Becker Division) GmbH Germany Harman Becker Automotive Systems (Kentucky), Inc. Delaware Harman Becker Automotive Systems (Pty) Ltd. South Africa Harman Becker Automotive Systems (Straubing Division) GmbH Germany 61 Name of Entity Jurisdiction Harman Becker Automotive Systems (Wisconsin), Inc. Delaware Harman Becker Automotive Systems Holding GmbH Germany Harman Becker Automotive Systems, Inc. Delaware Harman Becker Automotive Systems Manufacturing Kft. Hungary Harman Becker Automotive Systems S.A. de C.V. Mexico Harman Belgium NV Belgium Harman Consumer OY Finland Harman Consumer International SNC France Harman Consumer Manufacturing A/S Denmark Harman Consumer Nederland, B.V. Netherlands Harman Consumer Scandinavia A/S Denmark Harman de Mexico S.A. de C.V. Mexico Harman Enterprises, Inc. Delaware Harman Europe EEIG United Kingdom Harman France, S.N.C. France Harman Germany LLC Delaware Harman Holding GmbH & Co. KG Germany Harman Industries SNC France Harman International Industries Limited United Kingdom Harman International Singapore Pte. Ltd. Singapore Harman Investment Company, Inc. Delaware Harman Management GmbH Germany Harman Motive United Kingdom Harman Music Group, Incorporated Delaware Harman Pro North America, Inc. Delaware 62 Name of Entity Jurisdiction Harman Residential Group, Inc. Delaware Harman (Suzhou) Electronics Co. Ltd. China Harman UK Limited United Kingdom Harman-Kardon, Incorporated Delaware Ideasoft AG Germany Infinity Systems, Inc. California Innovative Systems GmbH Navigation-Multimedia Germany ISAS Gesellschaft fnr innovative Anwendungs-Software Germany mbH JBL Incorporated Delaware Lexicon, Incorporated Massachusetts Madrigal Audio Laboratories, Inc. Delaware Muller & Schmidt Vermogensverwaltungs-gesellschaft mbH Germany Precision Devices United Kingdom Son-Audax Loudspeakers Limited United Kingdom Soundcraft Electronics United Kingdom Studer Canada Limited Canada Studer Deutschland GmbH Germany Studer Digitec, S.A. France Studer Japan Ltd. Japan Studer Professional Audio AG Switzerland Studer UK United Kingdom Studer USA, Inc. Delaware TEMIC SDS GmbH Germany Total Audio Concepts Ltd. United Kingdom 63 THIS PAGE LEFT BLANK INTENTIONALLY 64 EXHIBIT 23.1 65 THIS PAGE LEFT BLANK INTENTIONALLY 66 INDEPENDENT AUDITORS' CONSENT - -------------------------------------------------------- The Board of Directors Harman International Industries, Incorporated: We consent to the incorporation by reference in the Registration Statement Nos. 33-20559, 33-28973, 33-36388, 33-60234, 33-60236, 33-59605, 333-02917, 333-28793, and 333-32673 on Form S-8, and 333-21021 on Form S-3 of Harman International Industries, Incorporated of our report dated August 14, 2002, relating to the consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of operations, cash flows and shareholders' equity and related schedule for each of the years in the three-year period ended June 30, 2002, which report appears in the June 30, 2002, annual report on Form 10-K of Harman International Industries, Incorporated. /s/ KPMG - ----------------------- Los Angeles, California September 16, 2002 67 THIS PAGE LEFT BLANK INTENTIONALLY 68 EXHIBIT 99.1 69 THIS PAGE LEFT BLANK INTENTIONALLY 70 CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Harman International Industries, Incorporated (the "Company") on Form 10-K for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Date: September 17, 2002 /s/ Sidney Harman ------------------------------------------------ Name: Sidney Harman Title: Executive Chairman /s/ Bernard A. Girod ------------------------------------------------ Name: Bernard A. Girod Title: Vice Chairman and Chief Executive Officer /s/ Frank Meredith ------------------------------------------------ Name: Frank Meredith Title: Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. 1350 and is not being filed as part of the Report or as a separate disclosure document. 71 EX-10 3 mca10k02.txt MULTI-CURRENCY MULTI-OPTION CREDIT AGREEMENT MULTI-CURRENCY, MULTI-OPTION CREDIT AGREEMENT among HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED The Several Lenders from Time to Time Parties Hereto JPMORGAN CHASE BANK, as Arranger JPMORGAN CHASE BANK, as Sole Advisor, Lead Arranger and Bookrunner JPMORGAN CHASE BANK, as Administrative Agent THE BANK OF NOVA SCOTIA, as Documentation Agent Dated as of August 14, 2002 TABLE OF CONTENTS Page SECTION 1. DEFINITIONS...........................................1 1.1. Defined Terms...........................................1 1.2. Other Definitional Provisions...........................18 SECTION 2. THE COMMITTED RATE LOANS..............................19 2.1. Committed Rate Loans....................................19 2.2. Procedure for Committed Rate Loan Borrowing.............19 2.3. Repayment of Committed Rate Loans; Evidence of Debt.....19 2.4. Termination or Reduction of Commitments.................20 2.5. Optional Prepayments....................................20 2.6. Conversion and Continuation Options.....................20 2.7. Minimum Amounts of Tranches.............................21 2.8. Interest Rates and Payment Dates for Committed Rate Loans...............................21 2.9. Inability to Determine Interest Rate....................21 2.10. Commitment Increases....................................22 SECTION 3. THE COMPETITIVE ADVANCE LOANS.........................23 3.1. Competitive Advance Loans...............................23 3.2. Procedure for Competitive Advance Loan Borrowing........24 3.3. Repayment of Competitive Advance Loans; Evidence of Debt...................................24 3.4. Prepayments.............................................25 SECTION 4. THE LETTERS OF CREDIT.................................25 4.1. L/C Commitment..........................................25 4.2. Procedure for Issuance of Letters of Credit under this Agreement...............................25 4.3. Fees, Commissions and Other Charges.....................26 4.4. L/C Participations......................................26 4.5. Reimbursement Obligation of the Company.................27 4.6. Obligations Absolute....................................27 4.7. Letter of Credit Payments...............................28 4.8. Application.............................................28 4.9. Issuance of Letters of Credit Priority for Acceptance of Time Drafts..........................28 SECTION 5. CERTAIN PROVISIONS APPLICABLE TO THE LOANS AND LETTERSOF CREDIT..................................29 5.1. Facility Fee............................................29 5.2. Computation of Interest and Fees........................29 5.3. Pro Rata Treatment and Payments.........................29 5.4. Requirements of Law.....................................30 Page 5.5. Taxes...................................................32 5.6. Indemnity...............................................34 5.7. Change of Lending Office................................34 5.8. Company Controls on Exposure; Calculation of Exposure; Prepayment if Exposure exceeds Commitments.........35 SECTION 6. REPRESENTATIONS AND WARRANTIES........................36 6.1. Financial Condition.....................................36 6.2. No Change...............................................36 6.3. Corporate Existence; Compliance with Law................36 6.4. Corporate Power; Authorization; Enforceable Obligations............................37 6.5. No Legal Bar............................................37 6.6. No Material Litigation..................................37 6.7. No Default..............................................37 6.8. Ownership of Property; Liens............................37 6.9. Intellectual Property...................................37 6.10. Taxes...................................................38 6.11. Federal Regulations.....................................38 6.12. ERISA...................................................38 6.13. Investment Company Act; Other Regulations...............39 6.14. Subsidiaries............................................39 6.15. Purpose of Loans and Letters of Credit..................39 6.16. Accuracy and Completeness of Information................39 6.17. Environmental Matters...................................39 SECTION 7. CONDITIONS PRECEDENT..................................40 7.1. Conditions to Initial Extensions of Credit..............40 7.2. Conditions to Each Extension of Credit..................41 SECTION 8. AFFIRMATIVE COVENANTS.................................42 8.1. Financial Statements....................................42 8.2. Certificates; Other Information.........................42 8.3. Payment of Obligations..................................43 8.4. Conduct of Business and Maintenance of Existence........43 8.5. Maintenance of Property; Insurance......................44 8.6. Inspection of Property; Books and Records; Discussions..44 8.7. Notices.................................................44 8.8. Environmental Laws......................................45 SECTION 9. NEGATIVE COVENANTS....................................45 9.1. Financial Condition Covenants...........................45 9.2. Limitation on Indebtedness of Restricted Subsidiaries...45 9.3. Limitation on Liens.....................................46 9.4. Limitation on Fundamental Changes.......................48 -ii- Page 9.5. Limitation on Sale of Assets............................48 9.6. Limitation on Dividends.................................49 9.7. Limitation on Investments, Loans and Advances...........49 9.8. Limitation on Optional Payments of Subordinated Debt and Modifications of Subordination Provisions......50 9.9. Limitation on Transactions with Affiliates..............50 9.10. Limitation on Sales and Leasebacks......................50 9.11. Limitation on Changes in Fiscal Year....................51 9.12. Limitation on Guarantee Obligations in respect of Indebtedness of Subsidiaries other than Restricted Subsidiaries............................51 9.13. Limitation on Subsidiaries other than Restricted Subsidiaries............................51 9.14. Limitation on Guarantee Obligations.....................51 SECTION 10. EVENTS OF DEFAULT...................................51 SECTION 11. THE ADMINISTRATIVE AGENT AND THE ARRANGER...........53 11.1. Appointment............................................53 11.2. Delegation of Duties...................................54 11.3. Exculpatory Provisions.................................54 11.4. Reliance by Administrative Agent.......................54 11.5. Notice of Default......................................54 11.6. Non-Reliance on Administrative Agent and Other Lenders....................................55 11.7. Indemnification........................................55 11.8. Administrative Agent in Its Individual Capacity........56 11.9. Successor Administrative Agent.........................56 11.10. The Arranger...........................................56 SECTION 12. MISCELLANEOUS........................................56 12.1. Amendments and Waivers Generally; Amendments to Schedules...........................56 12.2. Notices................................................57 12.3. No Waiver; Cumulative Remedies.........................58 12.4. Survival of Representations and Warranties.............58 12.5. Payment of Expenses and Taxes..........................58 12.6. Successors and Assigns; Participations and Assignments.59 12.7. Adjustments; Set-off...................................61 12.8. Judgment...............................................62 12.9. Counterparts...........................................62 12.10. Severability...........................................62 12.11. Integration............................................62 12.12. GOVERNING LAW..........................................62 12.13. Submission To Jurisdiction; Waivers....................62 12.14. Acknowledgements.......................................63 12.15. WAIVERS OF JURY TRIAL..................................63 12.16. Confidentiality........................................63 12.17. Termination of Existing Credit Agreement...............64 -iii- SCHEDULES Schedule I: Lenders and Commitments Schedule II: Administrative Schedule Schedule III: Material Debt Instruments Schedule IV: Restricted Subsidiaries Schedule V: Issuing Banks Schedule 6.14: Subsidiaries Schedule 9.2: Existing Indebtedness and Liens EXHIBITS Exhibit A: Schedule Amendment Exhibit B: Form of Borrowing Certificate Exhibit C: Assignment and Acceptance Exhibit D-1: Opinion of Jones, Day, Reavis & Pogue Exhibit D-2: Opinion of General Counsel Exhibit E: New Lender Supplement Exhibit F: Commitment Increase Supplement Exhibit G: Form of Exemption Certificate -iv- MULTI-CURRENCY, MULTI-OPTION CREDIT AGREEMENT, dated as of August 14, 2002, among: (i) HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED, a Delaware corporation (the "Company"); (ii) the several banks and other financial institutions from time to time parties to this Agreement (each, a "Lender"; and collectively, the "Lenders"); (iii) the Bank of Nova Scotia as the Documentation Agent (the "Documentation Agent"); and (iv) JPMORGAN CHASE BANK, as Arranger (the "Arranger") and as administrative agent for the Lenders hereunder (and its successors in such capacity, the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the Company has requested the Lenders to make available a credit facility pursuant to which (i) the Company may borrow revolving credit loans at committed interest rates and short-term loans at interest rates determined by a competitive bidding process to be conducted by the Company and (ii) one or more Issuing Banks (as hereinafter defined)will issue letters of credit for the account of the Company and each of the Lenders will acquire a participating interest in each such letter of credit; WHEREAS, the Company has requested that the loans made, and letters of credit issued, under this Agreement be denominated, at the option of the Company in United States Dollars or Available Foreign Currencies (as hereinafter defined); and WHEREAS, the Lenders are willing to make such credit facility available; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1. Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "ABR": for any day, a rate per annum equal to the greatest of (a)the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus one and a half of 1%. Any change in the ABR due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively. "ABR Loans": Loans in Dollars bearing interest based upon the ABR. "Adjusted Eurocurrency Rate": with respect to any Eurocurrency Loan for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1 1/100 of 1%)equal to (a) the Eurocurrency Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Schedule": Schedule II to this Agreement, which contains interest rate definitions and administrative information in respect of each Currency and each Type of Loan. "Affiliate": as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agreement": this Multi-Currency, Multi-Option Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Agreement Currency": as defined in subsection 12.8(b). "Applicable Margin": for each day during each Interest Period in respect of any Eurocurrency Loan, the margin per annum set forth below opposite the Interest Coverage Ratio (in the applicable Ratings category) shown on the last Interest Coverage Ratio Certificate delivered pursuant to subsection 8.2(c) prior to such day: Interest Coverage Ratio Applicable Margin (basis points) If Ratings are at BBB or Baa2 or -------------------------------- higher: ------ Interest Coverage Ratio at any level: 80.0 If Ratings are BBB- or Baa3: Less than 5.00 100.0 Greater than or equal to 5.00 and less than 6.25 95.0 Greater than or equal to 6.25 and less than 7.5 92.5 Greater than or equal to 7.5 90.0 2 If Ratings are at or below BB+ or --------------------------------- Bal or unrated: --------------- Less than 5.00 125.0 Greater than or equal to 5.00 and less than 6.25 107.5 Greater than or equal to 6.25 and less than 7.5 105.0 Greater than or equal to 7.5 100.0; provided, however, that, (i) in the event that no Interest Coverage Ratio Certificate has been delivered for a fiscal quarter prior to the last date on which it can be delivered without violation of subsection 8.2(c), the Applicable Margin from such date until such Interest Coverage Ratio Certificate is actually delivered shall be that applicable when the Interest Coverage Ratio is less than 5.00 at the lowest Rating level and (ii) in the event of a split Rating, the pricing applicable to the highest Rating shall apply unless the two Ratings are more than one level apart, in which case the pricing applicable to the level one level above the lowest Rating shall apply. Any change in the Applicable Margin resulting from a change in Ratings shall become effective on the date on which change is announced by the applicable ratings agency. Notwithstanding the foregoing, until delivery to the Lenders of the Company's financial statements, and related Interest Coverage Ratio Certificate, for the second full fiscal quarter after the Closing Date, the Applicable Margin shall be 95.0 basis points. "Application": in respect of each Letter of Credit issued by an Issuing Bank, an application, in such form as such Issuing Bank may specify from time to time, requesting issuance of such Letter of Credit. "Assessment Rate": for any day, the annual assessment rate in effect on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in dollars at the offices of such member in the United States; provided that if, as a result of any change in any law, rule or regulation, it is no longer possible to determine the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual rate as shall be determined by the Administrative Agent to be representative of the cost of such insurance to the Lenders. "Assignee": as defined in subsection 12.6(c). "Assignment and Acceptance": such Assignment and Acceptance, substantially in the form of Exhibit C, executed and delivered pursuant to subsection 12.6(c). 3 "Available Foreign Currencies": euro, Pounds Sterling, Danish Kroner, Japanese Yen, Swedish Krona, Swiss Francs, Hong Kong Dollars, Canadian Dollars, Singapore Dollars, and any other available and freely-convertible foreign currency selected by the Company and approved by the Administrative Agent in the manner described in subsection 12.1(b). "Base CD Rate": the sum of (a) the Three-Month Secondary CD Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. "Borrowing Date": any Business Day on which a Loan is to be made at the request of the Company under this Agreement. "Board": the Board of Governors of the Federal Reserve System of the United States (or any successor). "Business": as defined in subsection 6.17. "Business Day": (a) when such term is used in respect of any amount denominated or to be denominated in (i) any Available Foreign Currency, a London Banking Day which is also a day on which banks are open for general banking business in (x) the city which is the principal financial center of the country of issuance of such Available Foreign Currency, (y) in the case of euro only, Frankfurt am Main, Germany (or such other principal financial center as the Administrative Agent may from time to time nominate for this purpose) and (z) New York City and (ii) Dollars, (x) in the case of a Eurocurrency Loan, a London Banking Day which is also a day other than a Saturday or Sunday on which banks are open for general banking business in New York City, and (y) in the case of an ABR Loan, a day other than a Saturday or Sunday on which banks are open for general banking business in New York City, (b) when such term is used for the purpose of determining the date on which the Eurocurrency Rate is determined under this Agreement for any Loan denominated in euro for any Interest Period therefor and for purposes of determining the first and last day of any Interest Period, references in this Agreement to Business Days shall be deemed to be references to Target Operating Days and (c) when such term is used to describe a day on which a request is to be made to an Issuing Bank for issuance of a Letter of Credit or on which a Letter of Credit is to be issued, such term shall mean a day other than a Saturday, Sunday or other day on which commercial banks in the city in which such Issuing Bank's Issuing Office is located. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Cash Equivalents": (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof; (b) marketable general 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 one year from the date of acquisition thereof and, at the time of 4 acquisition, having one of the two highest credit ratings from either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (c) certificates of deposit, time deposits, eurodollar time deposits, overnight bank deposits, bankers' acceptances and repurchase agreements having maturities of one year or less from the date of acquisition issued, and money market deposit accounts issued or offered by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof having combined capital and surplus of not less than $100,000,000; and (d) commercial paper of an issuer rated at least A-2 by Standard & Poor's Corporation or P-2 by Moody's Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of investments, and, in either case, maturing within one year from the date of acquisition. "C/D Assessment Rate": for any day, the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation(the "FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a comparable successor assessment risk classification)within the meaning of 12 C.F.R. 327.3(d) (or any successor provision)to the FDIC (or any successor) for the FDIC's (or such successor's)insuring time deposits at offices of such institution in the United States. "C/D Reserve Percentage": for any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board, for determining the maximum reserve requirement for a Depositary Institution (as defined in Regulation D of the Board) in respect of new non-personal time deposits in Dollars having a maturity of 30 days or more. "Change of Control": an event or series of events by which (i) any "person" or "group" (as such terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than the Permitted Investor, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire without condition, other than passage of time, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the then outstanding Voting Stock of the Company, (ii)(A) the Company consolidates with or merges into another corporation or conveys, transfers or leases all or substantially all of its properties and assets (determined on a consolidated basis for the Company and its Subsidiaries taken as a whole) to any Person, or (B) any corporation consolidates with or merges into the Company or a Subsidiary of the Company in a transaction in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities or other property, other than a transaction solely between the Company and a Subsidiary of the Company or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a 5 vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; provided, however, that notwithstanding anything to the contrary in this definition, transfer of beneficial ownership of shares held by the Permitted Investor upon the death of the Permitted Investor to the heirs and devisees of the Permitted Investor shall not constitute a Change of Control. "Closing Date": the date on or before August 14, 2002 on which the conditions precedent set forth in subsection 7.1 shall be satisfied. "Code": the Internal Revenue Code of 1986, as amended from time to time. "Commercial Letter of Credit": as defined in subsection 4.1(b). "Commitment": as to any Lender, the obligation of such Lender to make and/or acquire participating interests in Loans and issue and/or acquire participating interests in Letters of Credit hereunder in an aggregate Dollar Equivalent Amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule I, as such amount may be changed from time to time in accordance with the provisions of this Agreement. "Commitment Increase Notice": as defined in subsection 2.10(a). "Commitment Percentage": as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the aggregate Commitments (or, at any time after the Commitments shall have expired or terminated, the percentage which the amount of such Lender's Exposure then outstanding constitutes of the aggregate amount of the Exposure of all the Lenders then outstanding). "Commitment Period": the period from and including the Closing Date to but not including the Termination Date or such earlier date on which the Commitments shall terminate as provided herein. "Committed Rate Loan": as defined in subsection 2.1; a Committed Rate Loan bearing interest based upon the ABR shall be a "Committed Rate ABR Loan", and a Committed Rate Loan bearing interest based upon the Eurocurrency Rate shall be a "Committed Rate Eurocurrency Loan". "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Company within the meaning of Section 4001 of ERISA or is part of a group which includes the Company and which is treated as a single employer under Section 414(b),(c), (m) or (o) of the Code. "Company Obligations": the unpaid principal of and interest on the Loans made to the Company, all Reimbursement Obligations in respect of Letters of Credit issued for the account of the Company and all other obligations and liabilities of the Company to the Administrative Agent, any Issuing Bank or any Lender (including, without limitation, interest accruing after the maturity or earlier acceleration of the Loans and 6 interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post-filing or post petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Loans, the Letters of Credit, or any other document made, delivered or given in connection therewith, in each case whether on account of principal,interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to the Administrative Agent, any Issuing Bank or any Lender) or otherwise. "Competitive Advance Loan": as defined in subsection 3.1. "Consolidated Capitalization": at any date, the sum of (i) shareholders' equity of the Company and (without duplication) its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, and (ii) Consolidated Total Debt. "Consolidated EBITDA": for any period, Consolidated Net Income for such period, plus the amount of taxes, interest, depreciation and amortization deducted from earnings in determining such Consolidated Net Income. "Consolidated Interest Expense": for any period, the amount of interest expense deducted from earnings of the Company and its consolidated Subsidiaries in determining Consolidated Net Income for such period in accordance with GAAP. "Consolidated Net Income": for any period, the net income of the Company and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Consolidated Senior Debt": at any date, Consolidated Total Debt less the outstanding principal amount of Subordinated Debt. "Consolidated Total Assets": at any date, the aggregate amount of the assets of the Company and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Consolidated Total Debt": at any date, without duplication, the aggregate of all Indebtedness (including the current portion thereof) of the Company and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any material agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Credit Re-Allocation Date": as defined in subsection 2.10(d). "Currencies": the collective reference to Dollars and the Available Foreign Currencies. "Default": any event or condition that upon notice, the lapse of time, or both, would constitute an Event of Default. 7 "Dollar Equivalent Amount": with respect to the amount of any Available Foreign Currency on any date, the equivalent amount in Dollars of such amount of Available Foreign Currency, as determined by the Administrative Agent using the Exchange Rate. "Dollars" and "$": dollars in lawful currency of the United States of America. "Environmental Laws": any and all applicable material, foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, enforceable requirements of any Governmental Authority or other Requirements of Law (including common law)regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "euro": the single currency of participating member states of the European Union. "Eurocurrency Loan": any Loan bearing interest based upon a Eurocurrency Rate. "Eurocurrency Rate": in respect of each Currency, the rate determined as the Eurocurrency Rate for such Currency in the manner set forth in the Administrative Schedule. "Event of Default": any of the events specified in Section 10, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Exchange Rate": with respect to any Available Foreign Currency on any date, the rate at which such Available Foreign Currency may be exchanged into Dollars, as set forth on such date on the relevant Reuters currency page at or about 11:00 A.M. London time on such date. In the event that such rate does not appear on any Reuters currency page, the "Exchange Rate" with respect to such Available Foreign Currency shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by the Administrative Agent and the Company or, in the absence of such agreement, such "Exchange Rate" shall instead be the Administrative Agent's spot rate of exchange in the interbank market where its foreign currency exchange operations in respect of such Available Foreign Currency are then being conducted, at or about 10:00 A.M., local time, at such date for the purchase of Dollars with such Available Foreign Currency, for delivery two Business Days later; provided, that if at the time of any such determination, no such spot rate can reasonably be quoted, the Administrative Agent may use any reasonable method as it deems applicable to determine such rate, and such determination shall be conclusive absent manifest error. "Exposure": at any date, the aggregate Dollar Equivalent Amount of (a) all Loans then outstanding and (b) all L/C Obligations then outstanding. 8 "Extensions of Credit": the collective reference to Loans made and Letters of Credit issued under this Agreement. "Facility Fee Rate": for each day during each fiscal quarter of the Company, the rate per annum set forth below opposite the Interest Coverage Ratio in the applicable Ratings category shown on the Interest Coverage Ratio Certificate required pursuant to subsection 8.2(c) to be delivered for the immediately preceding fiscal quarter: Interest Coverage Ratio Facility Fee (basis points) If Ratings are at BBB or Baa2 or -------------------------------- higher: ------ Interest Coverage Ratio at any level: 20.0 If Ratings are BBB- or Baa3: Less than 5.00 37.5 Greater than or equal to 5.00 and less than 6.25 30.0 Greater than or equal to 6.25 and less than 7.5 27.5 Greater than or equal to 7.5 25.0 If Ratings are at or below BB+ or Bal (or unrated): Less than 5.00 50.0 Greater than or equal to 5.00 and less than 6.25 42.5 Greater than or equal to 6.25 and less than 7.5 40.0 Greater than or equal to 7.5 37.5; provided, however, that, (i) in the event that no Interest Coverage Ratio Certificate has been delivered for a fiscal quarter prior to the last day of the next succeeding fiscal quarter, the Facility Fee Rate during such next succeeding fiscal quarter shall be that applicable when the Interest Coverage Ratio is less than 5.0 at the lowest Rating level and (ii) in the event of a split Rating, the pricing applicable to the highest Rating shall apply unless the two Ratings are more than one level apart, in which case the pricing applicable 9 to the level one level above the lowest Rating shall apply. Any change in the Facility Fee Rate resulting from a change in Ratings shall become effective on the date on which such change is announced by the applicable ratings agency. Notwithstanding the foregoing, until delivery to the Lender of the Company's financial statements, and related Interest Coverage Ratio Certificate for the second full fiscal quarter after the Closing Date, the applicable Facility Fee shall be 30.0 basis points. "Federal Funds Effective Rate": the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter": the letter agreement, dated June 14, 2002, between the Company and JPMorgan Chase. "Financing Lease": any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "Funding Office": for each Type of Loan and each Currency, the Funding Office set forth in respect thereof in the Administrative Schedule. "Funding Time": for each Type of Loan and each Currency, the Funding Time set forth in respect thereof in the Administrative Schedule. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising applicable executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations(the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary 10 obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include (x) endorsements of instruments for deposit or collection in the ordinary course of business or (y) obligations of the Company or any of its Subsidiaries under arrangements entered into in the ordinary course of business whereby the Company or such Subsidiary sells inventory to other Persons under agreements obligating the Company or such Subsidiary to repurchase such inventory, at a price not exceeding the original sale price, upon the occurrence of certain specified events. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Company in good faith. "Indebtedness": of any Person at any date, all indebtedness or obligations of such Person (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), as reflected on the balance sheet of such Person prepared in accordance with GAAP. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Intellectual Property": as defined in subsection 6.9. "Interest Coverage Ratio": for any period of four consecutive fiscal quarters, Consolidated EBITDA divided by Consolidated Interest Expense for such period. "Interest Coverage Ratio Certificate": as defined in subsection 8.2(c). "Interest Payment Date": (a) as to any ABR Loan, the last day of each March, June, September and December to occur while such Loan is outstanding, and on the Termination Date (b) as to any Committed Rate Eurocurrency Loan having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any Committed Rate Eurocurrency Loan having an Interest Period longer than three months, each day which is three months after the first day of such Interest Period and the last day of such Interest Period and (d) as to any Competitive Advance Loan, the date or dates agreed upon by the Company and the Lender at the time the terms of such Competitive Advance Loan are determined as provided in Section 3. "Interest Period": with respect to any Committed Rate Eurocurrency Loan: 11 (i) initially, the period commencing on the borrowing, continuation or conversion date, as the case may be, with respect to such Eurocurrency Loan and ending one, two, three or six months thereafter, as selected by the Company in its Notice of Borrowing, Notice of Continuation or Notice of Conversion, as the case may be, given with respect thereto; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurocurrency Loan and ending one, two, three or six months thereafter, as selected by the Company by a Notice of Continuation with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following: (1) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (2) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date; and (3) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "Investment Grade": the Company shall be deemed to be Investment Grade when its Rating is at least BBB- by Standard & Poor's Corporation and at least Baa3 by Moody's Investors Service, Inc. "Issuing Bank": each Lender listed as an Issuing Bank in Schedule V. "Issuing Office": in respect of each Issuing Bank, the Issuing Office set forth for such Issuing Bank in Schedule V. "JPMorgan Chase": JPMorgan Chase Bank. "Judgment Currency": as defined in subsection 12.8(b). "L/C Obligations": at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit, (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to subsection 4.5(a) and (c) Time Drafts. "L/C Participant": in respect of each Letter of Credit, each Lender (other than the Issuing Bank in respect of such Letter of Credit) in its capacity as the holder of a participating interest in such Letter of Credit. 12 "Letter of Credit": as defined in subsection 5.1. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Financing Lease having substantially the same economic effect as any of the foregoing). "Loan": any Committed Rate Loan or Competitive Advance Loan made by any Lender pursuant to this Agreement. "Loan Documents": this Agreement and each Application. "London Banking Day": any day on which banks in London are open for general banking business, including dealings in foreign currency and exchange. "Majority Lenders": at any time, Lenders the Commitment Percentages of which aggregate more than 50%. "Material Adverse Effect": a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or (b) the validity or enforceability of this or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. "Material Debt Instrument": those agreements and other instruments of Indebtedness listed on Schedule III, which list shall include any such instrument under which the Company is an obligor and under which the outstanding amount and/or available commitment to extend credit exceeds $10,000,000. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "New Lender": as defined in subsection 2.10(b). "Non-Excluded Taxes": as defined in subsection 5.5(a). "Non-U.S. Lender": as defined in subsection 5.5(b) "Notice of Borrowing": with respect to a Loan of any Type in any Currency, a notice from the Company in respect of such Loan, containing the information in respect of such Loan and delivered to the Person, in the manner and by the time specified for a 13 Notice of Borrowing in respect of such Currency and such Type of Loan in the Administrative Schedule. "Notice of Competitive Advance Loan": with respect to each Competitive Advance Loan in any Currency, a notice from the Lender in respect of such Loan, containing the information in respect of such Loan and delivered to the Person, in the manner and by the time specified for a Notice of Competitive Advance Loan in the Administrative Schedule. "Notice of Continuation": with respect to a Committed Rate Loan in any Currency, a notice from the Company in respect of such Loan, containing the information in respect of such Loan and delivered to the Person, in the manner and by the time specified for a Notice of Continuation in respect of such Currency in the Administrative Schedule. "Notice of Conversion": with respect to a Committed Rate Loan in Dollars which the Company wishes to convert from a Eurocurrency Loan to an ABR Loan, or from an ABR Loan to a Eurocurrency Loan, as the case may be, a notice from the Company setting forth the amount of such Loan to be converted, the date of such conversion (which, in the case of conversions of Eurocurrency Loans to ABR Loans, shall be the last day of an Interest Period applicable to such Eurocurrency Loans) and, in the case of conversions of ABR Loans to Eurocurrency Loans, the length of the initial Interest Period applicable thereto. Each Notice of Conversion shall be delivered to the Administrative Agent at its address set forth in subsection 12.2 and shall be delivered before 11:00 A.M., New York City time, one Business Day before the requested conversion in the case of conversions to ABR Loans, and before 11:00 A.M., New York City time, three Business Days before the requested conversion in the case of conversions to Eurocurrency Loans. "Offered Increase Amount": as defined in subsection 2.10(a). "Participant": as defined in subsection 12.6(b). "Payment Office": for each Type of Loan and each Currency, the Payment Office set forth in respect thereof in the Administrative Schedule. "Payment Time": for each Type of Loan and each Currency, the Payment Time set forth in respect thereof in the Administrative Schedule. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Permitted Business Acquisitions": acquisitions of all or substantially all of the assets of, or all of the shares or other equity interests in, a Person or division or line of business of a Person engaged in the same business as the Company and its Subsidiaries or in a related business if immediately after giving effect thereto: (i) no Default or Event of Default shall have occurred and be continuing after giving effect to such acquisition, (ii) all transactions related thereto shall be consummated in accordance with applicable laws, (iii) 75% of the outstanding capital stock or other ownership interests of any acquired or newly formed corporation or other entity must be owned directly by the Company or a 14 Restricted Subsidiary and such corporation or entity shall become a Restricted Subsidiary hereunder, (iv) in the case of an acquisition of Capital Stock, the board of directors (or equivalent governing body) of the target company shall have approved such transaction, and (v) the Company shall be in compliance, on a pro forma basis, with the covenants contained in subsection 9.1 recomputed as at the last day of the most recently ended fiscal quarter of the Company, and the Company shall have delivered to the Administrative Agent an officers' certificate to such effect, together with all relevant financial information for such acquired corporation, entity or assets. "Permitted Investor": Sidney Harman, Executive Chairman and Chairman of the Board of Directors of the Company on the date hereof. "Person": an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, overnmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Company or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Prime Rate": the rate of interest per annum publicly announced from time to time by JPMorgan Chase as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Properties": as defined in subsection 6.17. "Quotation Day": in respect of the determination of the Eurocurrency Rate for any Interest Period for loans in any Available Foreign Currency, the day on which quotations would ordinarily be given by prime banks in the London interbank market for deposits in such Available Foreign Currency for delivery on the first day of such Interest Period; provided, that if quotations would ordinarily be given on more than one date, the Quotation Day for such Interest Period shall be the last of such dates. On the date hereof, the Quotation Day in respect of any Interest Period for any Available Foreign Currency (other than the euro) is customarily the last London Banking Day prior to the beginning of such Interest Period which is (i) at least two London Banking Days prior to the beginning of such Interest Period and (ii) a day on which banks are open for general banking business in the city which is the principal financial center of the country of such Available Foreign Currency; and the Quotation Day in respect of any Interest Period for the euro is the day which is two Target Operating Days prior to the first day of such Interest Period. "Ratings": the actual senior unsecured non-credit enhanced debt ratings of the Company in effect from time to time by Moody's or Standard & Poor's Corporation, as the case may be. "Register": as defined in subsection 12.6(d). 15 "Regulation U": Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "Reimbursement Obligation": in respect of each Letter of Credit, the obligation of the account party thereunder to reimburse the Issuing Bank for all drawings made thereunder in accordance with Section 5 and the Application related to such Letter of Credit. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg. 4043. "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any material law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": the chief executive officer, the president, or the chief financial officer of the Company. "Restricted Subsidiary": any Subsidiary listed in Schedule IV. "Sale and Lease-Back Transaction": as defined in subsection 9.10. "Schedule Amendment": each Schedule Amendment, substantially in the form of Exhibit A, executed and delivered pursuant to subsection 12.1. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Special Non-Cash Charge": any non-cash, non recurring restructuring charges in accordance with GAAP and non-cash charges relating to the implementation of Financial Accounting Standard Board No. 142 Goodwill and Other Intangible Assets. "Standby Letter of Credit": as defined in subsection 4.1(b). "Statutory Reserve Rate": a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject (a) with respect to the Base CD Rate, for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months and (b) with respect to the Adjusted Eurocurrency Rate, for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed 16 pursuant to such Regulation D. Eurocurrency Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subordinated Debt": any unsecured Indebtedness of the Company (other than Indebtedness outstanding on the date hereof and described on Schedule 9.2) no part of the principal of which is required to be paid (whether by way of mandatory sinking fund, mandatory redemption or mandatory prepayment or otherwise) prior to the Termination Date, and the payment of the principal of and interest on which and any other obligations of the Company in respect thereof is subordinated to the prior payment in full of the principal of and interest (including post-petition interest) on the Loans and all other Company Obligations hereunder on terms and conditions that are reasonably acceptable to the Majority Lenders. "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Company. "Target Operating Day": any day that is not (a) a Saturday or Sunday, (b) Christmas Day or New Year's Day or (c) any other day on which the Trans-European Real-time Gross Settlement Operating System (or any successor settlement system) is not operating (as determined by the Administrative Agent). "Termination Date": August 14, 2005. "Three-Month Secondary CD Rate": for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three- month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Administrative Agent from three negotiable certificate of deposit dealers of recognized standing selected by it. "Time Draft": as defined in subsection 4.9. 17 "Tranche": the collective reference to Committed Rate Eurocurrency Loans in any Currency the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Transferee": as defined in subsection 12.6(f). "Type": in respect of any Loan, its character as a Committed Rate Loan or Competitive Advance Loan, as the case may be. "Uniform Customs": the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended, supplemented or otherwise modified from time to time. "Value": with respect to a Sale and Lease-Back Transaction, as of any particular time, the amount equal to the greater of (i) the net proceeds of the sale or transfer of the property leased pursuant to such Sale and Lease-Back Transaction or (ii) the fair market value of such property at the time of entering into such Sale and Lease-Back Transaction, in either case, divided first by the number of full years of the term of the lease and then multiplied by the number of full years of such term remaining at the time of determination, without regard to any renewal or extension options contained in the lease. "Voting Stock": stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the Board of Directors of the Company (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). 1.2. Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto. (b) As used herein and in any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Company and its Subsidiaries not defined in subsection 1.1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. References to Schedules to this Agreement are references to such Schedules as the same may from time to time be amended or otherwise modified in accordance with the terms hereof. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 18 SECTION 2. THE COMMITTED RATE LOANS 2.1. Committed Rate Loans. (a) Subject to the terms and conditions hereof, each Lender severally agrees to make loans on a revolving credit basis ("Committed Rate Loans") to the Company from time to time during the Commitment Period; provided, that no Committed Rate Loan shall be made if, after giving effect to the making of such Loan and the simultaneous application of the proceeds thereof, the amount of the Exposure would exceed the aggregate amount of the Commitments. During the Commitment Period the Company may use the Commitments by borrowing, prepaying the Committed Rate Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Committed Rate Loans may be made in Dollars or any Available Foreign Currency and may from time to time be (i) Committed Rate Eurocurrency Loans, (ii) in the case of Committed Rate Loans in Dollars only, Committed Rate ABR Loans or (iii) a combination thereof, as determined by the Company and set forth in the Notice of Borrowing or Notice of Conversion with respect thereto; provided, that no Committed Rate Eurocurrency Loan shall be made after the day that is one month prior to the Termination Date. 2.2. Procedure for Committed Rate Loan Borrowing. The Company may request the Lenders to make Committed Rate Loans on any Business Day during the Commitment Period by delivering a Notice of Borrowing. Each borrowing of Committed Rate Loans shall be in an amount equal to (a) in the case of ABR Loans, $1,000,000 or a whole multiple thereof (or, if the then aggregate undrawn amount of the Commitments is less than $1,000,000, such lesser amount) and (b) in the case of Eurocurrency Loans, (i) if in Dollars, $2,000,000 or increments of $500,000 thereafter, and (ii) if in any Available Foreign Currency, an amount in such Available Foreign Currency of which the Dollar Equivalent Amount is at least $2,000,000. Upon receipt of any such Notice of Borrowing from the Company, the Administrative Agent shall promptly notify each Lender thereof. Subject to the terms and conditions hereof, each Lender will make the amount of its pro rata share of each such borrowing available to the Administrative Agent for the account of the Company at the Funding Office, and at or prior to the Funding Time, for the Currency of such Loan in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Company at the Funding Office, in like funds as received by the Administrative Agent. 2.3. Repayment of Committed Rate Loans; Evidence of Debt. (a) The Company hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender on the Termination Date (or such earlier date on which the Loans become due and payable pursuant to Section 10), the then unpaid principal amount of each Committed Rate Loan made by such Lender. The Company hereby further agrees to pay interest on the unpaid principal amount of the Committed Rate Loans made to the Company from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in subsection 2.8. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Company to such Lender resulting from each Committed Rate Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. 19 (c) The Administrative Agent shall maintain the Register pursuant to subsection 12.6(d), and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Committed Rate Loan made hereunder and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Lender under the Committed Rate Loans and (iii) the amount of any sum received by the Administrative Agent from the Company in respect of Committed Rate Loans, and the amount of each Lender's share thereof. (d) The entries made in the Register and the accounts of each Lender maintained pursuant to subsection 2.3(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Company therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Company to repay (with applicable interest) the Committed Rate Loans made to the Company by such Lender in accordance with the terms of this Agreement. 2.4. Termination or Reduction of Commitments. The Company shall have the right, upon not less than four Business Days' notice to the Administrative Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments. Any such reduction shall be in an amount equal to $5,000,000 or a whole multiple thereof and shall reduce permanently the Commitments then in effect. 2.5. Optional Prepayments. The Company may, at any time and from time to time, prepay the Committed Rate Loans made to the Company, in whole or in part, without premium or penalty, upon at least four Business Days' irrevocable notice to the Administrative Agent, specifying the date and amount of prepayment, the Currency of the Committed Rate Loans to be prepaid and whether the prepayment is of Eurocurrency Loans, ABR Loans (in the case of Committed Rate Loans in Dollars) or a combination thereof, and, if of a combination thereof, the amount allocable to each. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with any amounts payable pursuant to subsection 5.6. Partial prepayments shall be in an aggregate principal amount of at least $1,000.000. 2.6. Conversion and Continuation Options. (a) By giving a Notice of Conversion, the Company may elect from time to time (i) to convert the Company's Eurocurrency Loans in Dollars to ABR Loans or (ii) to convert the Company's ABR Loans to Eurocurrency Loans in Dollars; provided, that any such conversion of Eurocurrency Loans may only be made on the last day of an Interest Period with respect thereto. Upon receipt of any Notice of Conversion the Administrative Agent shall promptly notify each Lender thereof. All or any part of Eurocurrency Loans outstanding in Dollars or ABR Loans may be converted as provided herein, provided that (i) no ABR Loan may be converted into a Eurocurrency Loan when any Event of Default has occurred and is continuing and the Administrative Agent has or the Majority Lenders have determined that such a conversion is not appropriate and (ii) no ABR Loan may be converted into a Eurocurrency Loan after the date that is one month prior to the Termination Date. 20 (b) By giving a Notice of Continuation, the Company may continue any of its Eurocurrency Loans as Eurocurrency Loans in the same Currency for additional Interest Periods. (c) The Company may convert Committed Rate Loans outstanding in one Currency to Committed Rate Loans of a different Currency by repaying such Loans in the first Currency and borrowing Loans of such different Currency in accordance with the applicable provisions of this Agreement. (d) If the Company shall fail to timely give a Notice of Continuation or a Notice of Conversion in respect of any of the Company's Eurocurrency Loans with respect to which an Interest Period is expiring, such Eurocurrency Loans shall become due and payable on the last day of such expiring Interest Period; provided, that the Company may, in accordance with and subject to the terms and conditions of this Agreement refinance such maturing Eurocurrency Loans on such maturity date with Competitive Advance Loans. 2.7. Minimum Amounts of Tranches. All borrowings, conversions and continuations of Committed Rate Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Loans comprising (i) each Tranche in Dollars shall be not less than $2,000,000 and (ii) each Tranche in any Available Foreign Currency shall be not less than the Dollar Equivalent Amount in such Currency of $2,000,000. 2.8. Interest Rates and Payment Dates for Committed Rate Loans. (a) Each Committed Rate Eurocurrency Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurocurrency Rate for such Interest Period plus the Applicable Margin. (b) Each Committed Rate ABR Loan shall bear interest at a rate per annum equal to the ABR. (c) If all or a portion of (i) the principal amount of any Committed Rate Loan or (ii) any interest payable thereon shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is (x) in the case of overdue principal, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection plus 2% or (y) in the case of overdue interest, the rate described in paragraph (b) of this subsection plus 2%, in each case from the date of such non-payment until such amount is paid in full (as well after as before judgment). (d) Interest on Committed Rate Loans shall be payable in arrears on each Interest Payment Date; provided, that interest accruing pursuant to paragraph (c) of this subsection shall be payable from time to time on demand. 2.9. Inability to Determine Interest Rate. If on or prior to the Quotation Day for any Interest Period in respect of any Eurocurrency Loan in any Currency: 21 (a) the Administrative Agent shall have determined which determination shall be conclusive absent manifest error) that, by reason of circumstances affecting the relevant market generally, adequate and reasonable means do not exist for ascertaining the Eurocurrency Rate for such affected Currency or such affected Interest Period, or (b) the Administrative Agent shall have received notice from Lenders having Commitments comprising at least 25% of the aggregate amount of the Commitments that the Eurocurrency Rate determined or to be determined for such affected Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Committed Rate Loans during such affected Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Company and the Lenders as soon as practicable thereafter. If such notice is given (x) any Eurocurrency Loans requested to be made in such affected Currency on the first day of such affected Interest Period shall be made as ABR Loans in Dollars in a Dollar Equivalent Amount, (y)any Committed Rate Loans that were to have been converted on the first day of such affected Interest Period from ABR Loans, to Eurocurrency Loans in such affected Currency, shall be continued as ABR Loans and (z) any Eurocurrency Loans in such affected Currency that were to have been continued as such shall be converted, on the first day of such Interest Period, to ABR Loans in Dollars in a Dollar Equivalent Amount. Until such notice has been withdrawn by the Administrative Agent, no further Eurocurrency Loans in such affected Currency shall be made or continued as such. 2.10. Commitment Increases. (a) In the event that the Company wishes to increase the total Commitment at any time when no Default or Event of Default has occurred and is continuing, it shall notify the Administrative Agent in writing of the amount (the "Offered Increase Amount") of such proposed increase (such notice, a "Commitment Increase Notice") in a minimum amount equal to $5,000,000. The Company may, at its election, (i) offer one or more of the Lenders the opportunity to provide all or a portion of the Offered Increase Amount pursuant to paragraph (c) below and/or (ii) with the consent of the Administrative Agent and each Issuing Bank (each such consent shall not be unreasonably withheld), offer one or more additional banks, financial institutions or other entities the opportunity to provide all or a portion of the Offered Increase Amount pursuant to paragraph (b) below. The Commitment Increase Notice shall specify which Lenders and/or banks, financial institutions or other entities the Company desires to provide such Offered Increase Amount. The Company or, if requested by the Company, the Administrative Agent will notify such Lenders, and/or banks, financial institutions or other entities of such offer. (b) Any additional bank, financial institution or other entity which the Company selects to offer participation in the increased Commitments and which elects to become a party to this Agreement and obtain a Commitment in an amount so offered and accepted by it pursuant to Section 2.10(a)(ii) shall execute a New Lender Supplement with the Company and the Administrative Agent, substantially in the form of Exhibit E, whereupon such bank, financial institution or other entity (herein called a "New Lender") shall become a Lender for all purposes and to the same extent as if originally a party hereto and shall be bound by and entitled to the benefits of this Agreement, provided that the Commitment of any such New Lender shall be in an amount not less than $5,000,000. 22 (c) Any Lender which accepts an offer to it by the Company to increase its Commitment pursuant to Section 2.10(a)(i) shall, in each case, execute a Commitment Increase Supplement with the Company, the Issuing Bank and the Administrative Agent, substantially in the form of Exhibit F, whereupon such Lender shall be bound by and entitled to the benefits of this Agreement with respect to the full amount of its Commitment as so increased. (d) If any bank, financial institution or other entity becomes a New Lender pursuant to Section 2.10(b) or any Lender's Commitment is increased pursuant to Section 2.10(c), additional Commitment Rate Loans made on or after the effectiveness thereof (the "Credit Re-Allocation Date") shall be made pro rata based on the Commitment Percentages in effect on and after such Credit Re-Allocation Date (except to the extent that any such pro rata borrowings would result in any Lender making an aggregate principal amount of Committed Rate Loans in excess of its Commitment, in which case such excess amount will be allocated to, and made by, such New Lenders and/or Lenders with such increased Commitments to the extent of, and pro rata based upon, their respective Commitments otherwise available for Loans), and continuations of Eurocurrency Loans outstanding on such Credit Re-Allocation Date shall be effected by repayment of such Eurocurrency Loans on the last day of the Interest Period applicable thereto and the making of new Eurocurrency Loans pro rata based on such new Commitment Percentages. In the event that on any such Credit Re-Allocation Date there is an unpaid principal amount of ABR Loans, the Company shall make prepayments thereof and borrowings of ABR Loans so that, after giving effect thereto, the ABR Loans outstanding are held pro rata based on such new Commitment Percentages. In the event that on any such Revolving Credit Re-Allocation Date there is an unpaid principal amount of Eurocurrency Loans, such Eurocurrency Loans shall remain outstanding with the respective holders thereof until the expiration of their respective Interest Periods (unless the Company elects to prepay any thereof in accordance with the applicable provisions of this Agreement), and interest on and repayments of such Eurodollar Loans will be paid thereon to the respective Lenders holding such Eurocurrency Loans pro rata based on the respective principal amounts thereof outstanding. (e) Notwithstanding anything to the contrary in this Section 2.10, (i) in no event shall any transaction effected pursuant to this Section 2.10 cause the total Commitments to exceed $150,000,000, (ii) in no event may the Company deliver more than one Commitment Increase Notice and (iii) no Lender shall have any obligation to increase its Commitment unless it agrees to do so in its sole discretion. (f) It shall be a condition precedent to an increase in the Commitments pursuant to this Section 2.10 that the Administrative Agent shall have received on or prior to the Credit Re-Allocation Date, for the benefit of the Lenders, (i) legal opinions of counsel to the Company covering such matters as are customary for transactions of this type and such other matters as may be reasonably requested by the Administrative Agent and (ii) certified copies of resolutions of the Company authorizing the Offered Increase Amount. (g) The Administrative Agent will notify all Lenders of each increase in Commitments pursuant to this Section. 23 SECTION 3. THE COMPETITIVE ADVANCE LOANS 3.1. Competitive Advance Loans. (a) Subject to the terms and conditions hereof, the Company may, from time to time during the Commitment Period, request one or more Lenders to offer bids, and any such Lender may, in its sole discretion, offer such bids, to make competitive advance loans ("Competitive Advance Loans") to the Company on the terms and conditions set forth in such bids. Each Competitive Advance Loan shall bear interest at the rates, payable on the dates, and shall mature on the date, agreed between the Company and Lender at the time such Competitive Advance Loan is made; provided, that (i) each Competitive Advance Loan shall mature not earlier than 1 day and not later than 180 days, after the date such Competitive Advance Loan is made and (ii) no Competitive Advance Loan shall mature after the Termination Date. During the Commitment Period the Company may accept bids from Lenders from time to time for Competitive Advance Loans, and borrow and repay Competitive Advance Loans, all in accordance with the terms and conditions hereof; provided, that no Competitive Advance Loan shall be made if, after giving effect to the making of such Loan and the simultaneous application of the proceeds thereof, the aggregate amount of the Exposure would exceed the aggregate amount of the Commitments; and provided further that the aggregate amount of Competitive Advance Loans of the Company at any time outstanding shall not exceed $25,000,000. Subject to the foregoing, any Lender may, in its sole discretion, make Competitive Advance Loans in an aggregate outstanding amount exceeding the amount of such Lender's Commitment. (b) The Competitive Advance Loans may be made in Dollars or any Available Foreign Currency, as agreed between the Company and Lender in respect thereof at the time such Competitive Advance Loan is made. 3.2. Procedure for Competitive Advance Loan Borrowing. (a) The Company may request one or more Lenders to make bids to make Committed Rate Loans in such manner and at such time as shall be agreed by the Company and such Lenders. The proceeds of each Competitive Advance Loan will be made available to the Company in respect thereof in the manner agreed between the Company and the relevant Lender at the time such Competitive Advance Loan is made. (b) Each Lender that makes a Competitive Advance Loan shall deliver a Notice of Competitive Advance Loan to the Administrative Agent on the Thursday (or, if such Thursday is not a Business Day, on the next Business Day following such Thursday) immediately following the making of such Competitive Advance Loan. 3.3. Repayment of Competitive Advance Loans; Evidence of Debt. (a) The Company hereby unconditionally promises to pay to the Lender that made such Competitive Advance Loan on the maturity date, as agreed by the Company and Lender at the time such Competitive Advance Loan is made (or such earlier date on which all the Loans become due and payable pursuant to Section 10), the then unpaid principal amount of such Competitive Advance Loan. The Company hereby further agrees to pay interest on the unpaid principal amount of the Competitive Advance Loans made by any Lender from time to time outstanding from the date thereof until payment in full thereof at the rate per annum, and on the dates, agreed by the Company and Lender at the time such Competitive Advance Loan is made. All payments in respect of Competitive Advance Loans shall be made by the Company to its Competitive Advance Loan Lender at the address separately agreed to between the Company and such Competitive Advance Loan Lender. 24 (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Company to such Lender resulting from each Competitive Advance Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time in respect of Competitive Advance Loans. The entries made in the accounts of each Lender maintained pursuant to this subsection 3.3(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Company therein recorded, absent manifest error; provided, however, that the failure of any Lender to maintain any such account, or any error therein, shall not in any manner affect the obligation of the Company to repay (with applicable interest) the Competitive Advance Loans made to the Company by such Lender in accordance with the terms of this Agreement. 3.4. Prepayments. Unless otherwise agreed by the Lender making a Competitive Advance Loan, such Competitive Advance Loan may not be optionally prepaid prior to the scheduled maturity date thereof. SECTION 4. THE LETTERS OF CREDIT 4.1. L/C Commitment. (a) Subject to the terms and conditions hereof, each Issuing Bank agrees to issue letters of credit (including Letters of Credit payable by acceptance of a Time Draft as described in subsection 4.9) ("Letters of Credit", which shall include the letters of credit issued by JP Morgan Chase Bank on August 8, 2002 in the amount of $7,298,767.12 and on August 13, 2002 in the amount of $3,600,000.00) for the account of the Company on any Business Day during the Commitment Period in such form as shall be reasonably acceptable to such Issuing Bank; provided, that no Letter of Credit shall be issued if, after giving effect thereto (i) the aggregate amount of the Exposure would exceed the aggregate amount of the Commitments or (ii) the aggregate amount of the L/C Obligations would exceed $25,000,000. (b) Each Letter of Credit shall: (i) be denominated in Dollars or an Available Foreign Currency and shall be either (A) a standby letter of credit issued to support obligations of the Company, contingent or otherwise, to provide credit support for workers' compensation, other insurance programs and other lawful corporate purposes (a "Standby Letter of Credit") or (B) a commercial letter of credit issued in respect of the purchase of goods and services in the ordinary course of business of the Company and its Subsidiaries (a "Commercial Letter of Credit"; together with the Standby Letters of Credit, the "Letters of Credit") and, (ii) expire no later than the earlier of (A) one year after its date of issuance and (B) 5 Business Days prior to the Termination Date; provided that any Letter of Credit with a one-year tenor may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (B) above). (c) No Issuing Bank shall at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause such Issuing Bank or any Lender to exceed any limits imposed by, any applicable Requirement of Law. 25 4.2. Procedure for Issuance of Letters of Credit under this Agreement. The Company may from time to time request that an Issuing Bank issue a Letter of Credit by delivering to such Issuing Bank at its Issuing Office an Application therefor, completed to the satisfaction of the Issuing Bank, and such other certificates, documents and other papers and information as such Issuing Bank may reasonably request. Upon receipt by an Issuing Bank of any Application, such Issuing Bank will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall any Issuing Bank be required to issue any Letter of Credit earlier than five Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by such Issuing Bank and the Company. Such Issuing Bank shall promptly (and in no event later than the Business Day following its issuance of any Letter of Credit) advise the Administrative Agent of the terms of such Letter of Credit (or provide the Administrative Agent with a copy of such Letter of Credit), and each Lender shall be entitled to receive from the Administrative Agent, following such Lender's request therefor, any materials so provided to the Administrative Agent. 4.3. Fees, Commissions and Other Charges. (a) The Company shall pay to the Administrative Agent, for the account of the Lenders (including the Issuing Bank) pro rata according to their Commitment Percentages, a letter of credit commission with respect to each Letter of Credit, computed at a rate equal to the then Applicable Margin for Eurocurrency Loans on the daily average undrawn face amount of such Letter of Credit. Such commissions shall be payable in arrears on the last Business Day of each March, June, September and December to occur after the date of issuance of each Letter of Credit and on the expiration date of such Letter of Credit and shall be nonrefundable. In addition to the foregoing fees, the Company shall pay to each Issuing Bank for its own account a fronting fee of 0.125% per annum on the aggregate drawable amount of all outstanding Letters of Credit issued by such Issuing Bank. Such fronting fees shall be paid quarterly in arrears and shall be nonrefundable. (b) In addition to the foregoing fees and commissions, the Company shall pay or reimburse the relevant Issuing Bank for such normal and customary costs and expenses as are incurred or charged by such Issuing Bank in issuing, effecting payment under, amending or otherwise administering such Letter of Credit. (c) The Administrative Agent shall, promptly following its receipt thereof, distribute to the Issuing Bank and the Lenders all fees and commissions received by the Administrative Agent for their respective accounts pursuant to this subsection. 4.4. L/C Participations. (a) Each Issuing Bank irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce the Issuing Bank to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from such Issuing Bank, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk, an undivided interest equal to such L/C Participant's Commitment Percentage in such Issuing Bank's obligations and rights under each Letter of Credit issued by such Issuing Bank hereunder and the amount of each draft paid by such Issuing Bank thereunder. Each L/C Participant unconditionally and irrevocably agrees with each Issuing Bank that, 26 if a draft is paid under any Letter of Credit issued by such Issuing Bank for which such Issuing Bank is not reimbursed in full by the Company which is the account party thereunder in accordance with the terms of this Agreement, such L/C Participant shall pay to such Issuing Bank upon demand at such Issuing Bank's Issuing Office an amount equal to such L/C Participant's Commitment Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (b) If any amount required to be paid by any L/C Participant to any Issuing Bank pursuant to subsection 4.4(a) in respect of any unreimbursed portion of any payment made by such Issuing Bank under any Letter of Credit is not paid to such Issuing Bank on the date such payment is due from such L/C Participant, such L/C Participant shall pay to such Issuing Bank on demand an amount equal to the product of (i) such amount, times (ii) (A) in the case of any such payment obligation denominated in Dollars, the daily average Federal funds rate, as quoted by such Issuing Bank, or (B) in the case of any such payment obligation denominated in an Available Foreign Currency, the rate customary in such Currency for settlement of similar inter-bank obligations, as quoted by such Issuing Bank, in each case during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Bank, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. A certificate of an Issuing Bank submitted to any L/C Participant with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. (c) Whenever, at any time after an Issuing Bank has made payment under any Letter of Credit and has received from any L/C Participant its pro rata share of such payment in accordance with subsection 4.4(a) the Issuing Bank receives any payment related to such Letter of Credit (whether directly from the account party or otherwise, including by way of set-off or proceeds of collateral applied thereto by such Issuing Bank), or any payment of interest on account thereof, such Issuing Bank will distribute to such L/C Participant its pro rata share thereof; provided, however, that in the event that any such payment received by such Issuing Bank shall be required to be returned by the Issuing Bank, such L/C Participant shall return to such Issuing Bank the portion thereof previously distributed by such Issuing Bank to it. 4.5. Reimbursement Obligation of the Company. (a) The Company agrees to reimburse the Issuing Bank in respect of such Letter of Credit on the same Business Day on which such Issuing Bank notifies the Company of the date and amount of a draft presented under such Letter of Credit and paid by such Issuing Bank for the amount of (i) such draft so paid and (ii) any taxes, fees, charges or other costs or expenses incurred by such Issuing Bank in connection with such payment. Each such payment shall be made to such Issuing Bank at its Issuing Office in the Currency in which payment of such draft was made and in immediately available funds. (b) Interest shall be payable on any and all amounts remaining unpaid by the Company under this subsection from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate which is (i) in the case of such amounts payable in Dollars, 2% above the ABR from time to time and (ii) in the case of such amounts payable in any other currency, 2% above the rate reasonably determined by the Issuing Bank as the cost of funding such overdue amount from time to time on an overnight basis. 27 4.6. Obligations Absolute. (a) The obligations of the Company under this Section 4 shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which the Company may have or have had against the Issuing Bank or any beneficiary of a Letter of Credit. (b) The Company also agrees with the Issuing Bank in respect of such Letter of Credit that such Issuing Bank shall not be responsible for, and the Company's Reimbursement Obligations under subsection 4.5(a) shall not be affected by, among other things, (i) the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, provided, that reliance upon such documents by such Issuing Bank shall not have constituted gross negligence or willful misconduct of such Issuing Bank or (ii) any dispute between or among the Company and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or (iii) any claims whatsoever of the Company against any beneficiary of such Letter of Credit or any such transferee. (c) The Issuing Banks shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by such Issuing Bank's gross negligence or willful misconduct. (d) The Company agrees that any action taken or omitted by any Issuing Bank under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Customs, shall be binding on the Company and shall not result in any liability of such Issuing Bank to the Company. 4.7. Letter of Credit Payments. If any draft shall be presented for payment to an Issuing Bank under any Letter of Credit, such Issuing Bank shall promptly notify the account party of the date and amount thereof. The responsibility of the Issuing Bank to the account party in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are in conformity with such Letter of Credit. 4.8. Application. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Section 4, the provisions of this Section 4 shall apply. 4.9. Issuance of Letters of Credit Priority for Acceptance of Time Drafts. Notwithstanding anything to the contrary contained in this Section 4, the Company may request that any Letter of Credit permit drawings thereunder to be by means of acceptance by the Issuing Bank of a time draft (a "Time Draft") rather than by payment of a sight draft. Each Time Draft shall (in addition to satisfying all of the provisions set forth in this Section 4, except to the extent such provisions conflict with the provisions in this subsection 4.9 (in which case this subsection 4.9 shall be controlling)) expire no later than the earliest of (i) 90 days following the acceptance of such Time Draft by the related Issuing Bank, (ii) 5 Business Days prior to the Termination Date and (iii) 180 days after the issuance of the Commercial Letter of Credit pursuant to which such Time Draft is made. Notwithstanding anything to the contrary in this Agreement: 28 (a) in calculating the outstanding amount of L/C Obligations for purpose of determining the amount of the Commitments available for usage as Letters of Credit under subsection 4.1(a), the face amount of each outstanding and accepted Time Draft shall be deemed to constitute L/C Obligations; (b) in calculating the undrawn face amount of any Letter of Credit for purposes of determining the amount of Letter of Credit commission payable pursuant to subsection 4.3(a), each Letter of Credit under which a Time Draft has been issued and accepted shall be deemed undrawn to the extent of the face amount of such Time Draft until such Time Draft has been paid; and (c) each L/C Participant shall be deemed to have an undivided interest equal to such L/C Participant's Commitment Percentage in the Issuing Bank's rights and obligations under any Time Draft accepted by such Issuing Bank under any Letter of Credit. SECTION 5. CERTAIN PROVISIONS APPLICABLE TO THE LOANS AND LETTERS OF CREDIT 5.1. Facility Fee. (a) The Company agrees to pay to the Administrative Agent for the account of each Lender a facility fee for the period from and including the Closing Date to, but excluding, the later of the Termination Date or the date on which the Company Obligations are paid in full, computed at the Facility Fee Rate in effect from time to time on the average daily amount of the Commitment (used and unused) of such Lender during the period for which payment is made (or after the Termination Date on the average daily amount of the Exposure), payable quarterly in arrears on the last day of each March, June, September and December and on the Termination Date or such earlier date on which the Commitments shall terminate as provided herein and thereafter upon demand, commencing on the first of such dates to occur after the date hereof. (b) The Company agrees to pay to the Administrative Agent, for its own account, the administrative agent's fee, to the Administrative Agent, for the account of the Lenders, the upfront fee, and to JPMorgan Chase, for its own account, such other fees, in the amounts and on the dates set forth in the Fee Letter. 5.2. Computation of Interest and Fees. (a) Facility fees and, whenever it is calculated on the basis of the Prime Rate, interest shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed; and, otherwise, interest and Letter of Credit commissions shall be calculated on the basis of a 360-day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Company and the Lenders of each determination of a Eurocurrency Rate. Any change in the ABR due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. The Administrative Agent shall as soon as practicable notify the Company and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Company and the Lenders in the absence of manifest error. 29 5.3. Pro Rata Treatment and Payments. (a) Each borrowing by the Company of Committed Rate Loans, each payment by the Company on account of any facility fee hereunder and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Commitment Percentages of the Lenders. Each payment (including each prepayment) by the Company on account of principal of and interest on any Loans shall be made pro rata according to the respective principal amounts of the Loans of the Company then due and owing to the Lenders. All payments (including prepayments) to be made by the Company hereunder, whether on account of principal, interest, fees, Reimbursement Obligations or otherwise, shall be made without set off or counterclaim. All payments in respect of Committed Rate Loans in any Currency shall be made in such Currency and in immediately available funds at the Payment Office, and at or prior to the Payment Time, for such Type of Loans and such Currency, on the due date thereof. The Administrative Agent shall distribute to the Lenders any payments received by the Administrative Agent promptly upon receipt in like funds as received. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. (b) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a Borrowing Date in respect of Committed Rate Loans that such Lender will not make the amount that would constitute its Commitment Percentage of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Company a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to (A) in the case of any such Committed Rate Loans denominated in Dollars, the daily average Federal funds rate, as quoted by the Administrative Agent, or (B) in the case of any Committed Rate Loans denominated in an Available Foreign Currency, the rate customary in such Currency for settlement of similar inter-bank obligations, as quoted by the Administrative Agent, in each case for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If such Lender's Commitment Percentage of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to Committed Rate Loans in such Currency hereunder, on demand, from the Company. 5.4. Requirements of Law. (a) If after the date hereof the adoption of or any change in any Requirement of Law or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof or compliance by any Lender with any request or directive (whether or not having the force of law) applicable generally in the jurisdiction of such Lender to banking institutions of the same type as such Lender: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Eurocurrency Loan made by it to the Company or any Extension of Credit to the Company, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by subsection 6.6 and changes in the rate or other basis of tax on the overall net income of such Lender); 30 (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurocurrency Rate; or (iii) shall impose on such Lender any other condition affecting Eurocurrency Loans made by such Lender to the Company, or Extensions of Credit by such Lender to the Company; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurocurrency Loans or making or maintaining Extensions of Credit to the Company or to reduce any amount receivable hereunder in respect thereof, and such Lender has no reasonable means (as it shall determine in its sole discretion) to avoid such costs or reductions, then, in any such case, the Company shall promptly pay such Lender following receipt of a certificate of such Lender in accordance with subsection 5.4(d) such additional amount or amounts as will compensate such Lender for such increased cost or reduction suffered. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, the Company shall promptly pay to such Lender following receipt of a certificate of such Lender in accordance with subsection 5.4(d) such additional amount or amounts as will compensate such Lender for any such reduction suffered. Notwithstanding any other provision in this paragraph (b), no Lender shall be entitled to demand compensation pursuant to this paragraph (b) if it shall not then be the general practice of such Lender to demand such compensation in similar circumstances under comparable provisions of other comparable credit agreements. (c) In addition to, and without duplication of, amounts which may become payable from time to time pursuant to paragraphs (a) and (b) of this subsection 5.4, the Company agrees to pay to each Lender which requests compensation under this paragraph (c) by notice to the Company, on the last day of each Interest Period with respect to any Committed Rate Eurocurrency Loan made by such Lender to the Company, at any time when such Lender shall be required to maintain reserves against "Eurocurrency liabilities" under Regulation D of the Board (or, at any time when such Lender may be required by the Board or by any other Governmental Authority, whether within the United States or in another relevant jurisdiction, to maintain reserves against any other category of liabilities which includes deposits by reference to which the Eurocurrency Rate is determined as provided in this Agreement or against any category of extensions of credit or other assets of such Lender which includes any such Committed Rate Eurocurrency Loans), an additional amount (determined by such Lender's calculation or, if an accurate calculation is 31 impracticable, reasonable estimate using such reasonable means of allocation as such Lender shall determine) equal to the actual costs, if any, incurred by such Lender during such Interest Period as a result of the applicability of the foregoing reserves to such Committed Rate Eurocurrency Loans. (d) A certificate of each Lender setting forth such amount or amounts as shall be necessary to compensate such Lender as specified in paragraph (a), (b) or (c) above, as the case may be, and setting forth in reasonable detail an explanation of the basis of requesting such compensation in accordance with paragraph (a) or (b) above, including calculations in detail comparable to the detail set forth in Certificates delivered to such Lender in similar circumstances under comparable provisions of other comparable credit agreements, shall be delivered to the Company and shall be conclusive absent manifest error. The Company shall pay each Lender the amount shown as due on any such certificate delivered to it within 10 days after its receipt of the same. (e) Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to such period or any other period, except that no Lender shall be entitled to compensation under this subsection 5.4 for any costs incurred or reduction suffered with respect to any date unless such Lender shall have notified the Company that it will demand compensation for such costs or reductions under paragraph (d) above, not more than six months after the later of (i) such date and (ii) the date on which such Lender as applicable, shall have become aware of such costs or reductions. The protection of this subsection 6.5 shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition that shall have occurred or been imposed. (f) The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 5.5. Taxes. (a) All payments made by the Company under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes and other similar taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement) provided, however, that the Lender shall have complied with the relevant provisions of this subsection 5.5. If any such non-excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded Taxes")are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder 32 at the rates or in the amounts specified in this Agreement. Whenever any Non-Excluded Taxes are payable by the Company, as promptly as possible thereafter the Company shall timely pay such Non-Excluded Taxes and shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Company showing payment thereof. If the Company fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Company shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. Notwithstanding the foregoing, the Company shall be required to make any payments in respect of Non-Excluded Taxes to any Lender that has changed the Funding Office at which it maintains the Extensions of Credit to which such Non-Excluded Taxes relate (other than any such change in Funding Office made by such Lender pursuant to subsection 5.7 to avoid or minimize the application or effects of subsection 5.4 or 5.5) in an amount greater than the Company would have been required to pay pursuant to this subsection 5.5 if no such change in Funding Office had occurred. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated, created or organized under the laws of the United States of America or a state or political subdivision thereof (a "Non-U.S. Lender") shall: (i) deliver to the Company and the Administrative Agent (A) two duly completed copies of either United States Internal Revenue Service Form W-8BEN (with respect to entitlement to treaty benefits) or W-8ECI, or successor applicable form, as applicable, and (B) in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholdings tax under Section 871(b) or 881(c) of the Code with respect to payments of "portfolio interests," a statement substantially in the form of Exhibit G and a Form W-8BEN, or applicable successor form, in each case, demonstrating such Non-U.S. Lender's entitlement to a complete exemption from U.S. Federal withholding tax on all payments by the Company under this Agreement, (ii) deliver to the Company and the Administrative Agent two further current copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Company; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Company or the Administrative Agent; unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Company and the Administrative Agent or the legal basis therefor. Each Person that shall become a Lender or a Participant pursuant to subsection 12.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this subsection, provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased. 33 5.6. Indemnity. The Company agrees to indemnify each Lender and to hold each Lender harmless from any loss or reasonable expense which such Lender may sustain or incur as a consequence of (a) default by the Company in making a borrowing of, conversion into or continuation of a Loan after the Company has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Company in making any prepayment after the Company has given a notice thereof in accordance with the provisions of this Agreement or (c) the making by the Company of a prepayment of Eurocurrency Loans or Competitive Advance Loans on a day which is not the last day of an Interest Period or the maturity date, as the case may be, with respect thereto. Such loss or reasonable expense shall be equal to the sum of (a) such Lender's actual costs and expenses incurred (other than any lost profits) in connection with, or by reason of, any of the foregoing events and (b) an amount equal to the excess, if any, as reasonably determined by such Lender of (i) its cost of obtaining the funds for the Loan being paid, prepaid, converted or continued (assumed to be the Eurocurrency Rate applicable thereto) for the period from and including the date for such payment, prepayment, conversion or continuation to but excluding the last day of the Interest Period for such Loan over (ii) the amount of interest (as reasonably determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid, converted or continued for such period or Interest Period, as the case may be. A certificate of any Lender setting forth any amount or amounts, including calculations in reasonable detail, that such Lender is entitled to receive pursuant to this subsection 5.6 shall be delivered to the Company and shall be conclusive absent manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 5.7. Change of Lending Office. (a) Each Lender agrees that upon the occurrence of any event giving rise to the operation of subsection 5.4 or 5.5, it will use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Company or designate a different lending office for Extensions of Credit affected by such event with the object of avoiding or minimizing the consequences of such event; provided, that such filing or designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no material economic, legal or regulatory disadvantage; and, provided, further, that nothing in this subsection 5.7 shall affect or postpone any of the obligations of the Company or the rights of any Lender pursuant to subsection 5.4 or 5.5. (b) In the event that any Lender shall have delivered a notice or certificate pursuant to subsection 5.4 or 5.5, the Company shall have the right, but not the obligation, at their own expense, upon notice to such Lender and the Administrative Agent, to replace such Lender with an assignee (in accordance with and subject to the restrictions contained in subsection 12.6) approved by the Administrative Agent (which approval shall not be unreasonably withheld), and such Lender hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in subsection 12.6) all its interests, rights and obligations under this Agreement to such assignee; provided, however, that no Lender shall be obligated to make any such assignment unless (i) such assignment shall not conflict with any Requirement of Law, (ii) such assignee shall pay to the affected Lender in immediately available funds on the date of such assignment the principal of 34 the Loans made by such Lender hereunder and (iii) the Company shall pay to the affected Lender in immediately available funds on the date of such assignment the interest accrued to the date of payment on the Loans made by such Lender hereunder and all other amounts accrued for such Lender's account or owed to it hereunder (including any amount that would be payable to such Lender pursuant to subsection 5.6 if such assignment were, instead, a prepayment). 5.8. Company Controls on Exposure; Calculation of Exposure; Prepayment if Exposure exceeds Commitments. (a) The Company will monitor the borrowings and repayments of Loans by the Company and the issuance of and drawings under Letters of Credit and Time Drafts, with the object of preventing any request for an Extension of Credit that would result in the aggregate amount of the Exposure being in excess of the Commitments and of promptly identifying and remedying any circumstance where, by reason of changes in exchange rates, the aggregate amount of the Exposure does exceed the Commitments. In the event that at any time the Company determines that the aggregate amount of the Exposure exceeds the aggregate amount of the Commitments by more that 5%, the Company will, as soon as practicable but in any event within five Business Days of making such determination, make such repayments or prepayments of Loans as shall be necessary to cause the aggregate amount of the Exposure to no longer exceed the Commitments. (b) The Administrative Agent will calculate the aggregate amount of the Exposure (including the aggregate amount of L/C Obligations) from time to time, and in any event not less frequently than once during each calendar week. In making such calculations, the Administrative Agent will rely on the information most recently received by it from Lenders in respect of outstanding Competitive Advance Loans and from Issuing Banks in respect of outstanding Letters of Credit(including, with respect to such Issuing Banks, the conversion ratios in respect of the non-Dollar denominated Letters of Credit provided to the Administrative Agent by such Issuing Banks on the fifteenth day and the end of each month (or on the Business Day next succeeding such days)). Upon making each such calculation, the Administrative Agent will inform the Company of the results thereof and, upon the request of any Lender, inform such Lender of the results thereof. (c) In the event that on any date the Administrative Agent calculates that the aggregate amount of the Exposure exceeds the aggregate amount of the Commitments by more than 5%, the Administrative Agent will give notice to such effect to the Company. Within five Business Days after receipt of any such notice, the Company will, as soon as practicable but in any event within five Business Days of receipt of such notice, make such repayments or prepayments of Loans as shall be necessary to cause the aggregate amount of the Exposure to no longer exceed the Commitments. (d) Any prepayment required to be made pursuant to this subsection 5.8 shall be accompanied by payment of amounts payable, if any, pursuant to subsection 5.6 in respect of the amount so prepaid. 35 SECTION 6. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Lenders to enter into this Agreement, to make the Loans and to issue and/or participate in the Letters of Credit, the Company hereby represents and warrants to the Administrative Agent and each Lender that: 6.1. Financial Condition. The consolidated balance sheet of the Company and its consolidated Subsidiaries as at June 30, 2001 and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by KMPG LLP, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Company and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries as of March 31, 2002 and the related unaudited consolidated statements of income and cash flows for the nine-month period ended on such date, present fairly the consolidated financial condition of the Company and its consolidated Subsidiaries as of such date, and the consolidated results of their operations and their consolidated cash flows for the nine-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Neither the Company nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto, except for such transactions disclosed in writing to the Administrative Agent prior to the Closing Date. During the period from June 30, 2001 to and including the date hereof there has been no sale, transfer or other disposition by the Company or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Company and its consolidated Subsidiaries at June 30, 2001. 6.2. No Change. Since June 30, 2001 there has been no development or event which has had or is reasonably expected to have a Material Adverse Effect. 6.3. Corporate Existence; Compliance with Law. Each of the Company and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, except to the extent, with respect to a Subsidiary, where failure to maintain existence or good standing would not have a Material Adverse Effect, (b) has the corporate or other power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation or other entity under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except to the extent that the failure to so qualify is not reasonably expected to have a Material Adverse Effect and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith is not reasonably expected to have a Material Adverse Effect. 36 6.4. Corporate Power; Authorization; Enforceable Obligations. The Company has the corporate power and authority to make, deliver and perform the Loan Documents to which it is a party and to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Loan Documents to which the Company is a party. This Agreement has been, and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of the Company. This Agreement constitutes, and each other Loan Document to which it is a party when executed and delivered will constitute, a valid and binding obligation of the Company enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 6.5. No Legal Bar. The execution, delivery and performance of the Loan Documents to which the Company is a party, the borrowings hereunder and the use of the proceeds thereof will not (a) violate any Requirement of Law or Contractual Obligation of the Company or of any of its Subsidiaries except where any such violation is not reasonably expected to result in a Material Adverse Effect or (b) result in the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation except where any such creation or imposition of any Lien is not reasonably expected to result in a Material Adverse Effect. 6.6. No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Company, threatened by or against the Company or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) which is reasonably expected to have a Material Adverse Effect. 6.7. No Default. Neither the Company nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 6.8. Ownership of Property; Liens. Each of the Company and its Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material real property, except for minor defects in title that do not interfere in any material respect with its ability to conduct its business as presently conducted. All such material properties are free and clear of all Liens, other than Liens permitted by subsection 9.3. 6.9. Intellectual Property. The Company and each of its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those failures to own or license which are not reasonably expected to have a Material Adverse 37 Effect (the "Intellectual Property"). No claim has been asserted against the Company or any Subsidiary and is pending by any Person challenging or questioning the use by the Company or any Subsidiary of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Company know of any valid basis for any such claim, except, in each case, for claims that could not reasonably be expected to have a Material Adverse Effect. To the best knowledge of the Company, the use of such Intellectual Property by the Company and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, are not reasonably expected to have a Material Adverse Effect. 6.10. Taxes. Each of the Company and its Subsidiaries has filed or caused to be filed all tax returns which, to the knowledge of the Company, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any amount the validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Company or its Subsidiaries, as the case may be) except where such failure to file or pay is not reasonably expected to result in a Material Adverse Effect; no tax Lien has been filed in respect of any material amount of unpaid taxes, and, to the knowledge of the Company, no claim is being asserted, with respect to any such tax, fee or other charge except where such claim is not reasonably expected to result in a Material Adverse Effect. 6.11. Federal Regulations. No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board as now and from time to time hereafter in effect. If requested by any Lender or the Administrative Agent, the Company will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in said Regulation U. 6.12. ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made on the date of any Extension of Credit with respect to any Single Employer Plan or, to the Company's knowledge, Multiemployer Plan, and each Plan (such representation in respect of any Multiemployer Plan being made to the Company's knowledge) has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien on assets of the Company or any Commonly Controlled Entity in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made on the date of any Extension of Credit, exceed the value of the assets of such Plan allocable to such accrued benefits. Neither the Company nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Company nor any Commonly Controlled Entity would become subject to any liability under ERISA that could reasonably be expected to have a Material Adverse Effect if the Company or any such Commonly Controlled Entity were to withdraw completely from 38 all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. To the Company's knowledge, no such Multiemployer Plan is in Reorganization or Insolvent. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Company and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits by an amount in excess of $10,000,000. 6.13. Investment Company Act; Other Regulations. The Company is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. The Company is not subject to regulation under any Federal or State statute or regulation (other than Regulation X of the Board of Governors of the Federal Reserve System) which limits its ability to incur Indebtedness. 6.14. Subsidiaries. Schedule 6.14 lists all the Subsidiaries of the Company at the date hereof. 6.15. Purpose of Loans and Letters of Credit. The proceeds of the Loans and the Letters of Credit shall be used by the Company to refinance existing bank lines and for general corporate purposes including, without limitation, working capital, letters of credit, repayment, prepayment or purchase of long-term indebtedness and acquisitions. 6.16. Accuracy and Completeness of Information. All written information heretofore furnished by the Company to the Lenders for purposes of or in connection with this Agreement, and all such information hereafter furnished by the Company to any Lender for purposes of this Agreement, will not, at the time delivered, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made or to be made, in the light of the circumstances under which they were or will be made, not misleading. Prior to the date hereof, the Company has disclosed to the Lenders in writing any and all facts which materially and adversely affect (to the extent the Company can as of the date hereof reasonably foresee), the business, operations or financial condition of the Company and its Subsidiaries taken as a whole, or the ability of the Company to perform its obligations under this Agreement. 6.17. Environmental Matters. Except to the extent that all of the following are not reasonably expected to have a Material Adverse Effect: (a) The facilities and properties owned, leased or operated by the Company or any of its Subsidiaries (the "Properties") do not contain, and to the knowledge of the Company during its period of ownership, lease or operation of the Properties, have not previously contained, any Materials of Environmental Concern in amounts or concentrations which (i) constitute a violation of, or (ii) are reasonably expected to give rise to liability under, any Environmental Law. (b) The Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or 39 violation of any Environmental Law with respect to the Properties or the business operated by the Company or any of its Subsidiaries (the "Business") which could materially interfere with the continued operation of the Properties or materially impair the fair saleable value thereof. (c) Neither the Company nor any of its Subsidiaries has received any written notice of violation, alleged violation, non- compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Company have knowledge or reason to believe that any such notice will be received or is being threatened. (d) Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability under, any applicable Environmental Law. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Company, threatened, under any Environmental Law to which the Company or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business. (f) There has been no release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Company or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably be expected to give rise to liability under Environmental Laws. SECTION 7. CONDITIONS PRECEDENT 7.1. Conditions to Initial Extensions of Credit. The agreement of each Lender to make the initial Extension of Credit requested to be made by it is subject to the satisfaction, immediately prior to or concurrently with the making of such Extension of Credit on the Closing Date, of the following conditions precedent: (a) Credit Agreement. The Administrative Agent shall have received this Agreement, executed and delivered by each Lender and by the Company. (b) Related Agreements. The Administrative Agent shall have received, with a copy for each Lender, true and correct copies, certified as to authenticity by the Company, of any Material Debt Instrument. (c) Borrowing Certificate. The Administrative Agent shall have received, with a counterpart for each Lender, a certificate of the Company, dated the Closing Date, substantially in the form of Exhibit B, with appropriate insertions and attachments, satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of 40 the Company. There shall be attached to such certificate (i) a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement and (ii) specimen signatures of officers of the Company authorized to execute this Agreement and related documents as of the date hereof. (d) Corporate Documents. The Administrative Agent shall have received, with a counterpart for each Lender, true and complete copies of the certificate of incorporation and by-laws of the Company, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Company. (e) Consents, Licenses and Approvals. The Administrative Agent shall have received, with a counterpart for each Lender, a certificate of a Responsible Officer of the Company (i) attaching copies of all consents, authorizations and filings, if any, referred to in subsection 6.4, and (ii) stating that such consents, authorizations and filings are in full force and effect, and each such consent, authorization and filing shall be in form and substance satisfactory to the Administrative Agent. (f) Fees. The Administrative Agent shall have received the fees to be received on the Closing Date referred to in subsection 5.1(b). (g) Financial Statements. The Administrative Agent shall have received, with a copy for each Lender the financial statements described in subsection 6.1. (h) Legal Opinions. The Administrative Agent shall have received, with a counterpart for each Lender, the following executed legal opinions: (i) the executed legal opinion of Jones, Day, Reavis & Pogue, counsel to the Company, substantially in the form of Exhibit D-1; and (ii) the executed legal opinion of the general counsel of the Company, substantially in the form of Exhibit D-2. Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require. (i) Prior Credit Agreement. All amounts outstanding under the Company's Multi-Currency, Multi-Option Credit Agreement dated as of September 30, 1994, as amended, shall have been repaid, and all commitments to extend credit thereunder shall have been terminated. 7.2. Conditions to Each Extension of Credit. The agreement of each Lender to make any Extension of Credit requested to be made by it on any date (including, without limitation, its initial Extension of Credit) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by the Company in or pursuant to this Agreement shall be true and correct in all material respects on and as of such date as if made on and as of such date. 41 (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extensions of Credit requested to be made on such date. (c) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to the Administrative Agent. Each request by the Company for an Extension of Credit hereunder shall constitute a representation and warranty by the Company as of the date on which such Extension of Credit is to be made that the conditions contained in this subsection have been satisfied. SECTION 8. AFFIRMATIVE COVENANTS The Company hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Company shall and (except in the case of delivery of financial information, certifications, reports and notices) shall cause each of its Subsidiaries to: 8.1. Financial Statements. Furnish to each Lender: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Company, a copy of the consolidated balance sheet of the Company and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by KPMG LLP or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Company, the unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and retained earnings and of cash flows of the Company and its consolidated Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 8.2. Certificates; Other Information. Furnish to each Lender: (a) concurrently with the delivery of the financial statements referred to in subsection 8.1(a), a certificate of the independent certified public accountants reporting on such financial statements 42 stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 8.1(a) and (b), a certificate of a Responsible Officer stating that, to the best of such Officer's knowledge, the Company during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate; (c) within 45 days after the end of each of the first three fiscal quarters in each fiscal year of the Company, and within 90 days after the end of each fiscal year of the Company, a certificate of the principal financial officer of the Company showing in detail the computations necessary to calculate the (i) Applicable Margin and Facility Fee Rate (an "Interest Coverage Ratio Certificate") and (ii) ratio set forth in subsection 9.1(a); (d) not later than ten Business Days following approval by the Board of Directors of the Company (and in any event at least once in each fiscal year), a copy of the Company's final business plan as approved by the Directors; (e) within five days after the same are sent, copies of all financial statements and reports which the Company sends to its stockholders, and within five days after the same are filed, copies of all financial statements and periodic reports which the Company may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and (f) promptly, such additional financial and other information as any Lender may from time to time reasonably request (including, but not limited to, annual consolidating financial statements not later than 150 days after the end of each fiscal year). 8.3. Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Company or its Subsidiaries, as the case may be or to the extent that the failure to so pay, discharge or satisfy would not be reasonably expected to have a Material Adverse Effect. 8.4. Conduct of Business and Maintenance of Existence. Continue to engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to subsection 9.4; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not be reasonably expected to have a Material Adverse Effect. 43 8.5. Maintenance of Property; Insurance. Keep all property useful and necessary in its business in good working order and condition (ordinary wear and tear excepted) except for failures to so maintain property that would not have a Material Adverse Effect; maintain with financially sound and reputable insurance companies insurance on all its property on an "all risk" basis; and furnish to each Lender, upon written request, full information as to the insurance carried. 8.6. Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of the Lenders to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time, upon reasonable prior notice and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Company and its Subsidiaries with officers and employees of the Company and its Subsidiaries and with its independent certified public accountants; provided that all such visits shall be coordinated by the Lenders with the Administrative Agent, and by the Administrative Agent with the Company, in order to minimize disruption of the Company's business. 8.7. Notices. Promptly give notice to the Administrative Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Company or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority, which in either case could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting the Company or any of its Subsidiaries (i) in which the amount involved is $10,000,000 or more and not covered by insurance unless the Company has determined in good faith, after consultation with and based upon advice of counsel acting for the Company or such Subsidiary in such litigation or proceeding, that it could not be reasonably expected that such litigation or proceeding would result in a final judgment against the Company or such Subsidiary in an amount greater than $10,000,000; or (ii) in which injunctive or similar relief is sought that could reasonably be expected to have a Material Adverse Effect; (d) the following events, as soon as possible, and in any event within 30 days after the Company knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Single Employer Plan or Multiemployer Plan, a failure of the Company or a Commonly Controlled Entity to make any required contribution to a Plan, the creation of any Lien on the assets of the Company or any Commonly Controlled Entity in favor of the PBGC or a Plan or any withdrawal of the Company or a Commonly Controlled Entity from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Company or any Commonly Controlled Entity or any 44 Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Single Employer Plan or Multiemployer Plan; and (e) any development or event which could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. 8.8. Environmental Laws. (a) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that failure to do so could not be reasonably expected to have a Material Adverse Effect. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same (i) are being contested in good faith by appropriate proceedings and could not be reasonably expected to have a Material Adverse Effect or (ii) could not be reasonably expected to have a Material Adverse Effect. SECTION 9. NEGATIVE COVENANTS The Company hereby agrees that, so long as the Commitments remain in effect or any amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Company shall not, directly or indirectly: 9.1. Financial Condition Covenants. (a) Consolidated Total Debt to Consolidated Capitalization. Permit the ratio of Consolidated Total Debt to Consolidated Capitalization at any time to be greater than 55%. (b) Interest Coverage Ratio. Permit the Interest Coverage Ratio for any period of four consecutive fiscal quarters to be less than 3.5 to 1.0; provided that for purposes of this computation, Consolidated EBITDA shall include an addback for the relevant period of (i) $8,300,000 for a special charge taken in the quarter ended December 31, 2001 and (ii) the amount of any Special Non-Cash Charges. 9.2. Limitation on Indebtedness of Restricted Subsidiaries. Permit any Restricted Subsidiary to create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness under this Agreement; (b) Indebtedness listed on Schedule 9.2 (a portion of which Indebtedness will be repaid at the time set forth in Part II of such Schedule); 45 (c) Indebtedness of a corporation or other entity which becomes a Restricted Subsidiary after the date hereof, provided that (i) such indebtedness existed at the time such corporation or other entity became a Subsidiary and was not created in anticipation thereof and (ii) immediately after giving effect to the acquisition of such corporation or other entity by the Company no Default or Event of Default shall have occurred and be continuing; (d) Indebtedness secured by any Lien permitted by subsection 9.3(g); (e) Indebtedness of the Company's Subsidiary or Subsidiaries in Denmark in an aggregate principal amount not exceeding $2,000,000 (or its equivalent in Danish Kroner) at any time outstanding; (f) additional Indebtedness not exceeding $50,000,000 in aggregate principal amount at any one time outstanding (as to all such Restricted Subsidiaries); (g) additional Indebtedness that is subordinate in right of payment to the Company Obligations on terms reasonably satisfactory to the Administrative Agent; and (h) any extension, renewal, refinancing or replacement (or successive extensions, renewals, refinancings or replacements), as a whole or in part, of any Indebtedness referred to in the foregoing clauses (b), (c) and (d) (other than such Indebtedness described in Part II of Schedule 9.2); provided that no such extension, renewal, refinancing or replacement shall result in an increase in such Indebtedness. 9.3. Limitation on Liens. Create, incur, assume or suffer to exist, or permit any Restricted Subsidiary to create, incur, assume or suffer to exist, any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Company or its Restricted Subsidiaries, as the case may be, in conformity with GAAP (or, in the case of Foreign Subsidiaries, generally accepted accounting principles in effect from time to time in their respective jurisdictions of incorporation); (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; 46 (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Company or such Restricted Subsidiary; (f) Liens in existence on the date hereof listed on Schedule 9.2, provided that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness or other obligations of the Company or such Restricted Subsidiaries incurred to finance the acquisition or leasing of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition or leasing of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness or other obligations (and the proceeds thereof and contract rights, subleases and other rights related thereto), and (iii) the amount of Indebtedness secured thereby is not increased; (h) Liens on the property or assets of a corporation or other entity which becomes a Restricted Subsidiary after the date hereof securing Indebtedness in existence at the time such corporation or other entity became a Subsidiary, provided that (i) such Liens existed at the time such corporation or other entity became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of such corporation or other entity after the time such corporation becomes a Subsidiary, and (iii) the amount of Indebtedness secured thereby is not increased; (i) Liens on the property or assets of a corporation or other entity existing at the time such corporation or other entity is merged or consolidated with or into the Company or a Restricted Subsidiary or at the time of a sale of the properties and assets of such corporation or other entity as an entirety or substantially as an entirety to the Company or a Restricted Subsidiary, and Liens on property or assets first acquired by the Company or a Restricted Subsidiary after the date of this Agreement, provided that (A) no such Lien shall extend to or cover any property other than the property initially subject thereto and improvements thereto, and (B) the Indebtedness secured by each such Lien is then permitted by this Agreement; (j) Liens on inventory acquired by the Company or a Restricted Subsidiary in the ordinary course of business securing the payment to the seller of such inventory of the purchase price thereof, provided, that such Liens encumber only the inventory to which such purchase price relates and such purchase price is payable in accordance with customary trade terms; (k) Liens arising in connection with trade letters of credit issued for the account of the Company or a Restricted Subsidiary securing the reimbursement obligations in respect of such letters of credit, provided, that such Liens encumber only the property being acquired through payments made under such letters of credit or the documents of title and shipping and insurance documents relating to such property; 47 (l) Liens on intellectual property acquired by the Company or a Restricted Subsidiary (such as software) securing the obligation of the Company or such Restricted Subsidiary to make royalty or similar payments to the seller of such intellectual property, provided, that such Liens encumber only the intellectual property to which such payments relate; (m) Liens (not otherwise permitted hereunder) which secure obligations not exceeding (as to the Company and all Restricted Subsidiaries) $25,000,000; and (n) any extension, renewal, refinancing or replacement (or successive extensions, renewals, refinancings or replacements), as a whole or in part, of any Lien referred to in the foregoing clauses (f) through (n), inclusive; provided that (i) no such extension, renewal, refinancing or replacement shall result in an increase in the liabilities secured thereby and (ii) such extension, renewal, refinancing or replacement Lien shall be limited to all or a part of the same property that secured the Lien so extended, renewed, refinanced or replaced (plus additions, accessions, replacements and improvements to such property). 9.4. Limitation on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business, or permit any Restricted Subsidiary to do any of the foregoing, except: (a) any Restricted Subsidiary of the Company may be merged or consolidated with or into the Company (provided that the Company shall be the continuing or surviving corporation) or with or into any one or more wholly owned Restricted Subsidiaries of the Company (provided that the wholly owned Restricted Subsidiary or Restricted Subsidiaries shall be the continuing or surviving corporation); (b) any Restricted Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or any other wholly owned Restricted Subsidiary of the Company; and (c) the Company and its Restricted Subsidiaries may consummate the transactions permitted by subsection 9.5. 9.5. Limitation on Sale of Assets. Convey, sell, lease, assign, transfer or otherwise dispose of, or permit any Restricted Subsidiary to convey, sell, lease, assign, transfer or otherwise dispose of, any of its respective property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or permit any Restricted Subsidiary to issue or sell any shares of such Restricted Subsidiary's Capital Stock to any Person other than the Company or any wholly owned Restricted Subsidiary, except: (a) the sale or other disposition of obsolete or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; 48 (c) the sale or discount without recourse of accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof; (d) the sale or other disposition of any other property in the ordinary course of business, provided that (i) the aggregate book value of all assets so sold or disposed of in any period of twelve consecutive months shall not exceed 15% of Consolidated Total Assets as at the beginning of such twelve-month period and (ii) the aggregate book value of all assets so sold or disposed of between August 14, 2002 and the date of any determination thereof shall not exceed 25% of Consolidated Total Assets as at the end of the fiscal year of the Company most recently ended prior to such date of determination; (e) the Company or any Restricted Subsidiary may sell or otherwise dispose of any Subsidiary other than a Restricted Subsidiary; (f) any Restricted Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise)to the Company or any other wholly owned Restricted Subsidiary of the Company; (g) the sale or discount of accounts receivable (as to the Company and all Restricted Subsidiaries) in an outstanding principal amount not exceeding $50,000,000 at any time; (h) licenses and sublicenses by the Company and the Restricted Subsidiaries of intellectual property in the ordinary course of business; and (i) the issuance or series of issuances of Capital Stock of any Restricted Subsidiary with a value, in the aggregate for all such issuances by all Restricted Subsidiaries, not exceeding 10% of Consolidated Total Assets. 9.6. Limitation on Dividends. Declare or pay any dividend (other than dividends payable solely in common stock of the Company) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Company or any warrants or options to purchase any such Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Company or any Subsidiary, except that, so long as no Event of Default has occurred and is continuing, or would be continuing after giving effect thereto, the Company may pay dividends on its Capital Stock and purchase or repurchase shares of its Capital Stock in an aggregate amount not exceeding the sum of (i) $50,000,000 in any fiscal year (with 50% of any unused portion of this amount being permitted to be carried forward on a cumulative basis to subsequent fiscal years) plus (ii) an amount equal to the net cash proceeds received by the Company from any issuance and sale by the Company of the capital stock of the Company after June 30, 2002. 9.7. Limitation on Investments, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person, or permit any Restricted Subsidiary to do any of the foregoing, except: 49 (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) Permitted Business Acquisitions; (d) loans and advances to employees of the Company or its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business in an aggregate amount for the Company and its Subsidiaries not to exceed $1,000,000 at any one time outstanding; (e) investments by the Company in its Restricted Subsidiaries and investments by Restricted Subsidiaries in the Company and in other Restricted Subsidiaries; and (f) investments by the Company or any Restricted Subsidiary in any Subsidiary other than a Restricted Subsidiary so long as after giving effect thereto there is no violation of subsection 9.13. 9.8. Limitation on Optional Payments of Subordinated Debt and Modifications of Subordination Provisions. At any time when the Company is not considered Investment Grade (a) agree to any amendment or other modification to any Subordinated Debt that would shorten the maturity thereof, (b) amend the subordination provisions of any Subordinated Debt or (c) make any optional payment or prepayment on or redemption or purchase of any Subordinated Debt unless, after giving effect to such payment, prepayment, redemption or purchase, the ratio of Consolidated Senior Debt to Consolidated Capitalization is not greater than 35%. 9.9. Limitation on Transactions with Affiliates. Enter into, or permit any Restricted Subsidiary to enter into, any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate (other than the Company or another Restricted Subsidiary), unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of the Company's or such Restricted Subsidiary's business and (c) upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. 9.10. Limitation on Sales and Leasebacks. Enter into, or permit any Restricted Subsidiary to enter into, any arrangement with any Person (other than the Company or another Restricted Subsidiary) providing for the leasing by the Company or such Restricted Subsidiary of real or personal property which is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Company or such Restricted Subsidiary (a "Sale and Lease-Back Transaction"), except for (i) Sale and Lease-Back Transactions having an aggregate Value not exceeding $25,000,000, (ii) Sale and Lease-Back Transactions in respect of assets acquired by the Company or a Restricted Subsidiary after August 14, 2002, provided, that such Sale and Lease-Back Transaction is consummated within 180 days after the acquisition by the Company or a Restricted Subsidiary of the asset subject thereto or (iii) Sale and Lease-Back Transactions between the Company and any Restricted Subsidiary or between Restricted Subsidiaries. 50 9.11. Limitation on Changes in Fiscal Year. Permit the fiscal year of the Company to end on a day other than June 30. 9.12. Limitation on Guarantee Obligations in respect of Indebtedness of Subsidiaries other than Restricted Subsidiaries. Create, incur or permit to exist, or permit any Restricted Subsidiary to create, incur or permit to exist, any material Guarantee Obligation in respect of any Indebtedness of any Subsidiary other than a Restricted Subsidiary. 9.13. Limitation on Subsidiaries other than Restricted Subsidiaries. Permit at any time more than 10% of consolidated assets of the Company and its Subsidiaries to be held by any Person other than the Company and the Restricted Subsidiaries, or permit for any fiscal year more than the greater of (a) $10,000,000 and (b) 15% of Consolidated Net Income, to be attributable to the earnings of any Person other than the Company and the Restricted Subsidiaries. 9.14. Limitation on Guarantee Obligations. Permit the aggregate outstanding amount of Guarantee Obligations of the Company and its Subsidiaries, determined on a consolidated basis (other than Guarantee Obligations not prohibited pursuant to subsection 9.12), to exceed, at any time, $25,000,000. SECTION 10. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Company shall fail to pay any principal of any Loan or any Reimbursement Obligation when due in accordance with the terms thereof or hereof; or the Company shall fail to pay any interest on any Loan, or any other amount payable hereunder, within five days after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by the Company herein or in any other Loan Document or which is contained in any certificate, document or financial or other written statement furnished by it at any time under or in connection with this Agreement shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Company shall default in the observance or performance of any agreement contained in Section 9, other than Section 9.7 and 9.13; or (d) The Company shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days; or (e) The Company or any of its Restricted Subsidiaries shall (i) default in any payment of principal of or interest on any Indebtedness (other than the Loans) or in the payment of any Guarantee Obligation, beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created, if the aggregate amount of the Indebtedness and/or Guarantee Obligations in respect of which such 51 default or defaults shall have occurred is at least $10,000,000; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or 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 beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (f) (i) The Company or any of its Restricted Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Company or any of its Restricted Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Company or any of its Restricted Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Company or any of its Restricted Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Company shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Company shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Company or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Majority Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Company or any Commonly Controlled Entity shall, or in the reasonable opinion of the 52 Majority Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (h) One or more final judgments or decrees of a court shall be entered against the Company or any of its Restricted Subsidiaries for the payment of money in an aggregate amount (to the extent not adequately covered by insurance) of $10,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (i) Any Change of Control shall occur; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of this Section with respect to the Company, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Majority Lenders, the Administrative Agent may, or upon the request of the Majority Lenders, the Administrative Agent shall, by notice to the Company declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Majority Lenders, the Administrative Agent may, or upon the request of the Majority Lenders, the Administrative Agent shall, by notice to the Company, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 11. THE ADMINISTRATIVE AGENT AND THE ARRANGER 11.1. Appointment. Each Lender hereby irrevocably designates and appoints the Administrative Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 53 11.2. Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 11.3. Exculpatory Provisions. Neither the Administrative 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 under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Company or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Company to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company. 11.4. Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order 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 the Company), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Majority Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 11.5. Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Company 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 Administrative Agent receives such a 54 notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Majority Lenders; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 11.6. Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Company, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Company and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Company which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys- in-fact or Affiliates. 11.7. Indemnification. The Lenders agree to indemnify the Administrative Agent and the Arranger in their capacity as such (to the extent not reimbursed by the Company and without limiting the obligation of the Company to do so), ratably according to their respective Commitment Percentages in effect on the date on which indemnification is sought (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with their Commitment Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, claims, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, 55 penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Administrative Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Loans and all other amounts payable hereunder. 11.8. Administrative Agent in Its Individual Capacity. The Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Company as though the Administrative Agent were not the Administrative Agent hereunder and under the other Loan Documents. With respect to the Loans made by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 11.9. Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 10 days' notice to the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Majority Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall, unless an Event of Default shall be outstanding, be approved by the Company (such approval not to be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Administrative Agent's resignation as Administrative Agent, 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 Administrative Agent under this Agreement and the other Loan Documents. 11.10. The Arranger. The Arranger, in such capacity, shall have no duties or responsibilities, and shall incur no obligations or liabilities, under this Agreement or the other Loan Documents but shall nevertheless be entitled to all of the indemnities and other protections afforded to the Administrative Agent under this Section 11. SECTION 12. MISCELLANEOUS 12.1. Amendments and Waivers Generally; Amendments to Schedules. (a) Neither this Agreement nor any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. The Majority Lenders may, or, with the written consent of the Majority Lenders, the Administrative Agent may, from time to time, (i) enter into with the Company written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Company or (ii) waive, on such terms and conditions as the Majority Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (A) reduce the amount or extend the scheduled date of maturity of any Loan or of any installment thereof, or reduce the stated 56 rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Commitments, in each case without the consent of each Lender directly affected thereby, or (B) amend, modify or waive any provision of this subsection or reduce the percentage specified in the definition of Majority Lenders, or consent to the assignment or transfer by the Company of any of its rights and obligations under this Agreement and the other Loan Documents or (C) amend, modify or waive any provision of Section 11 without the written consent of the then Administrative Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Company, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, the Company, the Lenders and the Administrative Agent shall be restored to their former positions and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. (b) Schedules II and V may be amended as follows: (i) Schedule II will be amended to change administrative information contained therein (other than any interest rate definition, Funding Time, Payment Time or notice time contained therein), upon execution and delivery by the Company and the Administrative Agent of a Schedule Amendment providing for such amendment. (ii) Schedule II will be amended to conform any Funding Time, Payment Time or notice time contained therein to then-prevailing market practices, upon execution and delivery by the Company, the Majority Lenders and the Administrative Agent of a Schedule Amendment providing for such amendment. (iii) Schedule II will be amended to change any interest rate definition contained therein or to add additional Available Foreign Currencies (and related interest rate definitions and administrative information), upon execution and delivery by the Company, all the Lenders and the Administrative Agent of a Schedule Amendment providing for such amendment. (iv) Schedule V will be amended to designate other Lenders as additional Issuing Banks, and add administrative information with respect thereto, upon execution and delivery by the Company, the Administrative Agent and such additional Issuing Bank of a Schedule Amendment providing for such amendment. (v) Schedule V will be amended to change administrative information with respect to Issuing Banks, upon execution and delivery by the Company, the Administrative Agent and such Issuing Bank, as the case may be, of a Schedule Amendment providing for such amendment. 12.2. Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or 5 days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of the Company and the Administrative Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: 57 The Company: Harman International Industries, Incorporated 1101 Pennsylvania Avenue, N.W. Suite 1010 Washington, D.C. 20004 Attention: Greg Henry, Treasurer Fax: 202-393-3064 Attention: Ed Summers, General Counsel Fax: 818-920-0677 The Administrative Agent: JPMorgan Chase Bank 270 Park Avenue New York, NY 10017 Attention: Doris Mesa Fax: 212-552-5650 provided that any Notice of Borrowing, Notice of Competitive Advance Loan, Notice of Continuation, Notice of Conversion, or any notice pursuant to subsections 2.4, 2.5 or 4.2 shall not be effective until received. 12.3. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 12.4. Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 12.5. Payment of Expenses and Taxes. The Company agrees (a) to pay or reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, the fees and disbursements of counsel to each Lender and of counsel to the Administrative Agent, (c) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, 58 or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold the Administrative Agent, the Arranger and each Lender, their respective affiliates, and their respective officers, directors, trustees, advisors and controlling persons, (each, an "indemnified person") harmless from and against any and all liabilities, obligations, losses, damages, judgments, claims, penalties, costs, expenses or disbursements of any kind or nature whatsoever arising out of claims, actions, suits or proceedings brought by third parties with respect to the execution, delivery, enforcement, performance and administration of this Agreement or the use of the proceeds of the Extensions of Credit (all the foregoing, collectively, the "indemnified liabilities"), provided, that the Company shall have no obligation hereunder to any indemnified person with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of such indemnified person or (ii) legal proceedings commenced against such indemnified person by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such. The agreements in this subsection shall survive repayment of the Loans and all other amounts payable hereunder. 12.6. Successors and Assigns; Participations and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the Company, the Lenders, the Administrative Agent and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Extension of Credit for all purposes under this Agreement and the other Loan Documents, and the Company and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. In no event shall any Participant under any such participation have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by the Company therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Loans or any fees payable hereunder, or postpone the date of the final maturity of the Loans, in each case to the extent subject to such participation. The Company agrees that if amounts outstanding under this Agreement are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in subsection 12.7(a) as fully as if it were a Lender hereunder. 59 The Company also agrees that each Participant shall be entitled to the benefits of subsections 5.4, 5.5 and 5.6 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it were a Lender; and provided, further, that no Participant shall be entitled to receive any greater amount pursuant to any such subsection than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate thereof or, with the consent of the Company and the Administrative Agent (which in each case shall not be unreasonably withheld), to an additional bank or financial institution ("an Assignee") all or any part of its rights and obligations under this Agreement and the other Loan Documents pursuant to an Assignment and Acceptance executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Company and the Administrative Agent) and delivered to the Administrative Agent for its acceptance and recording in the Register, provided that, in the case of any such assignment to an additional bank or financial institution, the aggregate amount of the Commitment being assigned and, if such assignment is of less than all of the rights and obligations of the assigning Lender, the aggregate amount of the Commitment remaining with the assigning Lender are each not less than $5,000,000 (or such lesser amount as may be agreed to by the Company and the Administrative Agent). Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this paragraph (c) and paragraph (e) of this subsection, the consent of the Company shall not be required for any assignment which occurs at any time when any of the events described in Section 10(f) shall have occurred and be continuing. (d) The Administrative Agent shall, on behalf of the Company, maintain at the address of the Administrative Agent referred to in subsection 12.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amounts of the Committed Rate Loans owing by the Company to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Company, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of a Committed Rate Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan Documents, notwithstanding any notice to the contrary. Any assignment of any Committed Rate Loan or other obligation hereunder shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. 60 (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Company and the Administrative Agent) together with payment to the Administrative Agent of a registration and processing fee of $3,500, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Company. (f) The Company authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee, subject to the provisions of subsection 12.16, any and all financial information in such Lender's possession concerning the Company and its Affiliates which has been delivered to such Lender by or on behalf of the Company pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Company in connection with such Lender's credit evaluation of the Company and its Affiliates prior to becoming a party to this Agreement, provided, that the Lenders shall take such steps as reasonably necessary to ensure that confidential information will be treated in a confidential manner as required by subsection 12.16. (g) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this subsection concerning assignments of Loans relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by a Lender of any Loan to any Federal Reserve Bank in accordance with applicable law. 12.7. Adjustments; Set-off. (a) If any Lender (a "benefitted Lender") shall at any time receive any payment of all or part of its Loans or other Company Obligations then due and owing, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 10(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans or other Company Obligations then due and owing, or interest thereon, such benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loans or other Company Obligations, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) If an Event of Default shall have occurred and be continuing, each Lender shall have the right, without prior notice to the Company, any such notice being expressly waived by the Company to the extent permitted by applicable law, upon any amount becoming due and payable by the Company hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each 61 case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Company. Each Lender agrees promptly to notify the Company and the Administrative Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. 12.8. Judgment. (a) If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in one currency into another currency, the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the first currency with such other currency on the Business Day preceding the day on which final judgment is given. (b) The obligation of the Company in respect of any sum due to any Lender or the Administrative Agent hereunder shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "Agreement Currency"), be discharged only to the extent that on the Business Day following receipt by such Lender or the Administrative Agent (as the case may be) of any sum adjudged to be so due in the Judgment Currency such Lender or the Administrative Agent (as the case may be) may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency; if the amount of the Agreement Currency so purchased is less than the sum originally due to such Lender or the Administrative Agent (as the case may be)in the Agreement Currency, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify such Lender or the Administrative Agent (as the case may be) against such loss, and if the amount of the Agreement Currency so purchased exceeds the sum originally due to any Lender or the Administrative Agent (as the case may be), such Lender or the Administrative Agent (as the case may be) agrees to remit to the Company such excess. 12.9. Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Company and the Administrative Agent. 12.10. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12.11. Integration. This Agreement and the other Loan Documents represent the agreement of the Company, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 62 12.12. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 12.13. Submission To Jurisdiction; Waivers. The Company hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Company at its address set forth in subsection 12.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. 12.14. Acknowledgements. The Company hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Company arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Administrative Agent and Lenders, on one hand, and the Company, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Company and the Lenders. 63 12.15. WAIVERS OF JURY TRIAL. THE COMPANY, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 12.16. Confidentiality. Each Lender agrees to keep confidential all non-public information provided to it by the Company pursuant to this Agreement that is designated by the Company in writing as confidential; provided that nothing herein shall prevent any Lender from disclosing any such information (i) to the Administrative Agent or any other Lender, (ii) to any Transferee or prospective Transferee which agrees to be bound by the provisions of this Section 12.16 or substantially equivalent provision, (iii) to its employees, directors, agents, attorneys, accountants and other professional advisors, (iv) upon the request or demand of any Governmental Authority having jurisdiction over such Lender, (v) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (vi) which has been publicly disclosed other than in breach of this Agreement, or (vii) in connection with the exercise of any remedy hereunder. 12.17. Termination of Existing Credit Agreement. On the Closing Date, all Commitments under (and as defined in) the Company's Multi-Currency, Multi-Option Credit Agreement, dated as of September 30, 1994, as amended, shall terminate, and each Lender hereunder that is also a Lender under (and as defined in) such Agreement agrees to waive any provision of such Agreement that would require prior notice of such termination. 64 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED By:/s/ Frank Meredith ------------------------- Name: Frank Meredith Title: Executive Vice President and CFO JPMORGAN CHASE BANK, as Lead Arranger, Administrative Agent and Lender By:/s/ James Maron ----------------------- Name: James Maron Title: Vice President THE BANK OF NOVA SCOTIA, as Documentation Agent and Lender By:/s/ Todd S. Meller ----------------------- Name: Todd S. Meller Title: Managing Director HSBC BANK USA By:/s/ Diane M. Zieske ----------------------- Name: Diane M. Zieske Title: First Vice President DANSKE BANK A/S By:/s/ John A. O'Neill ----------------------- Name: John A. O'Neill Title: Assistant General Manager By:/s/ Peter L. Hargraves ----------------------- Name: Peter L. Hargraves Title: Vice President CREDIT SUISSE FIRST BOSTON By:/s/ Robert Hetu ----------------------- Name: Robert Hetu Title: Director By:/s/Guy M. Baron ----------------------- Name: Guy M. Baron Title: Associate 65 BAYERISCHE HYPO-UND VEREINSBANK,AG By:/s/ Ken Hamilton ----------------------- Name: Ken Hamilton Title: Director By:/s/ Laura DePersis ----------------------- Name: Laura DePersis Title: Director CITIBANK, N.A. By:/s/ David L. Harris ----------------------- Name: David L. Harris Title: Vice President BANK OF TOKYO-MITSUBUSHI TRUST COMPANY By:/s/ Spencer Hughes ----------------------- Name: Spencer Hughes Title: Vice President ISRAEL DISCOUNT BANK OF NEW YORK By:/s/ Andrew Ackerman ----------------------- Name: Andrew Ackerman Title: First Vice President By:/s/ Scott Fishbein ----------------------- Name: Scott Fishbein Title: First Vice President 66 EX-13 4 mda10k02.txt MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Harman International Industries, Inc. designs, manufactures and markets high quality audio and video products for the consumer and professional markets. The Company is organized into segments based on the end-user markets they serve. The Consumer Systems Group designs, manufactures and markets loudspeakers, audio electronics and infotainment systems for vehicles and designs, manufactures and markets loudspeakers and electronics for home audio, video and computer applications. The Professional Group designs, manufactures and markets loudspeakers and electronics used by audio professionals in concert halls, stadiums, airports and other buildings and recording, broadcast, cinema and music reproduction applications. The Company's primary manufacturing facilities in the U.S. are located in California, Indiana, Kentucky and Utah. The Company's primary international manufacturing facilities are located in Germany, Austria, the United Kingdom, Mexico, France, Sweden, China and Hungary. The Company's products are sold worldwide with the largest markets being the U.S. and Germany. The Company experiences seasonal fluctuations in sales and earnings. The first fiscal quarter is generally the weakest due to automotive model changeovers and the summer holidays in Europe. Variations in seasonal demand among end-user markets may also cause operating results to vary from quarter to quarter. Sales Net sales for the Company increased 6 percent in fiscal 2002 to $1.826 billion, compared to $1.717 billion in fiscal 2001 and $1.678 billion in fiscal 2000. Presented below is a summary of sales by business segment: (in thousands) 2002 2001 2000 $ % $ % $ % ----------- ---- ----------- ---- ----------- ---- Consumer Systems Group $ 1,401,446 77% $ 1,267,358 74% $ 1,228,030 73% Professional Group 424,742 23% 449,189 26% 449,909 27% ----------- ---- ----------- ---- ----------- ---- Total $ 1,826,188 100% $ 1,716,547 100% $ 1,677,939 100% ----------- ---- ----------- ---- ----------- ---- Consumer Systems Group - The Consumer Systems Group reported sales of $1.401 billion in fiscal 2002 compared to sales of $1.267 billion in fiscal 2001, representing an increase of $134 million or 11 percent. In fiscal 2002, the foreign currency impact on sales was minimal versus fiscal 2001. The increase was due to higher sales of audio and infotainment systems to automotive customers of $138 million partially offset by modest sales declines in home audio products. Sales to the automotive customers increased in fiscal 2002 driven by new audio and infotainment systems for the BMW 7 Series and Mercedes-Benz E Class and increased branded audio systems for Toyota and Lexus. Sales to Chrysler in the U.S. declined in fiscal 2002 versus fiscal 2001. 17 Consumer Systems Group sales increased 3 percent to $1.267 billion in fiscal 2001, compared to $1.228 billion in fiscal 2000. Exclusive of currency effects, the Group's sales increased 9 percent in fiscal 2001 compared to fiscal 2000. Sales to automobile manufacturers were higher by $64.9 million due to increased audio system shipments to Toyota and higher shipments of radio and navigation units to Mercedes Benz and the European aftermarket. Sales of home speakers and electronics were lower by $15.2 million due to economic conditions in the U.S. and Europe, and sales to personal computer manufacturers were lower by $10.4 million in fiscal 2001 compared to fiscal 2000. Professional Group - Professional Group sales for fiscal 2002 were $424.7 million compared with $449.2 million in fiscal 2001. In fiscal 2002, the foreign currency impact on sales was minimal versus fiscal 2001. The decrease in sales was due in part to the sale of a business unit in the fourth quarter of fiscal 2001. This business unit accounted for approximately $11 million of sales in the prior year. Lower sales of transducers to the telecommunications industry and the discontinuance of certain broadcast and recording products in Europe also affected sales. Professional Group sales of $449.2 million in fiscal 2001 approximated fiscal 2000 sales of $449.9 million. Excluding currency effects, sales were 4 percent higher in fiscal 2001. Sales increased due to the acquisition of Crown and higher AKG shipments to General Motors' OnStar program. These increases were offset by lower sales to mobile phone manufacturers and the disposition of Orban in May 2000. Gross Profit The consolidated gross profit percentage was 27.4 percent in fiscal 2002, compared to 26.1 percent in fiscal 2001 or 26.9 percent excluding special charges. The increased gross profit margin was due to a shift in product mix as a greater percentage of the Company's sales in fiscal 2002 were to automotive customers. Productivity enhancements at factories in the United States also contributed. The consolidated gross profit percentage was 26.1 percent in fiscal 2001, compared to 28.0 percent in fiscal 2000. Fiscal 2001 gross profit was reduced by inventory write-downs totaling $8.6 million and other charges of $5.3 million as discussed below. Excluding those charges, the fiscal 2001 gross profit percentage was 26.9 percent. Lower margins were realized for consumer audio products as the Company sought to decrease inventory levels while implementing a direct to retailer distribution system in Europe. The implementation of the new distribution system has been completed. The Professional Group experienced lower margins in fiscal 2001 due to softness in the cinema business and inventory reduction initiatives at Studer. 18 The Company reported a $36.3 million pretax special charge in the third quarter of fiscal 2001. This charge included non-cash charges of $18.5 million and cash charges of $17.8 million. The amount of special charges recorded to cost of sales was $13.9 million. The charge resulted primarily from the Company's decision to move to a direct to retailer distribution model in its European consumer business, to consolidate its consumer and professional loudspeaker manufacturing operations in Northridge, California, to close or otherwise downsize certain other manufacturing operations, and to discontinue product lines. The items included in the charge were $6.4 million to terminate distributors; $8.6 million and $5.7 million for inventory and other impaired asset write-downs, respectively; $5.9 million for factory closures in the U.K. and Argentina; and $9.7 million for severance and other costs. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of sales were 21.7 percent in fiscal 2002 compared with 20.6 percent in fiscal 2001, excluding special charges. The increase in these costs as a percentage of sales was primarily due to increased research and development costs to support the development of new automotive products in the Consumer Systems Group. Also included in selling, general and administrative expenses was an $8.3 million legal charge paid during the year. Selling, general and administrative expenses in the Professional Group were approximately equal to the prior year. Research and development expenses were $109.9 million, or 6.0 percent of sales, in fiscal 2002 compared with $88.7 million, or 5.2 percent of sales, in fiscal 2001. We expect selling, general and administrative expenses to be approximately 21 percent of sales in fiscal 2003. However, new automotive contract awards may require the Company to fund additional non-reimbursable research and development initiatives, which would have an impact on these costs as a percent of sales. In fiscal 2001, selling, general and administrative expenses as a percentage of sales were 22.0 percent, compared to 20.7 percent in fiscal 2000. In fiscal 2001, these expenses included $22.4 million in special charges to terminate distributors in the U.K. and Germany, to cover severance costs for 250 employees, to write-off impaired assets, and to close factories in the U.K. and Argentina. At June 30, 2002, the unutilized portion of the fiscal 2001 special charge was $0.3 million reserved for a lease liability in the U.K. and unpaid severance in Switzerland. Excluding the special charges, selling, general and administrative expenses as a percentage of sales were 20.6 percent, approximately the same percentage as fiscal 2000. Higher selling costs and a $12.5 million increase in engineering and development expenses were partially offset by overhead cost reductions. Operating Income Fiscal 2002 operating income was 5.7 percent of sales compared with 6.3 percent in fiscal 2001, excluding special charges. The decrease was due to the increase in selling, general and administrative expenses as a percentage of sales at the Consumer Systems Group as a result of increased research and development costs to support future automotive programs. 19 Fiscal 2001 operating income was 4.1 percent of sales, compared to 7.3 percent in fiscal 2000. Excluding the special charges totaling $36.3 million, fiscal 2001 operating income was 6.3 percent of sales. Consumer Systems Group operating income decreased primarily due to higher costs to implement changes in the consumer international distribution system and lower operating margins on sales to Chrysler in North America, partially offset by higher operating margins from domestic home speaker and electronic sales. Consumer International's operating loss was $18.9 million before special charges and $28.6 million after the charges. In fiscal 2001, the Professional Group operating income, excluding special charges, approximated the fiscal 2000 level. Interest Expense Interest expense was $22.4 million in fiscal 2002 compared with $25.0 million in fiscal 2001. Interest expense decreased in fiscal 2002 primarily due to lower average interest rates and the Company's use of interest rate swaps to convert a portion of its fixed rate debt into floating rate debt, offset by higher average borrowings. Interest expense in fiscal 2001 was $25.0 million compared to $18.5 million in fiscal 2000. Fiscal 2001 interest expense increased over fiscal 2000 levels due to increased interest rates, higher borrowings as a result of the Company's share repurchase program, capital expenditures and higher working capital levels. The weighted average interest rate in fiscal 2002 was 5.0 percent, compared to 6.3 percent in fiscal 2001 and 5.7 percent in fiscal 2000. The weighted average borrowings were $451.9 million, $397.2 million and $325.4 million for fiscal years ended 2002, 2001 and 2000, respectively. The decrease in rates in fiscal 2002 was due to lower interest rates and an increased percentage of debt bearing floating rates due to the effect of converting fixed rate debt to variable rate debt using interest rate swaps. The increase in average interest rates in fiscal 2001 was due to higher average interest rates and the conversion of the Deutschmark term loan to U.S. dollars during fiscal 2001. Miscellaneous Expenses Miscellaneous expenses were $0.6 million in fiscal 2002 compared to $1.2 million in fiscal 2001 and $0.4 million in fiscal 2000. Foreign currency losses of $0.2 million were included in miscellaneous expenses in fiscal 2002 and foreign currency gains of $1.1 million and $0.8 million were included in miscellaneous expenses for fiscal years 2001 and 2000, respectively. Income Before Taxes and Minority Interest In fiscal 2002, the Company reported income before income taxes and minority interest of $80.2 million. In fiscal 2001, the Company reported income before income taxes and minority interest of $45.1 million, or $81.4 million excluding the special charges described above, compared to $102.8 million in fiscal 2000. 20 Income Taxes In fiscal 2002, the Company reported income tax expense of $22.6 million, an effective tax rate of 28.2 percent compared with income tax expense of $12.7 million, an effective tax rate of 28.2 percent in fiscal 2001, and $29.9 million, an effective tax rate of 29.1 percent in fiscal 2000. The effective tax rates for fiscal years 2002, 2001, and 2000 were below the U.S. statutory rate due to utilization of tax credits, realization of tax benefits for United States exports and the utilization of tax loss carryforwards at certain foreign subsidiaries. Net Income Net income for fiscal 2002 was $57.5 million, compared with net income of $32.4 million in fiscal 2001. Excluding the special charges described above, net income for fiscal 2001 was $58.2 million compared with $72.8 million in fiscal 2000. Liquidity and Capital Resources Harman International primarily finances its working capital requirements through cash generated by operations, cash borrowings and normal trade credit. The Company's debt at June 30, 2002, was comprised primarily of $300 million of 7.125 percent senior notes, issued in fiscal 2002 and due February 15, 2007, and $150 million of 7.32 percent senior notes due July 1, 2007. In addition, at June 30, 2002, the Company had a $125 million revolving credit facility that was scheduled to expire in September 2002. There were no borrowings under the revolving credit facility at June 30, 2002. The rates for borrowings under the revolving credit facility float with base rates. The Company also has mortgages, capital leases and other long-term borrowings of $16.6 million at June 30, 2002. The 7.125 percent senior notes were issued in February 2002. The net proceeds from this $300 million note issuance were used to repay debt, including funds drawn under an existing term loan and the revolving credit facility maturing in August and September 2002, respectively. The remaining balance was held in cash and short-term investments. At June 30, 2002, cash and short-term investments were $116.3 million. The Company reduced the amount of its revolving credit facility from $275 million to $125 million concurrent with the completion of the senior note offering. At June 30, 2002, the Company had no borrowings under its revolving credit facility and outstanding letters of credit of $10.9 million. Unused availability under the revolving credit facility was $114.1 million at June 30, 2002. In August 2002, the Company entered into a new multi-currency revolving credit facility with a group of eight banks, which committed $150 million to the Company for cash borrowings and letters of credit through August 14, 2005. It replaced the existing credit facility that was scheduled to expire in September 2002. 21 At June 30, 2001, the Company had outstanding indebtedness under its revolving credit facility of $111.6 million, outstanding letters of credit of $7.3 million and unused credit thereunder of $156.1 million. The indebtedness at June 30, 2001, consisted of committed rate loans, which bear interest at London Interbank Offered Rate (LIBOR) plus 0.25 percent, and swing line borrowings, which bear interest at base rates. In fiscal 2001, the Company and certain subsidiaries had a term loan with a group of banks committing $73.4 million to the Company for cash borrowings through August 30, 2002, bearing interest at LIBOR plus 0.60, equal to 4.7 percent at June 30, 2001. In addition, at June 30, 2001, certain international subsidiaries of the Company maintained unsecured short-term lines of credit of $23.2 million and had outstanding indebtedness thereunder of approximately $15.9 million. Capital expenditures, net of lease financing and acquisitions, were $104.5 million in fiscal 2002 compared to $88.1 million in fiscal 2001 and $80.4 million in fiscal 2000. Expenditures in fiscal years 2002, 2001 and 2000 were for equipment and facilities required to increase capacity and efficiency, primarily in our divisions that supply the automotive industry, and new product tooling. The Company anticipates capital expenditures of approximately $125 to $130 million during fiscal 2003. We believe future capital expenditures will be approximately 6 percent of sales. Firm commitments of approximately $31.4 million existed as of June 30, 2002, for capital expenditures during fiscal 2003. The Company utilizes operating lease financing for certain machinery and equipment. The amounts financed under operating leases were $17.1 million, $34.6 million and $57.4 million in fiscal years 2002, 2001 and 2000, respectively. Net working capital excluding short-term debt and cash was $331.3 million at June 30, 2002, compared with working capital of $380.9 million at June 30, 2001. The decrease primarily resulted from higher accounts payable and accrual balances offset by modest increases in inventories and accounts receivable, due to currency translation effects. Excluding currency translation effects, inventories and accounts receivable at June 30, 2002 decreased $16.0 million compared to June 30, 2001. Excess of cost over fair value of assets acquired was $199.2 million at June 30, 2002, compared with $145.3 million at June 30, 2001. The increase is due primarily to the acquisitions of CAA AG (CAA) and TEMIC SDS GmbH (TEMIC) during fiscal 2002 for which a total of $50.5 million in excess of cost over fair value of assets was recorded. Excess of cost over fair value of assets was also increased due to foreign currency translation, offset by amortization of $7.7 million during fiscal 2002. Total shareholders' equity was $526.6 million at June 30, 2002 compared with $422.9 million at June 30, 2001 and $486.3 million at June 30, 2000. The increase in fiscal 2002 is primarily due to net income of $57.5 million and positive foreign currency translation of $47.6 million primarily due to the strengthening of the Euro versus the U.S. dollar. The decrease in fiscal 2001 resulted from net income offset by common stock repurchases totaling $67.0 million and negative foreign currency translation totaling $33.2 million due primarily to the weakening of the Euro against the U.S. dollar. 22 Since the share repurchase program began in 1998, the Board of Directors has authorized the repurchase of a total of 7.0 million shares. In fiscal 2002, the Company acquired 118,000 shares at a cost of $3.7 million. From the inception of the share repurchase program through June 30, 2002, the Company has acquired and placed in treasury 5,807,300 shares of its common stock at a total cost of $140.6 million. Future share repurchases are expected to be funded with cash generated by operations. The Company will continue to have cash requirements to support seasonal working capital needs, capital expenditures, interest and principal payments, dividends and share repurchases. The Company intends to use cash on hand, cash generated by operations and borrowings under its existing revolving credit facility to meet these needs. The Company believes that cash from these sources will be adequate to meet its cash requirements over the next 12 months. The Company has dividend restrictions under its revolving credit agreement and the indenture under which the Company's 7.32 percent senior notes due July 2007 were issued. The most restrictive of these covenants limits the Company to dividend payments and purchases of capital stock of $50 million annually. Neither the credit agreement nor the indentures for the senior notes restrict the Company from transferring assets to or from its subsidiaries in the form of loans, advances or cash dividends. The Company is subject to various risks, including dependence on key customers, economic conditions affecting disposable consumer income and fluctuations in currency exchange rates. A disruption in the operations of one of our key customers, such as an automotive strike, could have a material adverse effect on the Company. In fiscal 2002, sales to DaimlerChrysler accounted for 20.6 percent of the Company's sales and accounts receivable due from DaimlerChrysler accounted for 19 percent of total consolidated accounts receivable at June 30, 2002. The following table provides a summary of the Company's contractual financing obligations by due date: <1 1-2 3-5 >5 (dollars in thousands) Year Years Years Years Total Senior notes(a) $ - - 297,815 150,000 447,815 Other long-term obligations (a) 4,114 1,377 769 8,927 15,187 Mortgages (a) 141 297 262 695 1,395 Non-cancelable operating leases(b) 59,281 82,660 51,099 46,946 239,986 ------- ------ ------- ------- ------- Total contractual cash obligations $63,536 84,334 349,945 206,568 704,383 ------- ------ ------- ------- ------- (a) As described in Note 5 to the Consolidated Financial Statements. (b) As described in Note 6 to the Consolidated Financial Statements. 23 Interest Rate Sensitivity The following table provides information as of June 30, 2002 about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and related average interest rates by contractual maturity dates. For interest rate swaps, the table presents notional principal amounts and weighted average interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the interest rate swaps. Weighted average variable rates are generally based on LIBOR as of the reset dates. Unless otherwise indicated, the information is presented in U.S. dollar equivalents as of June 30, 2002. Principal Payments and Interest Rates by Contractual Maturity Dates - ------------------------------------------------------------------------------- Fair Value FiscalYear (Assets)/ ($millions) 2003 2004 2005 2006 2007 Thereafter Total Liabilities - ------------------------------------------------------------------------------- Liabilities: Fixed Rate debt(US$) $-- $-- $-- $-- $300.0 $157.2 $457.2 $467.5 Average interest rate 7.13% 7.06% Interest Rate Derivatives: Fixed to Variable Interest Rate Swaps (US$) $-- $-- $-- $-- $200.0 $150.0 $350.0 $(10.3) Average pay rate (a) 3.39% 4.01% Average receive rate 7.13% 7.32% (a)The average pay rate is based on $175.0 million set at 3-month LIBOR set in arrears plus 1.62% and $175.0 million set at 6-month LIBOR set in arrears plus 1.88%. Foreign Currency The Company maintains significant operations in Germany, the United Kingdom, France, Austria, Hungary, Switzerland, Mexico, China and Sweden. As a result, exposure to foreign currency gains and losses exists. A portion of foreign currency exposure is hedged by incurring liabilities, including loans, denominated in the local currency where subsidiaries are located. 24 The subsidiaries of the Company purchase products and raw materials in various currencies. As a result, the Company may be exposed to cost increases relative to local currencies in the markets to which it sells. To mitigate such adverse trends, the Company enters into foreign exchange contracts and other hedging activities. Also, foreign currency positions are partially offsetting and are netted against one another to reduce exposure. Some products made in the U.S. are sold abroad. Sales of such products are affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress these sales. Competitive conditions in the Company's markets may limit its ability to increase product pricing in the face of adverse currency movements. However, due to the multiple currencies involved in the Company's business and the netting effect of various simultaneous transactions, the Company's foreign currency positions are partially offsetting. As discussed above, the Company is exposed to market risks arising from changes in foreign exchange rates, principally the change in the value of the euro versus the U.S. dollar. The Company estimates the effect on projected fiscal 2003 net income, based upon a recent estimate of foreign exchange transactional exposure, of a uniform strengthening or uniform weakening of the transaction currency pairs of 10 percent will decrease net income $9 million or will increase net income $9 million. As of June 30, 2002, the Company had hedged a portion of its estimated foreign currency transactions using forward exchange contracts. The Company estimates the effect on projected fiscal 2003 net income, based upon a recent estimate of foreign exchange translation exposure (translating the operating performance of our foreign subsidiaries into U.S. dollars) of a uniform strengthening or weakening of the U.S. dollar by 10 percent to decrease net income $5.9 million or to increase net income $5.9 million. Critical Accounting Policies The Company's accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about the future that may affect the amounts reported in the financial statements. Future events cannot be determined with certainty. Therefore, the use of estimates requires the exercise of judgment. Actual results may differ from those estimates and such differences may be material to the financial statements. Impact of New Accounting Pronouncements Recent accounting pronouncements are discussed in Note 1 of the Consolidated Financial Statements, Summary of Significant Accounting Policies. 25 Forward Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and 21E of the Exchange Act of 1934. You should not place undue reliance on these statements. Forward-looking statements include information concerning possible or assumed future results of operations, capital expenditures, the outcome of pending legal proceedings and claims, including environmental matters, goals and objectives for future operations, including descriptions of our business strategies and purchase commitments from customers, among other things. These statements are typically identified by words such as "believe," "anticipate," "expect," "plan," "intend," "estimate," and similar expressions. We base these statements on particular assumptions that we have made in light of our industry experience, as well as our perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read and consider the information in this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. These factors include, among other things: - - changes in consumer confidence and spending; - - automobile industry sales and production rates and the willingness of automobile purchasers to pay for the option of a premium branded audio system and/or a multi-functional infotainment system; - - model-year changeovers in the automotive industry; - - the ability to satisfy contract performance criteria, including technical specifications and due dates; - - competition in the consumer and/or professional markets in which we operate; - - the outcome of pending or future litigation and administrative claims, including patent and environmental matters; - - work stoppages at one or more of our facilities or at a facility of one of our significant customers; - - the loss of one or more significant customers, including our automotive manufacturer customers; - - the ability to adapt to technological advances and innovation on a cost- effective and timely basis; and - - general economic conditions. In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in this report will in fact transpire. 26 Statement of Management Responsibility The consolidated financial statements accompanying information were prepared by, and are the responsibility of, the management of Harman International Industries, Incorporated. The statements were prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts that are based on management's best estimates and judgments. The Company's internal control systems are designed to provide reliable financial information for the preparation of financial statements, to safeguard assets against loss or unauthorized use and to ensure that transactions are executed consistent with Company policies and procedures. Management believes that existing internal accounting control systems are achieving their objectives and that they provide reasonable assurance concerning the accuracy of financial statements. Oversight of management's financial reporting and internal accounting control responsibilities is exercised by the Board of Directors through the audit committee which consists solely of outside directors. The committee meets periodically with financial management and the independent auditors to ensure that each is meetings its responsibilities and to discuss matters concerning auditing, accounting control and financial reporting. The independent auditors have free access to meet with the audit committee without management's presence. /s/ Bernard A. Girod - ----------------------- Bernard A. Girod Vice Chairman and Chief Executive Officer /s/ Frank Meredith - ---------------------------- Frank Meredith Executive Vice President and Chief Financial Officer 27 Independent Auditors' Report The Board of Directors and Shareholders of Harman International Industries, Incorporated: We have audited the accompanying consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2002 and 2001 and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three-year people ended June 30, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express and opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on the test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harman International Industries, Incorporated and subsidiaries as of June 30, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP - -------------------- August 14, 2002 28 Consolidated Balance Sheets Harman International Industries, Incorporated and Subsidiaries June 30, 2002 and 2001 ($000s omitted except share amounts) Assets 2002 2001 ----------- ---------- Current assets Cash and cash equivalents $ 116,253 2,748 Receivables (less allowance for doubtful accounts of $18,211 in 2002 and $14,457 in 2001) 335,019 312,817 Inventories (note 2) 329,935 317,500 Other current assets 95,556 72,806 ----------- ---------- Total current assets 876,763 705,871 Property, plant and equipment, net (notes 3, 5 and 6) 325,812 264,136 Excess of cost over fair value of net assets acquired (less accumulated amortization of $48,329 in 2002 and $40,645 in 2001) 199,239 145,258 Other assets 78,466 44,120 ----------- ---------- Total assets $ 1,480,280 1,159,385 ----------- ---------- Liabilities and Shareholders' Equity Current liabilities Short-term borrowings (notes 4 and 5) $ -- 19,394 Current portion of long-term debt (note 5) 4,255 5,544 Accounts payable 193,110 151,478 Accrued liabilities 236,106 170,739 ----------- ---------- Total current liabilities 433,471 347,155 Borrowings under revolving credit facility (note 5) -- 108,072 Senior long-term debt (note 5) 470,424 235,750 Other non-current liabilities 47,523 44,537 Minority interest 2,233 929 Shareholders' equity (notes 5 and 7) Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued and outstanding -- -- Common stock, $.01 par value. Authorized 100,000,000 shares; issued 38,330,490 shares in 2002 and 37,749,931 shares in 2001 383 377 Additional paid-in capital 310,166 297,515 Accumulated other comprehensive income: Unrealized gain (loss) on hedging derivatives (1,499) 2,785 Minimum pension liability adjustment (2,907) -- Equity adjustment from foreign currency translation (44,686) (92,288) Retained earnings 405,811 351,525 Less common stock held in treasury (5,807,300 shares in 2002 and 5,689,300 shares in 2001) (140,639) (136,972) ----------- ---------- Total shareholders' equity 526,629 422,942 ----------- ---------- Commitments and contingencies (notes 6, 10 and 12) Total liabilities and shareholders' equity $ 1,480,280 1,159,385 ----------- ---------- See accompanying notes to consolidated financial statements. 29 Consolidated Statements of Operations Harman International Industries, Incorporated and Subsidiaries Years Ended June 30, 2002, 2001 and 2000 ($000s omitted except per share amounts) 2002 2001 2000 ----------- ----------- ----------- Net sales $ 1,826,188 1,716,547 1,677,939 Cost of sales 1,326,317 1,268,512 1,208,603 ----------- ----------- ----------- Gross profit 499,871 448,035 469,336 Selling, general and administrative expenses 396,650 376,807 347,614 ----------- ----------- ----------- Operating income 103,221 71,228 121,722 Other expenses Interest expense 22,406 24,950 18,507 Miscellaneous, net 638 1,179 386 ----------- ----------- ----------- Income before income taxes and minority interest 80,177 45,099 102,829 Income tax expense 22,602 12,703 29,923 Minority interest 62 32 68 ----------- ----------- ----------- Net income $ 57,513 32,364 72,838 Basic EPS $ 1.78 1.00 2.11 ----------- ----------- ----------- Diluted EPS $ 1.70 0.96 2.06 ----------- ----------- ----------- Weighted average shares outstanding - basic 32,261 32,296 34,452 Weighted average shares outstanding - diluted 33,903 33,737 35,300 See accompanying notes to consolidated financial statements. 30 Consolidated Statements of Cash Flows Harman International Industries, Incorporated and Subsidiaries Years Ended June 30, 2002, 2001 and 2000 ($000s omitted) 2002 2001 2000 ---------- ---------- ---------- Cash flows from operating activities: Net income $ 57,513 32,364 72,838 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 59,504 52,168 53,487 Amortization of intangible assets 18,580 15,033 11,131 Deferred income taxes (12,379) 12,480 4,512 Loss on disposition of assets 6,897 2,226 3,117 Tax benefit attributable to stock options 4,169 1,008 137 Change in working capital, net of acquisition/ disposition effects: Decrease (increase) in: Receivables 6,339 (25,174) (4,945) Inventories 13,047 (37,342) (20,557) Other current assets 2,588 3,161 (63) Increase (decrease) in: Accounts payable 25,689 (1,699) 40,283 Accrued liabilities and income taxes payable 15,448 695 31,278 Other operating activities (11,065) (977) 3,347 ---------- ---------- ---------- Net cash provided by operating activities $ 186,330 53,943 194,565 ---------- ---------- ---------- Cash flows from investing activities: Payment for purchase of companies, net of cash acquired $ (29,366) -- (49,683) Proceeds from asset dispositions 5,526 4,135 16,690 Capital expenditures (113,973) (88,083) (80,355) Purchased and capitalized software expenditure (20,617) (17,681) (16,306) Collection (issuance) of loans, net -- 12,259 (645) Other items, net (164) 105 356 ---------- ---------- ---------- Net cash used in investing activities $(158,594) (89,265) (129,943) ---------- ---------- ---------- Cash flows from financing activities: Net borrowings (repayments) under lines of credit $ (20,605) 4,826 (3,240) Proceeds from issuance of long-term debt 341,940 106,418 11,740 Repayments of long-term debt (238,961) (9,426) (33,568) Debt issuance costs (778) (1,179) -- Repurchase of common stock (3,667) (66,968) (36,027) Dividends paid to shareholders (3,227) (3,222) (3,444) Exercise of stock options and restricted stock granted 8,488 3,799 1,888 ---------- ---------- ---------- Net cash flow provided by (used in) financing activities $ 83,190 34,248 (62,651) ---------- ---------- ---------- Effect of exchange rate changes on cash 2,579 (543) (569) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 113,505 (1,617) 1,402 Cash and cash equivalents at beginning of year 2,748 4,365 2,963 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 116,253 2,748 4,365 Supplemental schedule of non-cash investing activities: Fair value of assets acquired $ 61,666 -- 78,084 Cash paid for the capital stock 29,366 -- 49,683 ---------- ---------- ---------- Liabilities assumed $ 32,300 -- 28,401 ---------- ---------- ---------- See accompanying notes to consolidated financial statements. 31 Consolidated Statements of Shareholders' Equity Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2002, 2001 and 2000 ($000s omitted) Accumulated -- Common Stock -- Additional Other Total Share- Number of $.01 paid-in Comprehensive Retained Treasury holders' Shares Par value capital Income Earnings stock equity ----------- ---------- ---------- ------------- ----------- ---------- ------------ Balance, June 30, 1999 17,757,335 $ 187 290,873 (41,885) 252,989 (33,977) 468,187 ----------- ---------- ---------- ------------- ----------- ---------- ------------ Comprehensive income: Net income -- -- -- -- 72,838 -- 72,838 Foreign currency translation adjustment -- -- -- (17,246) -- -- (17,246) ----------- ---------- ---------- ------------- ----------- ---------- ------------ Total comprehensive income -- -- -- (17,246) 72,838 -- 55,592 ----------- ---------- ---------- ------------- ----------- ---------- ------------ Exercise of stock options 52,569 1 1,887 -- -- -- 1,888 Tax benefit attributable to stock options -- -- 137 -- -- -- 137 Treasury shares purchased (778,600) -- -- -- -- (36,027) (36,027) Dividends ($.20 per share) -- -- -- -- (3,444) -- (3,444) ----------- ---------- ---------- ------------- ----------- ---------- ------------ Balance, June 30, 2000 17,031,304 $ 188 292,897 (59,131) 322,383 (70,004) 486,333 ----------- ---------- ---------- ------------- ----------- ---------- ------------ Comprehensive income: Net income -- -- -- -- 32,364 -- 32,364 Foreign currency translation adjustment -- -- -- (33,157) -- -- (33,157) Unrealized gain (loss) on hedging derivatives -- -- -- 2,785 -- -- 2,785 ----------- ---------- ---------- ------------- ----------- ---------- ------------ Total comprehensive income -- -- -- (30,372) 32,364 -- 1,992 ----------- ---------- ---------- ------------- ----------- ---------- ------------ Stock split adjustment 17,031,304 188 (188) -- -- -- -- Exercise of stock options 199,323 1 3,798 -- -- -- 3,799 Tax benefit attributable to stock options -- 1,008 -- -- -- 1,008 Treasury shares purchased (2,201,300) -- -- -- -- (66,968) (66,968) Dividends ($.10 per share) -- -- -- -- (3,222) -- (3,222) ----------- ---------- ---------- ------------- ----------- ---------- ------------ Balance, June 30, 2001 32,060,631 $ 377 297,515 (89,503) 351,525 (136,972) 422,942 ----------- ---------- ---------- ------------- ----------- ---------- ------------ Comprehensive income: Net income -- -- -- -- 57,513 -- 57,513 Foreign currency translation adjustment -- -- -- 47,602 -- -- 47,602 Unrealized gain (loss) on hedging derivatives -- -- -- (4,284) -- -- (4,284) Minimum pension liability adjustment -- -- -- (2,907) -- -- (2,907) ----------- ---------- ---------- ------------- ----------- ---------- ------------ Total comprehensive income -- -- -- 40,411 57,513 -- 97,924 ----------- ---------- ---------- ------------- ----------- ---------- ------------ Exercise of stock options and restricted stock granted 580,559 6 8,482 -- -- -- 8,488 Tax benefit attributable to stock options -- -- 4,169 -- -- -- 4,169 Treasury shares purchased (118,000) -- -- -- -- (3,667) (3,667) Dividends ($.10 per share) -- -- -- -- (3,227) -- (3,227) ----------- ---------- ---------- ------------- ----------- ---------- ------------ Balance, June 30, 2002 32,523,190 $ 383 310,166 (49,092) 405,811 (140,639) 526,629 ----------- ---------- ---------- ------------- ----------- ---------- ------------
See accompanying notes to consolidated financial statements. 32 Notes to Consolidated Financial Statements Harman International Industries, Incorporated and Subsidiaries 1. Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and subsidiaries after the elimination of significant intercompany transactions and accounts. Reclassifications: Where necessary, prior years' information has been reclassified to conform to the 2002 consolidated financial statement presentation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates, and the differences may be material to the consolidated financial statements. Among the most significant estimates used in the preparation of the Company's financial statements are estimates associated with the depreciable lives of fixed assets, the evaluation of net assets acquired and allocation of related purchase prices for corporate acquisitions, the evaluation of the recoverability of goodwill, evaluation of the recoverability of unbilled costs, warranty liability, litigation, product liability, taxation and environmental matters. In addition, estimates form the basis for the Company's reserves for sales discounts, sales allowances, accounts receivable, inventory, post retirement benefits and employee benefits. Various assumptions go into the determination of these estimates. The process of determining significant estimates requires consideration of factors such as historical experience, current and expected economic conditions, and actuarial methods. The Company re-evaluates these significant factors and makes changes and adjustments where facts and circumstances indicate that changes are necessary. Revenue Recognition: Revenue is recognized from product sales upon shipment of goods when passage of title to goods transfer to the customer. Substantially all revenue transactions involve the delivery of a physical product. The Company does not have multiple element arrangements that contain undelivered products or services at shipment. Sales Discounts: The Company offers product discounts and sales incentives including prompt payment discounts, volume incentive programs, rebates and dealer order incentives. The Company reports revenues net of discounts and other sales incentives in accordance with Emerging Issues Task Force (EITF) Issue No. 01-09. Cost of Sales: Cost of sales includes material, labor and overhead for products manufactured by the Company and cost of goods produced for the Company on a contract basis. Expenses incurred for manufacturing depreciation and engineering, warehousing, shipping and handling, sales commissions, and customer service, are also included in cost of sales. 33 Selling, General and Administrative Expenses: Selling, general and administrative expenses include non-manufacturing salaries and benefits, occupancy costs, professional fees, research and development costs, amortization of intangibles, advertising and marketing costs and other operating expenses. Advertising Costs: The Company expenses advertising costs as incurred. When production costs are incurred for future advertising, these costs are recorded as an asset and subsequently expensed when the advertisement is first put into service. Amortization of intangibles: Amortization of intangibles primarily includes amortization of goodwill and intangible assets, amortization of capitalized software costs, and amortization of costs, other than interest costs, associated with debt issuance. Research and Development: Research and development costs are expensed as incurred. The Company's expenditures for research and development were $109.9 million, $88.7 million and $76.2 million for the fiscal years ending June 30, 2002, 2001 and 2000,respectively. Interest Expense: Interest expense includes interest expense and amortization of original issue discount on notes. Cash and Cash Equivalents: Cash and cash equivalents includes cash on hand and short-term investments with original maturities of less than three months. Inventories: Inventories are stated at the lower of cost or market. Cost is determined principally by the first-in, first-out method. Property, Plant and Equipment: Property, plant and equipment is stated at cost or, in the case of capitalized leases, at the present value of the future minimum lease payments. Depreciation and amortization of property, plant and equipment is computed primarily using the straight-line method over useful lives estimated from 3 to 50 years. Buildings and improvements are depreciated over 3 to 50 years or over the term of the lease, whichever is shorter. Machinery and equipment are depreciated over 5 to 10 years and furniture and fixtures are depreciated over 3 years. Purchased and Deferred Software Costs: Software costs that are related to conceptual formulation and incurred prior to the establishment of technological feasibility are expensed as incurred. Costs incurred to purchase software to be sold as an integral component of a product are deferred. Software costs incurred subsequent to establishment of technological feasibility and which are considered recoverable by management are deferred in compliance with Statement of Financial Accounting Standards (SFAS) 86 and amortized over the product's life, usually three years. At June 30, 2002, deferred costs were $13.2 million, net of accumulated amortization of $18.8 million. At June 30, 2001, deferred costs were $28.2 million, net of accumulated amortization of $9.9 million. Deferred costs, net, are included in other assets on the balance sheet. Deferred costs are principally comprised of costs to acquire or develop automotive navigation, telecommunications and networking software. 34 Income Taxes: The deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. The Company has not provided U.S. federal or foreign withholding taxes on foreign subsidiary undistributed earnings as of June 30, 2002, because such earnings are intended to be permanently invested. It is not practicable to determine the U.S. Federal income tax liability, if any, that would be payable if such earnings were not reinvested indefinitely. Excess of Cost over Fair Value of Assets Acquired: During fiscal 2002, the net excess of cost over fair value of assets acquired prior to fiscal 2002 continued to be amortized over periods from 3 to 40 years, using the straight-line method. The Company evaluates net realizable value by comparisons of projected undiscounted cash flows to the asset balances. In the fiscal year beginning July 1, 2002, the Company will implement SFAS 142 that will no longer allow the amortization of goodwill and intangible assets with indefinite useful lives. The acquisitions of CAA and TEMIC by the Company during fiscal 2002 were accounted for under the provisions of SFAS 141 and 142. Unbilled Costs: The Company incurs pre-production and development costs related to products developed for automobile manufacturers pursuant to long-term supply agreements. The Company records costs incurred pursuant to these agreements as unbilled costs in accordance with EITF Issue No. 99-5. The amount of reimbursement of these costs can be objectively measured and verified. At June 30, 2002 unbilled costs reimbursable in the next 12 months are $13.5 million and are recorded in other current assets and unbilled costs reimbursable in subsequent years total $27.1 million and are recorded in other assets. No unbilled costs were recorded at June 30, 2001. Foreign Currency Translation: The financial statements of subsidiaries located outside of the United States generally are measured using the local currency as the functional currency. Assets, including goodwill, and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. The resulting translation adjustments are included in accumulated other comprehensive income. In fiscal 2002, the foreign currency translation adjustment was a positive $47.6 million compared with a negative foreign currency translation adjustment of $33.2 million in fiscal 2001. Income and expense items are translated at average monthly exchange rates. Gains and losses from foreign currency transactions of these subsidiaries are included in net income. Derivative Financial Instruments: The Company is exposed to market risks arising from changes in interest rates, commodity prices and foreign currency exchange rates. The Company uses derivatives in its management of interest rate and foreign currency exposure. The Company does not utilize derivatives that contain leverage features. On the date that the Company enters into a derivative, the derivative is designated as a hedge of the identified exposure. The Company documents all relationships between hedging instruments and hedged items and measures the effectiveness of its hedges at inception and on an ongoing basis. 35 For each derivative instrument that is designated and qualifies as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For each derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the period during which the hedged transaction affects earnings. For derivatives that are designated and qualify as hedges of net investments in subsidiaries located outside the United States, the gain or loss is reported in other comprehensive income as a part of the cumulative translation adjustment if the derivative is effective. For derivative instruments not designed as hedging instruments, the gain or loss is recognized in current earnings during the period of change. Interest Rate Management: The Company has in place interest rate swaps, which are designated as fair value hedges of the underlying fixed rate obligations. The fair value of the interest rate swaps is recorded in other assets or other long-term liabilities with a corresponding increase or decrease in the fixed rate obligation. The changes in the fair value of the interest rate swaps and the underlying fixed rate obligations are recorded as equal and offsetting unrealized gains and losses in interest expense in the Consolidated Statement of Operations. Foreign Currency Management: The fair value of foreign currency related derivatives is generally included in the Consolidated Balance Sheet in other current assets and accrued liabilities. The earnings impact of cash flow hedges relating to forecasted purchases of inventory is generally reported in cost of sales to match the underlying transaction being hedged. Unrealized gains and losses on these instruments are deferred in other comprehensive income until the underlying transaction is recognized in earnings. The earnings impact of cash flow hedges relating to the variability in cash flows associated with foreign currency denominated assets and liabilities is reported in cost of sales or other expense depending on the nature of the assets or liabilities being hedged. The amounts deferred in other comprehensive income associated with these instruments generally relate to foreign currency spot-rate to forward-rate differentials that are recognized in earnings over the term of the hedge. The discount or premium relating to cash flow hedges associated with foreign currency denominated assets and liabilities is recognized in net interest expense over the life of the hedge. Stock Based Compensation: Pursuant to SFAS 123, Accounting for Stock-Based Compensation, the Company elected to continue to apply the provisions of APB Opinion No. 25 for stock-based compensation accounting and reporting. The Company provides disclosure of pro forma net income and pro forma earnings per share for grants made in 1995 and future years as if the fair-value based method defined in SFAS 123 had been applied. The Company will adopt the fair value method of SFAS 123 effective July 1, 2002, applying it to all new options granted after that date and recognizing expense over the vesting period of those options. 36 Recent Accounting Pronouncements: In July 2001, the FASB issued SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company will adopt SFAS 142 effective July 1, 2002. Application of the non-amortization provisions of SFAS 142 is expected to result in an increase in pretax earnings of approximately $7.4 million in fiscal 2003. The Company will perform the first of the required impairment tests of goodwill using the methodology prescribed by SFAS 142 as of July 1, 2002. The Company does not expect that goodwill will be impaired upon the initial application of SFAS 142's required impairment test. In June 2001, the Financial Accounting Standards Boards (FASB) issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company will adopt SFAS 143 on July 1, 2002. The Company does not expect that the adoption of SFAS 143 will have a material impact on its financial position or results of operations. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company will adopt SFAS 144 on July 1, 2002. The Company does not expect that the adoption of SFAS 144 will have a material impact on its financial position or results of operations. 37 In November 2001, the EITF reached consensus on Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products (EITF 01-09). Upon adoption of this consensus, certain payments that had formerly been classified as selling, general and administrative expenses were reclassified to a reduction of sales. The Company adopted EITF 01-09 in the quarter ended December 31, 2001. The effect of adopting EITF 01-09 was not material to the Company. In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB's conceptual framework. SFAS 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. The Company does not expect that the adoption of SFAS 146 will have a material impact on its financial position or results of operations. 2. Inventories Inventories consist of the following: June 30 ($000s omitted) 2002 2001 ---------------------------------------------- Finished goods $133,685 145,349 Work in process 54,132 38,572 Raw materials 142,118 133,579 -------- -------- Total $329,935 317,500 -------- -------- The Company calculates inventory reserves using a combination of lower of cost or market analysis and analysis of usage data. Lower of cost or market analysis is typically applied to those units that represent a high portion of the total value on-hand. In some cases, lower of cost or market analysis is applied to a broader population of similar inventory items. The high-value units typically represent a small percentage of the total inventory, so identification of obsolescence or valuation reserve requirements for the balance of the inventory on-hand is accomplished using either historic or forecast usage data to identify slow-moving or obsolete units. In fiscal 2001, the Company recorded special charges totaling $8.6 million to reduce inventory carrying values to net realizable value resulting from decisions to discontinue various product lines, change manufacturing processes and terminate certain European distributors in connection with the transition of the Company's international consumer business to a direct to retailer model. These charges were recorded as a component of cost of sales. 38 3. Property, Plant and Equipment Property, plant and equipment are composed of the following: June 30 ($000s omitted) 2002 2001 ------------------------------------------------- Land $ 7,907 6,899 Buildings and improvements 155,199 117,801 Machinery and equipment 386,642 327,175 Furniture and fixtures 51,151 37,959 -------- -------- 600,899 489,834 Less accumulated depreciation and amortization (275,087) (225,698) -------- -------- Property, plant and equipment, net $ 325,812 264,136 -------- -------- In fiscal 2001, the Company recorded special charges of $4.9 million for property, plant and equipment write-downs for closed facilities in the U.K. and Argentina. 4. Short-Term Borrowings At June 30, 2002, the Company had no outstanding short-term borrowings. The Company did have short-term borrowings outstanding during fiscal 2002 that were repaid with a portion of the net proceeds from the issuance of $300 million of unsecured senior notes in February 2002. At June 30, 2001, the Company had outstanding borrowings of $15.9 million with interest rates based on various indices ranging from 4.9 percent to 8.8 percent. 5. Long-Term Debt On February 19, 2002, the Company sold $300 million of five-year unsecured senior notes bearing interest at 7.125 percent to be paid semiannually. The notes mature on February 15, 2007, and were sold at an offering price of 99.214 percent of the principal amount. After repaying swing line, competitive advance, revolving credit and term credit borrowings and reinvesting in certain foreign operations, the Company had cash and cash equivalents on hand of $116.3 million at June 30, 2002. At June 30, 2002, the Company and certain subsidiaries had a five-year multi- currency unsecured revolving credit facility with a group of eleven banks committing $125 million to the Company for cash borrowings and letters of credit through September 30, 2002. At June 30, 2002, the Company had no borrowings under the revolving credit facility and outstanding letters of credit of $10.9 million. The Company is required under the revolving credit agreement to maintain certain financial ratios and meet certain net worth and indebtedness tests. The Company was in compliance with such covenants at June 30, 2002 and 2001. In August 2002, this revolving credit line was replaced with a new $150 million unsecured revolving credit facility that expires in August 2005. The Company pays an annual facility fee ranging from 20 to 50 basis points on the notional amount of the facility. 39 The Company's other long-term debt agreements contain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, create restrictions on subsidiary dividends and distributions, limit the Company's ability to encumber certain assets and restrict the Company's ability to issue capital stock of its subsidiaries. The Company was in compliance with the terms of its long-term debt agreements at June 30, 2002 and 2001. The most restrictive provisions limit the Company's ability to make dividend payments and purchases of capital stock to $50 million annually. The Company's weighted average borrowings were $451.9 million, $397.2 million and $325.4 million for fiscal years ended 2002, 2001 and 2000, respectively. The weighted average interest rate in fiscal 2002 was 5.0 percent, compared to 6.3 percent in fiscal 2001 and 5.7 percent in fiscal 2000. Cash paid for interest for both short- and long-term borrowings was $23,273,000, $24,873,000, and $20,472,000 during the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Long-term debt is composed of the following: June 30 ($000s omitted) 2002 2001 --------------------------------------------------------- Senior notes, unsecured, due February 15, 2007, interest due semiannually at 7.13% $ 297,815 -- Senior notes, unsecured, due July 1, 2007, interest due semiannually at 7.32% 150,000 150,000 Carrying value of interest rate hedge 10,282 -- Borrowings under revolving credit facility, due September 30, 2002 at June 30, 2001 -- 108,072 Borrowings under Commerzbank term facility, due August 30, 2002; variable rate was 4.7% at June 30, 2001 -- 73,403 Obligations under capital leases (note 6) 4,579 4,561 Other unsubordinated loans due in installments through 2030, some of which vary with the prime rate, bearing interest at an average effective rate of 5.15% at June 30, 2002 12,003 13,330 -------- -------- Total 474,679 349,366 Less current installments (4,255) (5,544) -------- -------- Long-term debt $470,424 343,822 -------- -------- 40 Long-term debt, including obligations under capital leases, maturing in each of the next five fiscal years ($000s omitted) is as follows: ------------------------------------ 2003 $ 4,255 2004 809 2005 866 2006 575 2007 305,408 Thereafter 162,766 ------------------------------------ 6. Leases The following analysis represents property under capital leases: June 30 ($000s omitted) 2002 2001 ----------------------------------------------------- Capital lease assets $ 10,506 10,254 Less accumulated amortization (3,537) (2,392) --------- -------- Net $ 6,969 7,862 --------- -------- No new capital lease obligations were incurred in fiscal years 2002 and 2001. At June 30, 2002, the Company is obligated for the following minimum lease commitments under terms of noncancelable lease agreements: Capital Operating ($000s omitted) Leases Leases --------------------------------------------------- 2003 $ 983 $ 59,281 2004 889 48,181 2005 887 34,479 2006 554 28,209 2007 440 22,890 Thereafter 1,813 46,946 -------- -------- Total minimum lease payments 5,566 $239,986 less interest (987) -------- -------- Present value of minimum lease payments $ 4,579 -------- Operating lease expense net of subrental income under operating leases having noncancelable terms of greater than one year for the years ended June 30, 2002, 2001 and 2000 was $60,681,000, $53,649,000, and $43,731,000, respectively. 41 7. Stock Option Plan The 1992 Incentive Plan (the 1992 Plan) provides for the grant of stock options, stock appreciation rights in tandem with options, restricted stock and performance units to officers, key employees and consultants of the Company and its subsidiaries. In addition, the 1992 Plan provides for the automatic annual grant of options to the non-officer directors of the Company and for a further automatic grant to such non-officer directors each year in which the Company achieves a specified level of return on consolidated equity. The 1992 Plan replaced the Company's 1987 Plan and added an automatic grant feature for non-officer directors. The 1987 Plan has been terminated; however, options previously granted pursuant to this Plan remain outstanding and will be exercisable in accordance with the terms of the 1987 Plan. The 1992 Plan expires on November 9, 2002. Stock appreciation rights allow the holders to receive a predetermined percentage of the spread between the option price and the current value of the shares. A grant of restricted stock involves the immediate transfer to a participant of ownership of a specified number of shares of Common Stock in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other share ownership rights. A transfer of restricted stock may be made without consideration or in consideration of a payment by the participant that is less than current market value, as the Compensation and Option Committee may determine. A performance unit is the equivalent of $100 and is granted for the achievement of specified management objectives. No stock appreciation right, restricted stock or performance unit grants have been made under the 1992 Plan through June 30, 2002. Options to purchase shares of Common Stock have been granted under both the 1987 and 1992 Plans. However, no grants have been made to consultants of the Company. Options granted are at prices not less than market value on the date of grant and, under the terms of the 1992 Plan, may not be repriced. Options granted pursuant to the 1987 and 1992 Plans generally vest over five years and expire ten years from the date of grant. In August 2001, an employee received 10,000 shares of restricted stock not covered by the 1992 Plan. The fair value of each option granted has been estimated on the date of grant using the Black-Scholes option-pricing model, with the following assumptions for grants in fiscal 2002, fiscal 2001 and fiscal 2000: annual dividends consistent with the Company's current dividend policy, which resulted in payments of $0.10 per share in the last three years; expected volatility of 60 percent in fiscal 2002, 56 percent in fiscal 2001 and 33 percent in fiscal 2000; risk free interest rate of 4.0 percent in fiscal 2002, 3.9 percent in fiscal 2001 and 6.4 percent in fiscal 2000; and weighted average expected life of 5.4 years in fiscal years 2002, 2001 and 2000. The weighted average fair value of options granted was $20.51 in fiscal 2002, $14.81 in fiscal 2001 and $19.11 in fiscal 2000. Pro forma compensation cost for grants under the stock option program since July 1, 1995, recognized in accordance with SFAS No. 123, would reduce the Company's net income from $57.5 million (diluted EPS of $1.70) to $51.5 million (diluted EPS of $1.52) in fiscal 2002, from $32.4 million (diluted EPS of $0.96) to $27.3 million (diluted EPS of $0.81) in fiscal 2001, and from $72.8 million (diluted EPS of $2.06) to $68.6 million (diluted EPS of $1.94) in fiscal 2000. At June 30, 2002, a total of 1,742,310 shares of Common Stock were reserved for issuance under the 1992 Plan. 42 Stock Option Activity Summary: Years ended June 30 Weighted Average Shares Exercise Price --------------------------------------------------- Balance at June 30, 1999 3,628,662 $ 18.48 --------- Granted 968,000 $ 22.86 Canceled (133,250) $ 17.96 Exercised (105,138) $ 21.06 --------- Balance at June 30, 2000 4,358,274 $ 19.38 --------- Granted 855,900 $ 28.49 Canceled ( 69,850) $ 20.71 Exercised (202,725) $ 19.28 --------- Balance at June 30, 2001 4,941,599 $ 20.95 --------- Granted 323,500 $ 37.00 Canceled (704,020) $ 20.26 Exercised (635,379) $ 16.80 --------- Balance at June 30, 2002 3,925,700 $ 23.04 --------- Options Outstanding at June 30, 2002 Weighted average Weighted Range of Number of remaining average exercise prices options life in years exercise price --------------------------------------------------------- $ 5.65-5.65 16,800 0.36 $ 5.65 $ 9.88-14.00 442,914 1.32 $ 12.51 $ 15.09-22.00 1,700,534 4.81 $ 20.18 $ 22.59-33.50 1,414,952 7.58 $ 26.41 $ 34.80-45.00 350,000 9.07 $ 37.36 $ 48.26-48.26 500 9.67 $ 48.26 ------------- --------- $ 5.65-48.26 3,925,700 5.78 $ 23.04 ------------- --------- 43 Options Exercisable at June 30, 2002 Weighted Range of Number of average exercise prices options exercise price ------------------------------------------ $ 5.65-5.65 16,800 $ 5.65 $ 9.88-14.00 442,914 $ 12.51 $ 15.09-22.00 1,235,804 $ 19.59 $ 22.59-33.50 457,352 $ 25.94 $ 34.80-45.00 5,400 $ 42.01 $ 48.26-48.26 0 $ 0.00 ------------- --------- $ 5.65-48.26 2,158,270 $ 19.43 ------------- --------- At June 30, 2001, options with an average exercise price of $17.98 were exercisable on 2,764,669 shares. At June 30, 2000, options with an average exercise price of $16.88 were exercisable on 2,163,304 shares. In August 1998, the Company granted 600,000 performance-based stock options to a group of executive officers that only vested as Harman's common stock price achieved specified target levels and the average closing stock price remained at or above those levels for at least 30 consecutive calendar days. The Company measured the cost of these performance-based options as the difference between the exercise price and market price and recognized this expense over the period to the estimated vesting dates and in full for options that had vested. The Company recognized $8.6 million and $2.0 million in fiscal years 2001 and 2000, respectively, in compensation expense for the performance-based options. In September 2001, the Company repurchased these options for an amount equal to $18.125 per option, representing the difference between $38.00 and the $19.875 exercise price of the options and the options were canceled. 44 8. Income Taxes The tax provisions and analysis of effective income tax rates are comprised of the following items: Years Ended June 30 ($000s omitted) 2002 2001 2000 - ----------------------------------------------------------- Provision for Federal income taxes before credits at statutory rate $ 28,062 15,785 35,990 State income taxes 344 314 276 Difference between Federal statutory rate and foreign effective rate 526 1,086 (384) Permanent differences between financial and tax accounting income 226 683 624 Tax benefit from export sales (3,242) (1,336) (1,139) Change in valuation allowance (541) (2,927) (2,422) Change in other tax liabilities (925) (1,325) (1,257) Losses without income tax benefit -- 2,419 673 Federal income tax credits (2,000) (2,000) (1,875) Other 152 4 (563) -------- ------- ------- Total $ 22,602 12,703 29,923 -------- ------- ------- Income tax expense (benefit) consists of the following: Years Ended June 30 ($000s omitted) 2002 2001 2000 -------------------------------------------------- Current: Federal $ 9,158 (1,247) 10,158 State 380 209 368 Foreign 24,371 1,261 21,528 -------- ------- ------- 33,909 223 32,054 -------- ------- ------- Deferred: Federal (3,454) (216) (2,039) State (36) 146 (92) Foreign (7,817) 12,550 -- -------- ------- ------- (11,307) 12,480 (2,131) -------- ------- ------- Total $ 22,602 12,703 29,923 -------- ------- ------- 45 Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities and available tax loss carry-forwards. The following deferred taxes are recorded: Assets/(liabilities) June 30 ($000s omitted) 2002 2001 - ----------------------------------------------------- Federal tax credits $ 7,612 5,228 Inventory costing differences 5,948 7,485 Foreign net operating loss 17,649 7,343 Valuations and other allowances 13,594 9,381 -------- ------- Total gross deferred tax asset $ 44,803 29,437 Less valuation allowance (11,559) (3,640) -------- ------- Deferred tax asset $ 33,244 25,797 Total gross deferred tax liability from fixed asset depreciation $(13,335) (12,906) Foreign statutory accounting (10,937) (16,253) -------- ------- Total gross deferred tax liability $(24,272) (29,159) -------- ------- Net deferred tax asset (liability) $ 8,972 (3,362) -------- ------- The deferred taxes schedule reflects an asset valued at $8.5 million for acquired tax loss carryforwards relating to the fiscal 2002 acquisition of CAA. This asset is offset with a 100% valuation allowance and any utilization of this asset will reduce goodwill. The Company has a Federal research credit carryforward valued at $7.0 million and an alternative minimum tax credit valued at $0.6 million. The research credit will expire beginning in 2019. The alternative minimum tax credit does not expire. Management believes the results of future operations will generate sufficient taxable income to realize the net deferred tax asset. Cash paid for Federal, state and foreign income taxes was $6.2 million, $13.2 million, and $2.3 million, during fiscal years ended June 30, 2002, 2001 and 2000, respectively. Accrued income taxes were $37.9 million and $11.3 million as of June 30, 2002 and 2001, respectively. These balances are included in accrued liabilities. Income before income tax of the Company's foreign operations totaled $44.6 million for the year ended June 30, 2002. 46 9. Business Segment Data The Company designs, manufactures and markets high quality audio products and electronic systems for the consumer and professional markets. The Company is organized into segments by the end-user markets they serve - consumer and professional. The Consumer Systems Group designs, manufactures and markets audio and infotainment systems for vehicles and designs, manufactures and markets loudspeakers and electronics for home audio, video and computer applications. Consumer products are marketed worldwide under brand names including JBL, Harman Kardon, Infinity, Revel, Lexicon, Mark Levinson and Proceed. In the consumer segment, sales to DaimlerChrysler accounted for approximately 20.6%, 20.5% and 22.3% of consolidated net sales for the years ended June 30, 2002, 2001 and 2000, respectively. Accounts receivable due from DaimlerChrysler accounted for 19% and 17% of total consolidated accounts receivable at June 30, 2002 and 2001, respectively. The Professional Group designs, manufactures and markets loudspeakers and electronics used by audio professionals in concert halls, stadiums, airports and other buildings and recording, broadcast, cinema and music reproduction applications. Professional products are marketed worldwide under brand names including JBL, AKG, Crown, Studer, Soundcraft, DOD, Digitech and dbx. 47 The following table reports external sales, operating income (loss), assets, capital expenditures and depreciation and amortization by segment. Segmentation Years ended June 30 ($000s omitted) 2002 2001 2000 - ----------------------------------------------------------------- External sales: Consumer Systems $ 1,401,446 1,267,358 1,228,030 Professional 424,742 449,189 449,909 Other -- -- -- ----------- ---------- ---------- Total $ 1,826,188 1,716,547 1,677,939 ----------- ---------- ---------- Operating income (loss): Consumer Systems $ 110,445 94,517 112,211 Professional 16,802 1,948 21,504 Other (24,026) (25,237) (11,993) ----------- ---------- ---------- Total $ 103,221 71,228 121,722 ----------- ---------- ---------- Assets: Consumer Systems $ 1,023,623 803,435 745,971 Professional 295,534 315,265 349,206 Other 161,123 40,685 39,328 ----------- ---------- ---------- Total $ 1,480,280 1,159,385 1,134,505 ----------- ---------- ---------- Capital expenditures: Consumer Systems $ 97,673 69,908 64,679 Professional 13,636 17,147 15,259 Other 2,664 1,028 417 ----------- ---------- ---------- Total $ 113,973 88,083 80,355 ----------- ---------- ---------- Depreciation and amortization: Consumer Systems $ 61,357 45,795 46,011 Professional 14,552 17,213 17,056 Other 2,175 4,193 1,551 ----------- ---------- ---------- Total $ 78,084 67,201 64,618 ----------- ---------- ---------- The results for a manufacturing facility that principally produced professional products in fiscal 2002 has been reclassified from Consumer Systems to Professional in fiscal years 2001 and 2000, respectively, to conform to fiscal 2002 presentation. 48 Net sales, long-lived assets and net assets by geographic area for the years ended June 30, 2002, 2001 and 2000 were as follows. Years Ended June 30 ($000s omitted) 2002 2001 2000 - ----------------------------------------------------------------- Net sales: U.S. $ 714,774 715,449 786,296 Germany 459,042 372,320 340,205 Other Europe 289,711 293,101 312,090 Other 362,661 335,677 239,348 ----------- ---------- ---------- Total $ 1,826,188 1,716,547 1,677,939 ----------- ---------- ---------- Long-lived assets: U.S. $ 176,924 170,139 211,212 Germany 260,515 147,823 129,418 Other Europe 128,445 85,074 94,393 Other 37,633 44,337 8,072 ----------- ---------- ---------- Total $ 603,517 447,373 443,095 ----------- ---------- ---------- Net assets: U.S. $ 253,551 202,498 286,096 Germany 208,483 166,265 147,126 Other Europe 39,315 49,872 45,062 Other 25,280 4,307 8,049 ----------- ---------- ---------- Total $ 526,629 422,942 486,333 ----------- ---------- ---------- 49 10. Commitments and Contingencies In fiscal 2002, the Company recorded and paid $8.3 million as the result of a judgment on appeal in a lawsuit. The Company and its subsidiaries are also involved in several other legal actions. The outcome cannot be predicted with certainty; however, management, based upon advice from legal counsel, believes such actions are either without merit or will not have a material adverse effect on the Company's financial position or results of operations. Harman's Board of Directors has authorized the repurchase a total of 7.0 million shares. Through June 30, 2002, the Company has acquired and placed in treasury 5,807,300 shares of its common stock at a total cost of $140.6 million. Future repurchases are expected to be funded with operating cash flow. 11. Employee Benefit Plans Under the Retirement Savings Plan, domestic employees may contribute up to 50.0% of their pretax compensation. Each division will make a safe harbor non-elective contribution in an amount equal to 3.0% of a participant's eligible contribution. With the approval of the Board of Directors, each division may make a basic contribution equal to 3.0% of a participant's eligible compensation; a matching contribution of up to 3.0% (50.0% on the first 6.0% of an employee's tax-deferred contribution); and a profit sharing contribution. Profit sharing and matching contributions vest at a rate of 25.0% for each year of service with the employer, beginning with the second year of service. Expenses related to the Retirement Savings Plan for the years ended June 30, 2002, 2001 and 2000 totaled $8,480,000, $6,740,000 and $5,818,000, respectively. The Company also has a Supplemental Executive Retirement Plan(SERP) that provides normal retirement, pre-retirement and termination benefits, as defined, to certain key executives designated by the Board of Directors. Expenses related to the SERP for the years ended June 30, 2002, 2001 and 2000 were $1,996,000, $2,067,000 and $1,887,000, respectively. Additionally, certain non-domestic subsidiaries maintain defined benefit pension plans. These plans are not material to the accompanying consolidated financial statements. 12. Fair Value of Financial Instruments The estimated fair value of the Company's financial instruments was determined using market information and valuation methodologies. In the measurement of the fair value of certain financial instruments, quoted market prices were unavailable and other valuation techniques were utilized. These derived fair value estimates are significantly affected by the assumptions used. The fair values of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these items. Long-Term Debt. Fair values of long-term debt are based on market prices where available. When quoted market prices are not available, fair values are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 50 The Company used current market pricing models to estimate fair value of financial instruments. The carrying value and fair value of long-term debt were $474.7 million and $477.5 million, respectively, at June 30, 2002. 13. Derivatives The Company uses foreign currency forward contracts to hedge a portion of its forecasted transactions. These forward contracts are designated as foreign currency cash flow hedges and recorded at fair value in the statement of financial position. The recorded fair value is balanced by an entry to other comprehensive income (loss) in the statement of financial position until the underlying forecasted foreign currency transaction occurs. When the transaction occurs, the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the same income statement line item in which the foreign currency gain or loss on the underlying hedged transaction is recorded. If the underlying forecasted transaction does not occur, the amount recorded in accumulated other comprehensive income (loss) is reclassified to the miscellaneous, net line of the income statement in the then-current period. Because the amounts and the maturities of the derivatives approximate those of the forecasted exposures, changes in the fair value of the derivatives are highly effective in offsetting changes in the cash flows of the hedged items. Any ineffective portion of the derivatives is recognized in current earnings. The ineffective portion of the derivatives, which was immaterial for all periods presented, primarily results from discounts or premiums on forward contracts. As of June 30, 2002, the Company has contracts maturing through December 2002 to purchase and sell the equivalent of approximately $6.0 million of various currencies to hedge future foreign currency purchases and sales. The Company recorded approximately $0.2 million in net gains from cash flow hedges of forecasted foreign currency transactions in the year ended June 30, 2002. These gains were offset by equivalent losses on the underlying hedged items. The amount as of June 30, 2002, that will be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months that is associated with these hedges is a gain of $0.9 million. The Company has entered into cross currency swaps to hedge future cash flows due from foreign consolidated subsidiaries under operating lease agreements. As of June 30, 2002, the Company had such contracts in place to purchase and sell the equivalent of approximately $47.7 million in various currencies to hedge quarterly lease commitments through March 2006. The Company recorded $0.2 million in net gains from cash flow hedges related to these forward contracts in the year ended June 30, 2002. These gains were offset by equivalent losses on the underlying hedged items. The amount as of June 30, 2002 that will be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months that is associated with these hedges is a loss of $0.6 million. 51 The Company entered into swap contracts in August 2001 and October 2001 to convert interest on $150 million principal amount of its 7.32 percent senior notes due July 1, 2007, from a fixed rate to a floating rate. The Company also entered into swap contracts in March 2002 and April 2002 to convert interest on $200 million of the $300 million principal amount of its 7.125 percent senior notes due February 15, 2007, from a fixed rate to a floating rate. The objective of these interest rate swap contracts is to offset changes in the fair value of the Company's fixed rate debt caused by interest rate fluctuations. The interest rate swap contracts are carried at fair value in the Company's consolidated balance sheet and the related hedged portion of fixed-rate debt is carried at remaining principal due net of the valuation adjustment for the change in fair value of the debt obligation attributable to the hedged risk. This valuation adjustment as of June 30, 2002, was $10.3 million. Changes in the fair value of the interest rate swaps and the offsetting changes in the carrying value of the hedged fixed-rate debt are recognized in interest expense in the Company's consolidated statement of operations. As of June 30, 2002, the Company had contracts maturing through August 2002 to purchase and sell the equivalent of $177.0 million of various currencies to hedge foreign currency denominated loans to foreign subsidiaries. These loans are of a long-term investment nature. Therefore, foreign currency gains and losses on these loans are not included in the determination of net income, but are reported in the same manner as translation adjustments. Adjustments to the carrying value of the foreign currency forward contracts offset the gains and losses on the underlying loans and are also recorded as translation adjustments. The translation adjustment on these contracts was a negative $6.6 million at June 30, 2002, and is included in equity adjustment from foreign currency translation on the balance sheet. 14. Acquisitions In October 2001, the Company acquired 26 percent of CAA which is based in Filderstadt, Germany. The Company subsequently increased its ownership to 95 percent at June 30, 2002. CAA develops software platforms and provides services to enable and facilitate system integration in customer service functions. The Company recorded $20.1 million of goodwill at June 30, 2002 related to this acquisition. The Company acquired the TEMIC speech recognition and processing business from DaimlerChrysler in April 2002. This acquisition is expected to expand the Company's infotainment systems' capabilities to include full-integrated voice-activated solutions. At June 30, 2002, the Company recorded goodwill in the amount of $30.4 million related to the TEMIC acquisition. 52 15. Earnings Per Share Information
Years Ended June 30 (000s omitted except per share amounts) 2002 2001 2000 ------------------------------------------------------------------------------------------ Basic Diluted Basic Diluted Basic Diluted -------- ------- ------- ------- ------- ------- Net income $ 57,513 57,513 32,364 32,364 72,838 72,838 -------- ------- ------- ------- ------- ------- Shares of Harman common stock outstanding 32,261 32,261 32,296 32,296 34,452 34,452 Employee stock options -- 1,642 -- 1,441 -- 848 -------- ------- ------- ------- ------- ------- Total average equivalent shares 32,261 33,903 32,296 33,737 34,452 35,300 -------- ------- ------- ------- ------- ------- Earnings per share $ 1.78 1.70 1.00 0.96 2.11 2.06 -------- ------- ------- ------- ------- -------
Options to purchase 18,167, 12,419 and 25,500 shares of common stock at prices ranging from $45.00 to $48.26 and $36.10 to $45.00 at June 30, 2002 and 2001, respectively, and $26.63 at June 30, 2000, were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the share of common stock and, therefore, such options would be anti-dilutive. 16. Quarterly Summary of Operations (unaudited) The following is a summary of operations by quarter for fiscal 2002 and 2001: Three months ended: ($000s omitted except per share amounts) Fiscal 2002 SEPT 30 DEC 31 MAR 31 JUN 30 - ------------------------------------------------------------------------------- Net sales $ 399,009 467,432 458,310 501,437 Gross profit $ 103,721 127,438 123,482 145,230 Net income $ 5,031 11,730 14,648 26,104 EPS - basic * $ 0.16 0.37 .45 0.80 EPS - diluted * $ 0.15 0.35 .43 0.76 Fiscal 2001 Net sales $ 394,976 438,176 435,658 447,737 Gross profit $ 109,710 121,593 96,342 120,390 Net income $ 7,245 24,154 (18,392) 19,357 EPS - basic * $ 0.22 0.75 (0.57) 0.60 EPS - diluted * $ 0.21 0.72 (0.57) 0.58 Note: The quarter ended March 31, 2001, included special charges totaling $36.3 million, or $0.76 per diluted share. *Quarters do not add to full year due to changes in shares outstanding. 53 Shareholder Information Harman International Industries, Incorporated and Subsidiaries
Market Price Fiscal 2002 Fiscal 2001 Fiscal 2000 - ---------------------------------------------------------------------------------------------- High Low High Low High Low First quarter ended September 30 $41.710 30.890 $41.375 30.250 $23.594 20.469 Second quarter ended December 31 46.270 31.230 48.000 32.300 28.063 18.375 Third quarter ended March 31 51.460 42.600 37.050 24.900 31.875 27.500 Fourth quarter ended June 30 60.650 48.950 39.730 24.800 34.250 28.000
The Common Stock of the Company is listed on the New York Stock Exchange and is reported on the New York Stock Exchange Composite Tape under the symbol HAR. As of June 30, 2002, the Company's Common Stock was held by approximately 184 record holders. The table above sets forth the reported high and low sales prices at the market close of the Company's Common Stock, as reported on the New York Stock Exchange, for each quarterly period for fiscal years ended June 30, 2002, 2001, and 2000. The Company paid dividends during fiscal years 2002, 2001 and 2000 of $.10 per share, with a dividend of $.025 per share paid in each of the four quarters. 54 -----END PRIVACY-ENHANCED MESSAGE-----