-----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, MHwGCbcHozlFTcnAj8CnExnDuLIyfZKppEHYcsSfotpSZAmPwn2PQb1a5HQKk+Zq 8Z4L0cvFo2v7FGiD+PMe5Q== 0001171520-02-000116.txt : 20021028 0001171520-02-000116.hdr.sgml : 20021028 20021028161342 ACCESSION NUMBER: 0001171520-02-000116 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020731 FILED AS OF DATE: 20021028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATURAL FOODS INC CENTRAL INDEX KEY: 0001020859 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 050376157 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15723 FILM NUMBER: 02800068 BUSINESS ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 BUSINESS PHONE: 8607792800 MAIL ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 10-K 1 d02-1054.txt UNITED NATURAL FOODS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for fiscal year ended July 31, 2002 or |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________. Commission File Number: 000-1020859 UNITED NATURAL FOODS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the common stock held by non-affiliates of the registrant was $422,817,263, based upon the closing price of the registrant's common stock on the Nasdaq National Market on October 1, 2002. The number of shares of the registrant's common stock, $0.01 par value, outstanding as of October 1, was 19,106,067. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on December 3, 2002 are incorporated herein by reference into Part III of this report. UNITED NATURAL FOODS, INC. FORM 10-K TABLE OF CONTENTS Section Page Part I Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 12 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 24 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43 Part III Item 10. Directors and Executive Officers of the Registrant 43 Item 11. Executive Compensation 43 Item 12. Security Ownership of Certain Beneficial Owners and Management 43 Item 13. Certain Relationships and Related Transactions 43 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 43 Signatures 44 Certification 45 2 PART I. ITEM 1. BUSINESS We are the leading national distributor of natural and organic foods and related products in the United States. We are the primary distributor to a majority of our customers and carry more than 30,000 high-quality natural products, consisting of national brand, regional brand, private label and master distribution products in six product categories consisting of grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements, bulk and food service products and personal care items. We serve more than 10,000 customers including super natural chains, independent natural products retailers, conventional supermarkets and buying clubs located across the United States and we have been the primary distributor to the two largest super natural chains, Whole Foods Market, Inc. ("Whole Foods Market") and Wild Oats, Inc., ("Wild Oats") for more than 10 years. On June 19, 2002, we announced that our contract as primary distributor to Wild Oats, Inc., would not be renewed past its expiration date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and expect revenue from such distribution of approximately $10 million to $15 million in fiscal 2003. In recent years, our sales to existing and new customers have increased through the acquisition of or merger with natural products distributors, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Through our subsidiary, the Natural Retail Group, we also own and operate 12 retail natural products stores located primarily in Florida. We believe our retail business serves as a natural complement to our distribution business because it enables us to develop new marketing programs and improve customer service. In the fiscal year ended July 31, 2002 we generated total net sales of $1.2 billion. Since 1985, we have completed 11 acquisitions of distributors and suppliers, including Hershey Import Co., Inc. ("Hershey") and Albert's Organics, Inc. ("Albert's"), and 11 acquisitions of retail stores, all of which have expanded our distribution network, product offerings and customer base. On November 6, 2001, our Albert's division purchased the assets of privately held Boulder Fruit Express, Inc. ("Boulder Fruit Express"), located in Louisville, Colorado. Boulder Fruit Express provides high quality organic produce and perishables to a market area that includes Colorado, New Mexico, Kansas, Nebraska and Iowa. Boulder Fruit Express' high level of customer service complements our rapidly growing Denver produce division. On October 11, 2002, we acquired substantially all of the assets of Blooming Prairie Cooperative Warehouse ("Blooming Prairie"), the largest volume distributor of natural foods and products in the Midwest region of the United States. Prior to our acquisition of Blooming Prairie, our distribution operations were divided into three principal units: United Natural Foods in the Eastern Region, Mountain People's Warehouse, Inc. and Rainbow Natural Foods, Inc. in the Western Region, and Albert's in various markets in the United States. We have added a fourth principal unit to our distribution operations with the acquisition of Blooming Prairie. On October 23, 2002, we signed an agreement to purchase Northeast Cooperatives, a distributor of natural foods and products in the Eastern United States. Northeast Cooperatives, headquartered in Brattleboro, Vermont, and in business since 1973, had approximately $120 million in sales for the latest twelve months. Consummation of the transaction is contingent upon customary closing conditions, approval by the members of Northeast Cooperatives and approval from Northeast Cooperatives' lenders. NATURAL PRODUCTS INDUSTRY Although most natural products are food products, including organic foods, the natural products industry encompasses a number of other categories, including nutritional, herbal and sports supplements, toiletries and personal care items, naturally based cosmetics, natural/homeopathic medicines, pet products and cleaning agents. According to the June 2002 Natural Foods Merchandiser, sales revenues for all types of natural products exceeded $34 billion in 2001, an increase of 7% compared to 2000. This increase in sales of natural and organic products in retail and nonretail outlets was driven primarily by substantial growth in the following categories: (i) sales of natural foods, especially nutrition bars; (ii) food service, which includes deli and restaurant and juice bars; (iii) other beverages, which includes shelf stable and refrigerated juices, functional beverages and sports drinks, but excludes dairy, nondairy, beer, wine, coffee and tea beverages; and (iv) snack foods. The fastest growing categories in organic foods were food service, nutrition bars, snack foods, nondairy beverages and packaged grocery. Other product categories driving industry growth include the following: (i) sports supplements, which include powders, pills and sports beverages; (ii) specialty supplements, including Ayurvedic products, hormones and essential fatty acids; (iii) personal care categories, including aromatherapy; (iv) house wares; and (v) pet products. Our fastest growing product categories are frozen and refrigerated. Organic produce also experienced strong growth in 2001 as sales totaled $2.2 billion, or 40%, of the $5.5 billion organic foods market. Among the reasons cited by the Natural Foods Merchandiser for the growth were increased consumer demand due primarily to the health benefits of fresh fruits and vegetables, increasing availability of convenience items such as bagged salads and cut vegetables, greater seasonal availability, expansion of produce departments in both conventional and natural retailers, and an increasing number of acres under certified organic production. 3 Historically the interest in natural and organic products has been limited to the higher end of the socioeconomic scale. However, the Natural Foods Merchandiser recently noted that the consumer's desire for healthful natural convenience foods has led to increased demand by more middle-class and lower middle-class consumers for the core organic and natural lifestyle. The U.S. economy has suffered a general economic downturn in recent fiscal years. As a result of the economic downturn, the pace of consumer spending has likewise faltered in most sectors of the economy. We believe that the recent economic downturn has thus far not affected our growth but there can be no assurance that we will not be affected by the economic downturn in the future. COMPETITIVE ADVANTAGES We believe we benefit from a number of significant competitive advantages including: MARKET LEADER WITH A NATIONWIDE PRESENCE. We believe we are one of the few distributors capable of serving local and regional customers as well as the rapidly growing super natural chains. We believe we have significant advantages over smaller, regional natural products distributors as a result of our ability to: (i) expand marketing and customer service programs across regions; (ii) expand national purchasing opportunities; (iii) consolidate systems applications among physical locations and regions; (iv) integrate administrative and accounting functions; and (v) reduce geographic overlap between regions. On September 12, 2002, Quality Assurance International, Inc. ("QAI") announced that we had earned organic certification, making us the first organic food distribution network in the United States to gain certification coast-to-coast. This certification comprises all of our distribution centers, including those of our Albert's and Hershey divisions, except for our newly acquired Blooming Prairie facilities, which are preparing to undergo the certification process. LOW-COST DISTRIBUTOR. In addition to our volume purchasing opportunities, a critical component of our position as a low-cost provider is our management of warehouse and distribution costs. Our continuing growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to ensure adequate space for future needs. We have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities, including the expansion of our facilities located in Auburn, California, New Oxford, Pennsylvania and Vernon, California. In January 2002 we began distribution from our new 310,000 square foot Atlanta, Georgia facility. We are currently utilizing approximately 240,000 square feet and leasing the remaining 70,000 square feet. The efficiencies created by consolidating our two Atlanta, Georgia facilities into one have lowered our expenses relative to sales. In March 2002 we began distribution to our southern California, southern Nevada and Arizona customers from our new 200,000 square foot distribution center in Fontana, California. The proximity of our new facility to these customers enables us to provide improved service, while reducing transportation expenses. In May 2002 we relocated our Hershey subsidiary from Rahway, New Jersey to Edison, New Jersey in order to expand our shipping and receiving capacity and to consolidate inventories currently being stored in outside warehouses. At fiscal year end the increased capacity of our distribution centers was approximately 1,000,000 square feet greater than it was five years ago. We are currently expanding our Chesterfield, New Hampshire distribution facility from its existing 117,000 square feet to 289,000 square feet. This will enable us to service existing and new customers, provide more product diversity and enable us to better balance products among our distribution centers in our Eastern region. While operating margins may be affected in periods in which these expenses are incurred, over the long term, we expect to benefit from the increased absorption of our expenses over a larger sales base. CUSTOMER RELATIONSHIPS. We serve more than 10,000 customers across the United States. We have developed long-standing customer relationships, which we believe are among the strongest in the industry. We have also been the primary supplier to each of the industry's two largest super natural chains, Whole Foods Market, Inc. and Wild Oats, Inc. for more than ten years. Our distribution arrangement with Whole Foods Market, Inc. has been extended through August 31, 2004. On June 19, 2002, we announced that our contract as primary distributor to Wild Oats, Inc. would not be renewed past its expiration date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and expect revenue from such distribution of approximately $10 million to $15 million in fiscal 2003. EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. Our management team has extensive experience in the natural products industry and has been successful in identifying, consummating and integrating multiple acquisitions. Since 1985, we have successfully completed 11 acquisitions of distributors and suppliers, including Hershey and Albert's, and 11 acquisitions of retail stores. In addition, our executive officers and directors and their affiliates, and the Employee Stock Ownership Trust, beneficially own in the aggregate approximately 15.6% of our Common Stock. Accordingly, senior management and employees have significant incentive to continue to generate strong growth in operating results in the future. GROWTH STRATEGY Our growth strategy is to maintain and enhance our position as a leading national distributor to the natural products industry. Key elements of our strategy include: 4 INCREASE MARKET SHARE OF THE GROWING NATURAL PRODUCTS INDUSTRY. Our strategy is to continue to increase our leading market share of the growing natural products industry by expanding our customer base, increasing our share of existing customers' business and continuing to expand and further penetrate new distribution territories, particularly in the Midwest and Texas markets. To this end, on October 11, 2002 we acquired substantially all the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest region of the United States. The acquisition of Blooming Prairie's Iowa City, Iowa and Mounds View, Minnesota distribution facilities has provided us with an immediate physical base and growth platform with which to broaden our presence in the fast growing Midwest market. On October 23, 2002, we signed an agreement to purchase Northeast Cooperatives, a distributor of natural foods and products in the Eastern United States. Northeast Cooperatives, headquartered in Brattleboro, Vermont, and in business since 1973, had approximately $120 million in sales for the latest twelve months. Consummation of the transaction is contingent upon customary closing conditions, approval by the members of Northeast Cooperatives and approval from Northeast Cooperatives' lenders. EXPAND CUSTOMER BASE. We have expanded our number of customers served to more than 10,000 as of July 31, 2002. We plan to continue to expand our coverage of the highly fragmented natural products industry by cultivating new customer relationships within the industry and by further developing other channels of distribution such as traditional supermarkets, mass market outlets, institutional food service providers, buying clubs, hotels and gourmet stores. INCREASE MARKET SHARE OF EXISTING CUSTOMERS' BUSINESS. We seek to become the primary supplier for a majority of our customers by offering the broadest product offerings in the industry at the most competitive prices. Since 1993, we have expanded our product offerings from approximately 14,000 to more than 30,000 SKUs as of July 31, 2002. Additionally, we have launched a number of private label programs that present to us and our customers higher margins than many of our existing product offerings. As a result, we believe we have become the primary distributor to the majority of our natural products customer base. CONTINUE TO EXPAND AND PENETRATE INTO NEW REGIONS OF DISTRIBUTION. As discussed under "Competitive Advantages," we have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities. We will continue to selectively evaluate opportunities to acquire distributors to fulfill existing markets and expand into new markets. To this end on October 11, 2002 we acquired substantially all the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest region of the United States. On October 23, 2002, we signed an agreement to purchase Northeast Cooperatives, a distributor of natural foods and products in the Eastern United States. Northeast Cooperatives, headquartered in Brattleboro, Vermont, and in business since 1973, had approximately $120 million in sales for the latest twelve months. Consummation of the transaction is contingent upon customary closing conditions, approval by the members of Northeast Cooperatives and approval from Northeast Cooperatives' lenders. CONTINUE TO IMPROVE EFFICIENCY OF NATIONWIDE DISTRIBUTION NETWORK. We continually seek to improve our operating results by integrating our nationwide network utilizing the best practices within the industry and within each of the regions, which have formed our foundation. This focus on achieving improved economies of scale in purchasing, warehousing, transportation and general and administrative functions has improved our operating margin, which increased from 3.0% in fiscal 2001 to 3.6% for the fiscal year ended July 31, 2002 (excluding special items). CONTINUE TO PROVIDE THE LEADING DISTRIBUTION SOLUTION. Our strategy is to continue to provide the leading distribution solution to the natural products industry through our national presence, regional responsiveness, high customer service focus and breadth of product offerings. We offer our customers a selection of inventory management, merchandising, marketing, promotional and event management services to increase sales and enhance customer satisfaction. The marketing services, many of which are supplier-sponsored, include monthly and thematic flyer programs, in-store signage and assistance in product display. In September 2002, we announced a strategic alliance with Living Naturally, LLC, a leading provider of marketing promotion and electronic ordering systems to the natural products industry. We plan to provide our customers access to Living Naturally's suite of products at preferred prices and terms. These products include an intelligent electronic ordering system and turnkey retailer website services, which are expected to create new opportunities for our retailers to increase their inventory turns, reduce their costs and enhance their profits. PRODUCTS Our extensive selection of high-quality natural products enables us to provide a primary source of supply to a diverse base of customers whose product needs vary significantly. We carry more than 30,000 high-quality natural products, consisting of national brand, regional brand, private label and master distribution products in six product categories consisting of grocery and general merchandise, produce, perishables and frozen, nutritional supplements, bulk and food service products and personal care items. Our private label products address certain preferences of customers, which are not otherwise being met by other suppliers. 5 We evaluate approximately 3,000 potential new products each year based on both existing and anticipated trends in consumer preferences and buying patterns. Our buyers regularly attend regional and national natural, organic, specialty, ethnic and gourmet products shows to review the latest products which are likely to be of interest to retailers and consumers. We also actively solicit suggestions for new products from our customers. We make the majority of our new product decisions at the regional level. We believe that our decentralized purchasing practices allow our regional buyers to react quickly to changing consumer preferences and to evaluate new products and new product categories regionally. Additionally, many of the new products that we offer are marketed on a regional basis or in our own retail stores prior to being offered nationally, which enables us to evaluate local consumer reaction to the products without incurring significant inventory risk. Furthermore, by exchanging regional product sales information between our regions, we are able to make more informed and timely new product decisions in each region. SUPPLIERS We purchase our products from approximately 2000 suppliers. The majority of our suppliers are based in the United States, but we source products from suppliers throughout Europe, Asia, South America, Africa and Australia. We believe the reason natural products suppliers seek distribution of their products through us is because we provide access to a large and growing customer base, distribute the majority of the suppliers' products and offer many kinds of marketing programs to our customers to help aggressively sell the suppliers' products. Substantially all product categories that we distribute are available from a number of suppliers and therefore we are not dependent on any single source of supply for any product category. Our largest supplier, Hain Celestial Group, Inc., accounted for approximately 7.5% of total purchases in fiscal 2002. We are well positioned to respond to regional and local customer preferences for natural products by decentralizing the majority of our purchasing decisions for all products except bulk commodities. We believe that regional buyers are best suited to identify and to respond to local demands and preferences. Although each of our regions is responsible for placing its own orders and can select the products that it believes will most appeal to its customers, each region is required to participate in company-wide purchasing programs that enable us to take advantage of our consolidated purchasing power. For example, we have positioned ourselves as the largest purchaser of organically grown bulk products in the natural products industry by centralizing our purchase of nuts, seeds, grains, flours and dried foods. In addition, we have implemented a number of national consumer flyer programs, which have resulted in incremental sales growth for our customers and ourselves. Our purchasing staff cooperates closely with suppliers to provide new and existing products. The suppliers assist in training our customer service representatives in marketing new products, identifying industry trends and coordinating advertising and other promotions. We maintain a comprehensive quality assurance program. All of the products we sell, which are represented as "organic," are required to be certified as such by an independent third-party agency. We maintain current certification affidavits on all organic commodities and produce in order to verify the authenticity of the product. All potential suppliers of organic products are required to provide such third-party certification to us before they are approved as a supplier. We recently became the first organic food distribution network in the United States to gain organic certification coast-to-coast. This certification comprises all of our distribution centers, including of our Albert's and Hershey divisions, except for our newly acquired Blooming Prairie facilities, which are preparing to undergo the certification process. CUSTOMERS We market our products to more than 10,000 customers across the United States. We maintain long-standing customer relationships with independent natural products retailers, including super natural chains, and have continued to emphasize our relationships with new customers, such as conventional supermarkets, mass market outlets and gourmet stores, all of which are continually increasing their natural product offerings. Among our wholesale customers for the fiscal year ended July 31, 2002 were leading super natural chains: Whole Foods Market, Inc. (including Bread and Circus, Fresh Fields, and Bread of Life), Wild Oats, Inc. (including Henry's), Nature's Fresh! Northwest, Wild Harvest, Rainbow, Basha's, and conventional supermarket chains such as Wegman's, Stop and Shop, Shaws/Star Market, Quality Food Centers (QFC), Hannaford, Pathmark, Bilos, Lowe's and Publix. We believe that we are the primary supplier to the majority of our customers. Whole Foods Market, Inc. accounted for approximately 19% and 17% of our net sales in fiscal 2002 and 2001, respectively. Wild Oats, Inc. accounted for approximately 14% of our net sales in both fiscal 2002 and 2001. Whole Foods Market, Inc. was a member of the Blooming Prairie Cooperative Warehouse, which we recently acquired, and we expect Whole Foods Market, Inc. to represent approximately 25% of our total sales in fiscal 2003. No other customer accounted for more than 10% of our net sales in fiscal 2002. On June 19, 2002, we announced that our contract as primary distributor to Wild Oats, Inc., would not be renewed past its expiration date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and expect revenue of approximately $10 million to $15 million from such distribution in fiscal 2003. 6 FILL RATES Fill rates refer to the percentage of items ordered by customers that are shipped, excluding manufacturers' out of stocks. Our average fill rate for fiscal 2002 was approximately 96%, which we believe is the highest in the industry. We believe that our high fill rates are attributable to our experienced purchasing department and sophisticated warehousing, inventory control and distribution systems. We offer next-day delivery service to a majority of our active customers and offer multiple deliveries each week to our largest customers. We believe that customer loyalty is dependent upon outstanding customer service to ensure accurate fulfillment of orders, timely product delivery, low prices and a high level of product marketing support. MARKETING We have developed a variety of supplier-sponsored marketing services, which cater to a broad range of retail formats. These programs are designed to educate consumers, profile suppliers and increase sales for retailers, the majority of which do not have the resources necessary to conduct such marketing programs independently. We offer multiple monthly flyer programs featuring the logo and address of the participating retailer imprinted on a flyer advertising approximately 200 sale items, which are sold by the retailer to its customers. The color flyers are designed by our in-house marketing department utilizing modern digital photography and contain detailed product descriptions and pricing information. Additionally, each flyer generally includes detailed information on selected suppliers, recipes, product features and a comparison of the characteristics of a natural product with a similar mass-market product. The monthly flyer programs are structured to pass through to the retailer the benefit of company negotiated discounts and advertising allowances. The program also provides retailers with posters, window banners and shelf tags to coincide with each month's promotions. In addition, in order to maximize our national leverage and to utilize our rich internal marketing resources to best effect, we have increased the number of national marketing programs we offer, with favorable results for our suppliers, our customers and ourselves. In addition to our monthly flyer programs, we offer thematic custom and seasonal consumer flyers which are used to promote items associated with a particular cause or season, such as environmentally sensitive products for Earth Day or foods and gifts particularly popular during the holiday season. We also (i) offer in-store signage and promotional materials, including shopping bags and end-cap displays, (ii) provide assistance with planning and setting up product displays and (iii) advise on pricing decisions to enable our customers to respond to local competition. DISTRIBUTION We have carefully chosen the sites for our distribution centers to provide direct access to our regional markets. This proximity allows us to reduce our transportation costs compared to competitors that seek to service their customers from locations that are often hundreds of miles away. We believe that we incur lower inbound freight expense than our regional competitors because our national presence allows us to buy full and partial truckloads of products. Whenever necessary, we backhaul between our distribution centers and satellite staging facilities using our own trucks. Many of our competitors must employ outside consolidation services and pay higher carrier transportation fees to move products from other regions. Additionally, we can redistribute overstocks and inventory imbalances at one distribution center to another distribution center to ensure products are sold prior to their expiration date. Products are delivered to our distribution centers primarily by our leased fleet of trucks, contract carriers and the suppliers themselves. We lease our trucks from national leasing companies such as Ryder Truck Leasing and Penske Truck Leasing, which in some cases maintain facilities on our premises for the maintenance and service of these vehicles. Other trucks are leased from regional firms that offer competitive services. We ship certain orders for supplements or for items that are destined for areas outside regular delivery routes through United Parcel Service and other independent carriers. Deliveries to areas outside the continental United States are shipped by ocean-going containers on a weekly basis. 7 TECHNOLOGY We have made a significant investment in information and warehouse management systems. We continually evaluate and upgrade our management information systems based on the best practices in the distribution industry and at our regional operations in order to make the systems more efficient, cost effective and responsive to customer needs. These systems include functionality in radio frequency inventory control, computer-assisted order processing and slot locator/retrieval assignment systems. At the receiving docks, warehouse workers attach computer-generated, preprinted locator tags to inbound products. These tags contain the expiration date, locations, quantity, lot number and other information in bar code format. Customer returns are processed by scanning the UPC bar codes. We also employ a management information system that enables us to lower our inbound transportation costs by making optimum use of our own fleet of trucks or by consolidating deliveries into full truckloads. Orders from multiple suppliers and multiple distribution centers are consolidated into single truckloads for efficient use of available vehicle capacity and return-haul trips. RETAIL OPERATIONS Our Natural Retail Group ("NRG") currently owns and operates 12 natural product retail stores located in Florida, Maryland and Massachusetts. Our retail operations are classified in the Other category for segment reporting purposes. Our retail strategy is to: (i) selectively acquire existing stores that meet our strict criteria in categories such as sales and profitability, growth potential, merchandising and management and (ii) open new stores in areas with favorable competitive climates and growth potential. Generally, we will not purchase or open new stores that directly compete with primary retail customers of our distribution business. We believe our retail stores have a number of advantages over their competitors, including our financial strength and marketing expertise, the purchasing power resulting from group purchasing by stores within NRG and the breadth of their product selection. We opened our twelfth store, SunSplash Market in Port Charlotte, Florida, during the first quarter of fiscal year 2002. Acting as a distributor to our retail stores is an advantageous position for us and includes the ability to: (i) control the purchases made by these stores: (ii) expand the number of high-growth, high-margin product categories such as produce and prepared foods within these stores; and (iii) keep current with the retail marketplace which enables us to better serve our distribution customers. Additionally, as the primary natural products distributor to our retail locations, we expect to realize significant economies of scale and operating and buying efficiencies. As an operator of retail stores, we also have the ability to test market select products prior to offering them nationally. We can then evaluate consumer reaction to the product without incurring significant inventory risk. We are able to test new marketing and promotional programs within our stores prior to offering them to a broader customer base. COMPETITION The natural products distribution industry is highly competitive and has been characterized in recent years by significant consolidation and the emergence of large competitors. Our major national competitor is Tree of Life Distribution, Inc. (a subsidiary of Koninklijke Wessanen N.V.), and our major regional competitor is Nature's Best, Inc. in the Western United States. On October 11, 2002 we acquired substantially all the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest United States. On October 23, 2002, we signed an agreement to purchase Northeast Cooperatives, a distributor of natural foods and products in the Eastern United States. Northeast Cooperatives, headquartered in Brattleboro, Vermont, and in business since 1973, had approximately $120 million in sales for the latest twelve months. Consummation of the transaction is contingent upon customary closing conditions, approval by the members of Northeast Cooperatives and approval from Northeast Cooperatives' lenders. We also compete with numerous smaller regional and local distributors of ethnic, Kosher, gourmet and other specialty foods. Additionally, we compete with national, regional and local distributors of conventional groceries and, to a lesser extent, companies that distribute to their own retail facilities. We believe that distributors in the natural products industry primarily compete on product quality and depth of inventory selection, price and quality of customer service and that we currently compete effectively with respect to each of these factors. Our retail stores compete against other natural products outlets, conventional supermarkets and specialty stores. We believe that retailers of natural products compete principally on product quality and selection, price, customer service, knowledge of personnel and convenience of location. EMPLOYEES As of July 31, 2002, we had approximately 3,000 full and part-time employees. An aggregate of approximately 235 of the employees at our Auburn, Washington, and Edison, New Jersey facilities are covered by a collective bargaining agreement. These agreements expire in June of 2005 and February of 2003 respectively. We have never experienced a work stoppage by our unionized employees and we believe that our employee relations are good. On October 11, 2002 we acquired substantially all the assets of Blooming Prairie, adding approximately 280 employees. Approximately 100 of these employees are covered by a collective bargaining agreement. This agreement expires in June of 2003. The predecessor company has never experienced a work stoppage by its unionized employees. 8 ITEM 2. PROPERTIES We maintained twelve distribution centers at fiscal year end. These facilities consisted of an aggregate of approximately 1.9 million square feet of space, the largest capacity of any distributor in the natural products industry. We are currently expanding our Chesterfield, New Hampshire distribution facility from its existing 117,000 square feet to 289,000 square feet. On October 11, 2002, we acquired substantially all the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest region of the United States. The acquisition of Blooming Prairie's Iowa City, Iowa and Mounds View, Minnesota distribution facilities increased our capacity by approximately 238,000 square feet and provides us with an immediate physical base and growth platform to broaden our presence in the fast-growing Midwest market. Our total distribution space will be approximately 2.3 million square feet upon completion of the expansion of our Chesterfield, New Hampshire facility. Set forth below for each of our distribution facilities is its location, its current size (in square feet) and the date when our lease will expire for those distribution facilities that we do not own. LOCATION SIZE LEASE EXPIRATION (Square feet) Atlanta, Georgia 310,000 Owned Auburn, California 150,000 Owned Auburn, California 100,000 Owned Auburn, Washington 204,800 March 2009 Bridgeport, New Jersey 35,700 Owned Chesterfield, New Hampshire (1) 117,000 Owned Dayville, Connecticut 245,000 Owned Denver, Colorado 180,800 July 2013 Fontana, California 200,000 November 2011 Iowa City, Iowa 134,600 Owned Kealeakua, Hawaii 16,300 December 2006 Mounds View, Minnesota 104,000 May 2007 Vernon, California 34,500 Owned New Oxford, Pennsylvania 250,000 Owned Winterhaven, Florida 10,600 September 2003 - -------------------------------------------------- Total 2,093,300 (1) We expect to complete the expansion of this facility to 289,000 square feet during the summer of 2003. We also rent facilities to operate twelve retail stores along the east coast with various lease expiration dates and a 107,000 square foot processing and manufacturing facility in Edison, New Jersey with lease expiration date of March 31, 2007. ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in routine litigation that arises in the ordinary course of our business. There are no pending material legal proceedings to which we are a party or to which our property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended July 31, 2002. 9 EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS OF THE REGISTRANT The executive officers, key employees and directors of the Company and their ages as of October 18, 2002 are listed below: NAME AGE POSITION Thomas B. Simone (1) (2) (3) 60 Chair of the Board, Chair of the Nominating and Governance Committee Michael S. Funk 48 Chief Executive Officer and Vice Chair of the Board Steven H. Townsend 49 President and Director Todd E. Weintraub 39 Vice President, Chief Financial Officer and Treasurer Kevin T. Michel 45 President of Western Region, Assistant Secretary and Director Richard Antonelli 45 President of Eastern Region Daniel V. Atwood 44 Senior Vice President and Secretary Gordon D. Barker (1) (2) (3) 56 Director and Chair of the Compensation Committee Joseph M. Cianciolo (1) (2) (3) 63 Director and Chair of the Audit Committee Gail A. Graham 51 Director James P. Heffernan (1) (2) (3) 56 Director (1) Member of the Audit Committee. (2) Member of the Nominating and Governance Committee. (3) Member of the Compensation Committee. Thomas B. Simone has served as the Chair of the Board of Directors since December 1999 and as a member of the Board of Directors since October 1996. Mr. Simone is the Chair of the Nominating and Governance Committee and is a member of the Audit Committee and the Compensation Committee. Mr. Simone has served as President and Chief Executive Officer of Simone & Associates, a healthcare and natural products investment and consulting company, since April 1994. Mr. Simone also serves on the Board of Directors of ECO-DENT International, Inc. and Spectrum Organic Products, Inc. Michael S. Funk has served as Vice Chair of the Board of Directors since February 1996 and as a member of the Board of Directors since February 1996. Mr. Funk has served as our Chief Executive Officer since December 1999. Mr. Funk served as our President from October 1996 to December 1999 and as our Executive Vice President from February 1996 until October 1996. Since its inception in July 1976 until April 2001, Mr. Funk served as President of Mountain People's Warehouse. Steven H. Townsend has served as a member of the Board of Directors since December 2000, as our President since April 2001, and as President of our Eastern Region from January 2000 to October 2002. Mr. Townsend served on the Board of Directors of our predecessor company, Cornucopia Natural Foods, from August 1988 until October 1996, as its Vice President of Finance and Administration from July 1983 until May 1995, and as its Chief Financial Officer from June 1995 until December 1997. Mr. Townsend was self-employed as a real estate developer from January 1998 to November 1999. Todd E. Weintraub has served as our Vice President, Treasurer and Chief Financial Officer since April 2001. Mr. Weintraub served as our Corporate Controller from July 2000 until April 2001. From December 1997 until July 2000, Mr. Weintraub served as our Manager of Financial Reporting. From June 1995 until December 1997, Mr. Weintraub served in certain financial reporting positions at State Street Corporation and Allmerica Financial Corporation. Mr. Weintraub met all requirements as a Certified Public Accountant and was also employed by KPMG LLP from January 1990 until February 1994. Kevin T. Michel has served as a member of the Board of Directors since February 1996 and as President of our Western Region since April 2001. Mr. Michel served as our Chief Financial Officer and Treasurer from December 1999 until April 2001, as our interim Chief Financial Officer and Treasurer from August 1999 until November 1999, as Executive Vice President of our Western Region from April 1999 until July 1999 and as President of our Central Region from January 1998 until March 1999. Mr. Michel served as Chief Financial Officer of Mountain People's Warehouse from January 1995 until December 1997. 10 Richard Antonelli has served as President of our Eastern Region since September 2002. Mr. Antonelli served as president of Fairfield Farm Kitchens, a Massachusetts-based custom food manufacturer from August of 2001 until August of 2002. Mr. Antonelli served as Director of Sales for United Natural Foods, and its predecessor company, from 1985 through July 2001. Daniel V. Atwood has served as our Senior Vice President since October 2002. He served as our National Vice President of Marketing from April 2001 to October 2002 and as our Vice President and Secretary since January 1998. Mr. Atwood served on the Board of Directors of our predecessor company, Cornucopia Natural Foods from August 1988 to October 1996 and served on our Board of Directors from November 1996 to December 1997. Mr. Atwood served as President of our Natural Retail Group from August 1995 until March 2001. Gordon D. Barker has served as a member of the Board of Directors since September 1999. Mr. Barker serves as the Chair of the Compensation Committee and as a member of the Audit Committee and the Nominating and Governance Committee. Mr. Barker has served as Chief Executive Officer of Snyder's Drug Stores, Inc. since October 1999. Mr. Barker was the principal of Barker Enterprises, an investment and consultant firm from January 1997 until September 1999. From March 1968 to December 1996, Mr. Barker was employed at PayLess Drug Stores, Inc. (subsequently renamed ThriftyPayLess Drug Stores, Inc.), where he rose from Pharmacist, through several levels of management and ultimately became Chief Executive Officer and President. Mr. Barker also serves on the following Boards of Directors: Gart Sports Company, NuMedics Inc., and Advanced Cosmetic Treatments, LLC. Joseph M. Cianciolo has served as a member of the Board of Directors since September 1999. Mr. Cianciolo serves as Chair of the Audit Committee and as a member of the Compensation Committee and the Nominating and Governance Committee. Mr. Cianciolo served as the Managing Partner of KPMG LLP, Providence, Rhode Island Office, from June 1990 until June 1999. Mr. Cianciolo also serves on the Board of Directors of Speidel, Inc., and the Board of Trustees of Providence College and is Trustee and Treasurer of the Board of Rhode Island Hospital. Mr. Cianciolo also serves on the Board of Directors of the Rhode Island Airport Corporation, a non-public corporation. Gail A. Graham has served as a member of the Board of Directors since October 2002. Ms. Graham has served as the General Manager of Mississippi Market Natural Foods Cooperative, a consumer owned and controlled cooperative in St. Paul, Minnesota since October 1999. From August 1986 until October 1999, Ms. Graham served as General Manager of Seward Co-op Grocery & Deli, one of the oldest community-owned natural food stores in Minneapolis, Minnesota. Ms. Graham served as Vice Chair of the Board of Directors of Blooming Prairie Cooperative Warehouse from November 1994 to October 1998 and November 2000 to October 2002. Ms. Graham was the Chair of the Board of Directors of Blooming Prairie Cooperative Warehouse from November 1998 until October 2000. Ms. Graham resigned from the Board of Directors of Blooming Prairie Cooperative Warehouse in October 2002, concurrent with her appointment to the Company's Board of Directors. James P. Heffernan has served as a member of the Board of Directors since March 2000. Mr. Heffernan serves as a member of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee. Mr. Heffernan has served as a Trustee for the New York Racing Association since November 1998. Mr. Heffernan served as a member of the Board of Directors and Chair of the Finance Committee of Columbia Gas System, Inc. from January 1993 until November 2000. 11 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is traded on the Nasdaq National Market under the symbol "UNFI." Our Common Stock began trading on the Nasdaq National Market on November 1, 1996. The following table sets forth for the periods indicated the high and low sale prices per share of our Common Stock on the Nasdaq National Market: Fiscal 2001 High Low ----------- ---- --- First Quarter $15.250 $ 9.563 Second Quarter 20.375 11.375 Third Quarter 19.500 10.875 Fourth Quarter 23.200 13.940 Fiscal 2002 High Low ----------- ---- --- First Quarter $24.110 $15.640 Second Quarter 25.250 20.210 Third Quarter 26.380 21.340 Fourth Quarter 24.129 14.250 Fiscal 2003 ----------- First Quarter through October 24, 2002 $24.670 $17.840 On July 31, 2002 we had 81 stockholders of record. The number of record holders may not be representative of the number of beneficial holders because depositories, brokers or other nominees hold many shares. We have never declared or paid any cash dividends on our capital stock. We anticipate that all of our earnings in the foreseeable future will be retained to finance the continued growth and development of our business and we have no current intention to pay cash dividends. Our future dividend policy will depend on earnings, capital requirements and financial condition, requirements of the financing agreements to which we are then a party and other factors considered relevant by the Board of Directors. Our existing revolving line of credit agreement prohibits the declaration or payment of cash dividends to our stockholders without the written consent of the bank during the term of the credit agreement and until all of our obligations under the credit agreement have been met. 12 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below under the caption Consolidated Statement of Operations Data with respect to the fiscal years ended July 31, 1998, 1999, 2000, 2001 and 2002, and under the caption Consolidated Balance Sheet Data at July 31, 1998, 1999, 2000, 2001 and 2002, are derived from our consolidated financial statements, which have been audited by KPMG LLP, independent certified public accountants. The historical results are not necessarily indicative of results to be expected for any future period. The following selected consolidated financial data should be read in conjunction with and are qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Consolidated Statement of Operations Data (In thousands, except per share data) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Statement of Operations Data: Net sales $728,910 $856,998 $908,688 $1,016,834 $1,175,393 Cost of sales 578,575 680,301 734,673 818,040 944,777 Gross profit 150,335 176,697 174,015 198,794 230,616 Operating expenses 116,042 144,937 166,673 167,325 190,047 Merger, restructuring and asset impairment expenses 4,064 3,869 2,420 801 424 Amortization of intangibles 1,185 1,075 1,070 1,036 180 Total operating expenses 121,291 149,881 170,163 169,162 190,651 Operating Income 29,044 26,816 3,852 29,632 39,965 Other expense (income): Interest expense 5,157 5,700 6,412 6,939 7,233 Other, net (778) (2,477) (527) 429 4,050 Total other expense 4,379 3,223 5,885 7,368 11,283 Income (loss) before income taxes 24,665 23,593 (2,033) 22,264 28,682 Income taxes (benefit) 11,580 10,126 (802) 8,906 11,473 Net income (loss) $ 13,085 $ 13,467 $ (1,231) $ 13,358 $ 17,209 Per share data (Basic): Net income (loss) $ 0.75 $ 0.74 $ (0.07) $ 0.72 $ 0.91 Weighted average basic shares of common stock 17,467 18,196 18,264 18,482 18,933 Per share data (Diluted): Net income (loss) per share $ 0.74 $ 0.73 $ (0.07) $ 0.71 $ 0.89 Weighted average diluted shares of common stock 17,798 18,537 18,264 18,818 19,334 Consolidated Balance Sheet Data: (In thousands) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Working capital $ 65,568 $ 73,825 $ 65,812 $ 53,351 $ 51,697 Total assets 212,242 237,901 270,234 300,444 354,457 Total long term debt and capital leases 25,845 25,791 28,529 9,289 8,672 Total stockholders' equity 104,386 118,581 117,954 135,943 160,387
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are the leading national distributor of natural and organic foods and related products in the United States. In recent years, our sales to existing and new customers have increased through the acquisition of or merger with natural products distributors, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Our distribution operations are divided into four principal units: United Natural Foods in the Eastern Region, Mountain People's Warehouse, Inc. and Rainbow Natural Foods in the Western Region, Blooming Prairie (since October 11, 2002) and Albert's in various markets in the United States. Through our subsidiary, the Natural Retail Group, we also own and operate 12 natural products retail stores located primarily in Florida. We believe our retail business serves as a natural complement to our distribution business, enabling us to develop new marketing programs and improve customer service. In addition, our Hershey subsidiary is a business that specializes in the international trading, roasting and packaging of nuts, seeds, dried fruits and snack items. We are continually integrating certain operating functions in order to improve operating efficiencies, including: (i) expanding marketing and customer service programs across the four regions; (ii) expanding national purchasing opportunities; (iii) consolidating systems applications among physical locations and regions; (iv) integrating administrative and accounting functions; and (v) reducing geographic overlap between regions. In addition, our continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. We have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities located in Auburn, California, New Oxford, Pennsylvania and Los Angeles, California. In January 2002 we began distribution from our new 310,000 square foot Atlanta, Georgia facility. We are currently utilizing approximately 240,000 square feet and leasing out the remaining 70,000 square feet. The efficiencies created by consolidating our two Atlanta, Georgia, facilities into one have lowered our expenses relative to sales. In March 2002 we began distribution to our southern California, southern Nevada and Arizona customers from our new 200,000 square foot distribution center in Fontana, California. The proximity of our new facility to these customers enables us to provide improved service, while reducing transportation expenses. In May 2002 we relocated our Hershey subsidiary from Rahway, New Jersey to Edison, New Jersey in order to expand our shipping and receiving capacity and to consolidate inventories currently being stored in outside warehouses. At fiscal year end the increased capacity of our distribution centers was approximately 1,000,000 square feet greater than it was five years ago. We recently began expansion of our Chesterfield, New Hampshire distribution facility from its existing 117,000 square feet to 289,000 square feet. This will enable us to service existing and new customers, provide more product diversity, and enable us to better balance products among our distribution centers in our Eastern Region. While operating margins may be affected in periods in which these expenses are incurred, over the long term, we expect to benefit from the increased absorption of our expenses over a larger sales base. In addition, we continue to increase our leading market share of the growing natural products industry by expanding our customer base, increasing our share of existing customers' business and continuing to expand and further penetrate new distribution territories, particularly in the Midwest and Texas markets. To this end, on October 11, 2002 we acquired substantially all the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest region of the United States. The acquisition of Blooming Prairie's Iowa City, Iowa and Mounds View, Minnesota distribution facilities has provided us with an immediate physical base and growth platform with which to broaden our presence in the fast growing Midwest market. On October 23, 2002, we signed an agreement to purchase Northeast Cooperatives, a distributor of natural foods and products in the Eastern United States. Northeast Cooperatives, headquartered in Brattleboro, Vermont, and in business since 1973, had approximately $120 million in sales for the latest twelve months. Consummation of the transaction is contingent upon customary closing conditions, approval by the members of Northeast Cooperatives and approval from Northeast Cooperatives' lenders. Our net sales consist primarily of sales of natural products to retailers adjusted for customer volume discounts, returns and allowances. The principal components of our cost of sales include the amount paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to our distribution facilities. Operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, insurance, administrative, depreciation and amortization expense. Other expenses (income) include interest on outstanding indebtedness, interest income, and the change in fair value of financial instruments and miscellaneous income and expenses. Our operating margin increased from 2.5% in fiscal 1994 to 3.6% for the fiscal year ended July 31, 2002 (excluding special items). Critical Accounting Policies The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the policies of accounts receivable valuation and the valuation of goodwill and intangible assets. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies. 14 Allowance for doubtful accounts We analyze customer creditworthiness, accounts receivable and notes receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of our allowance for doubtful accounts. Our accounts receivable balance was $84.3 million, net of allowance for doubtful accounts of $5.8 million, and $81.6 million, net of allowance for doubtful accounts of $4.5 million, as of July 31, 2002 and 2001, respectively. Our notes receivable balance was $1.5 million, net of allowance for doubtful accounts of $0.2 million, and $1.7 million, net of allowance for doubtful accounts of $0.5 million, as of July 31, 2002 and 2001, respectively. Valuation of goodwill and intangible assets Intangible assets consist principally of goodwill and covenants not to compete. Goodwill represents the excess purchase price over fair value of net assets acquired in connection with purchase business combinations. Covenants not to compete are initially recorded at fair value and are amortized using the straight-line method over the lives of the respective agreements, generally five years. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 ("SFAS" No. 142), "Goodwill and Other Intangible Assets". SFAS No. 142 requires that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually (or more frequently if impairment indicators arise). We adopted SFAS No. 142 on August 1, 2001. We completed our transition goodwill impairment test during the quarter ended January 31, 2002 and there were no indicators of goodwill impairment for any of our reporting units. We tested each of our reporting units for an indicator of goodwill impairment by comparing the net present value of projected cash flows to the carrying value of the reporting unit as of July 31, 2001. We used discount rates determined by our management to be commensurate with the level of risk in our current business model and projected cash flows for 5 to 8 years. We completed a second goodwill impairment test during the quarter ended July 31, 2002 and there were no indicators of goodwill impairment for any of our reporting divisions. There can be no assurance that at our next annual review a material impairment charge will not be recorded. We ceased to amortize goodwill when we adopted SFAS No. 142. Net intangible assets and goodwill amounted to $31.7 million as of July 31, 2002. We recorded additional goodwill of $3.9 million during the year ended July 31, 2002 as a result of our acquisition of Boulder Fruit Express. We had recorded approximately $0.9 million of goodwill amortization for the year ended July 31, 2001. We expect to record additional goodwill and intangible assets, in the first quarter of fiscal 2003, relating to our Blooming Prairie acquisition, of approximately $15.0 million. 15 RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:
Year Ended July 31, U.S. GAAP basis Excluding Special Items ------------------------- ------------------------- 2002 2001 2000 2002 2001 2000 ------------------------- ------------------------- Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 80.4% 80.4% 80.8% 80.4% 80.4% 80.8% ------------------------- ------------------------- Gross profit 19.6% 19.6% 19.2% 19.6% 19.6% 19.2% ------------------------- ------------------------- Operating expenses 16.2% 16.5% 18.3% 16.0% 16.4% 18.0% Merger, restructuring and asset impairment expenses 0.0% 0.1% 0.3% 0.0% 0.0% 0.0% Amortization of intangibles 0.0% 0.1% 0.1% 0.0% 0.1% 0.1% ------------------------- ------------------------- Total operating expenses 16.2% 16.6% 18.7% 16.0% 16.5% 18.1% ------------------------- ------------------------- Operating income 3.4% 2.9% 0.4% 3.6% 3.0% 1.1% ------------------------- ------------------------- Other expense (income): Interest expense 0.6% 0.7% 0.7% 0.6% 0.7% 0.7% Change in value of financial instruments 0.4% 0.1% 0.0% 0.0% 0.0% 0.0% Other, net 0.0% -0.1% -0.1% 0.0% -0.1% -0.1% ------------------------- ------------------------- Total other expense 1.0% 0.7% 0.6% 0.6% 0.6% 0.6% ------------------------- ------------------------- Income (loss) before income taxes 2.4% 2.2% -0.2% 3.0% 2.4% 0.5% Income taxes (benefit) 1.0% 0.9% -0.1% 1.2% 0.9% 0.2% ------------------------- ------------------------- Net income (loss) 1.5% 1.3% -0.1% 1.8% 1.5% 0.3% ========================= =========================
YEAR ENDED JULY 31, 2002 COMPARED TO YEAR ENDED JULY 31, 2001 Net Sales. Our net sales increased approximately 15.6%, or $158.6 million, to $1.18 billion for the year ended July 31, 2002 from $1.02 billion for the year ended July 31, 2001. The increase was primarily due to growth in the supernatural and mass market distribution channels of approximately 25% and 19%, respectively. Also included in net sales for fiscal 2002 were sales for Boulder Fruit Express, an organic produce and perishables distributor we acquired in November 2001, and sales for a Florida retail store we opened in October 2001. Sales growth excluding the acquisition and the new store sales would have been 14.4%. Sales to our two largest customers, Whole Foods Market, Inc. and Wild Oats, Inc. represented approximately 19% and 14%, respectively, of net sales for the year ended July 31, 2002. Whole Foods Market, Inc. represented approximately 17% and Wild Oats, Inc. represented approximately 14% of net sales for the year ended July 31, 2001. Whole Foods Market, Inc. agreed to extend our current distribution arrangement through August 31, 2004. In addition, Whole Foods Market, Inc. is a member of Blooming Prairie Cooperative Warehouse, which we recently acquired, and we expect Whole Foods Market, Inc. to represent approximately 25% of our total sales in fiscal 2003. On June 19, 2002, we announced that our contract as primary distributor to Wild Oats, Inc. would not be renewed past its expiration date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and expect revenue of approximately $10 million to $15 million in fiscal 2003. Gross Profit. Our gross profit increased approximately 16.0%, or $31.8 million, to $230.6 million for the year ended July 31, 2002 from $198.8 million for the year ended July 31, 2001. Our gross profit as a percentage of net sales was 19.6% for the years ended July 31, 2002 and July 31, 2001. We expect our gross margin as a percentage of sales to be in the range of 20.0% to 20.5% for the fiscal year 2003 as our business with Wild Oats, Inc., a low gross margin customer, declines because we will be a secondary, rather than a primary, distributor to them. 16 Operating Expenses. Our total operating expenses, excluding special items, increased approximately 12.1%, or $20.3 million, to $188.3 million for the year ended July 31, 2002 from $168.0 million for the year ended July 31, 2001. As a percentage of net sales, operating expenses, excluding special charges, decreased to 16.0% for the year ended July 31, 2002 from 16.5% for the year ended July 31, 2001. Special items are discussed in the following paragraph. The lower operating expenses as a percentage of net sales were due primarily to increased efficiencies in our transportation departments as a result of more efficient routing and successfully leveraging our fixed expenses against a higher sales base. We also experienced improved labor productivity due primarily to a more favorable labor market nationwide and a higher retention rate of experienced warehouse and transportation employees. We experienced significant increases in workers' compensation and commercial automobile insurance premiums. The insurance premium market is somewhat volatile, and whether there is improvement or deterioration in future quarters is largely dependent on our ability to control our automobile and workers' compensation losses, which are retained risks. We have reduced our operating expenses, excluding special charges, to 16% of sales by continuing to realize operating efficiencies and expanding our sales base. We expect operating expenses as a percentage of sales to be in the mid-16% range for the fiscal year 2003 due to absorption of fixed costs over a lower sales base as our Wild Oats, Inc. business is reduced. We expect to incur additional special charges as we increase our warehouse capacity. Special Items. Special items for the year ended July 31, 2002 included a non-cash charge related to the change in fair value of financial instruments (interest rate swaps and related option agreements), relocation, asset impairment and redundant rent expense related to moving our Atlanta, Georgia distribution facility, incremental costs such as labor, utilities and rent related to the startup of our southern California distribution facility and labor, utilities, rent and severance related to relocating Hershey Import. Special items for the year ended July 31, 2001 consisted of a non-cash charge related to the change in financial instruments, costs related to the expansion of our New Oxford, Pennsylvania distribution facility and asset impairment charges, primarily goodwill, associated with closing an unprofitable retail store. Operating expenses, including special items, increased approximately 12.7%, or $21.5 million, to $190.7 million from $169.2 million for the year ended July 31, 2001. As a percentage of sales, operating expenses, including special items, decreased to 16.2% for the year ended July 31, 2002 from 16.6% for the year ended July 31, 2001. Operating Income. Operating income, excluding the special items, increased $11.5 million to $42.4 million for the year ended July 31, 2002 from $30.8 million for the year ended July 31, 2001. As a percentage of sales, operating income, excluding special items, increased to 3.6% for the year ended July 31, 2002 compared to 3.0% for the year ended July 31, 2001. Operating income, including special items, increased $10.3 million to $40.0 million or 3.4% of sales for the year ended July 31, 2002 from $29.6 million or 2.9% of sales for the year ended July 31, 2001. Other (Income)/Expense. Other expense, excluding the change in fair value of financial instruments, increased $0.9 million to $7.0 million for the year ended July 31, 2002 from $6.1 million for the year ended July 31, 2001. This increase was primarily due to higher interest expense caused by a higher borrowing base, partially offset by lower interest rates. Other expense, including the change in fair value of financial instruments, increased $3.9 million to $11.3 million for the year ended July 31, 2002 from $7.4 million for the year ended July 31, 2001. This increase was primarily due to the decrease in fair value on our interest rate swap agreements and related option agreements resulting from unfavorable changes in yield curves used to determine the change in fair value. We will continue to recognize either income or expense quarterly for the duration of the swap agreement until either October 2003 or 2005 for the swap agreement entered into in October 1998, and either August 2005 or 2007 for the swap agreement entered into in August 2001, depending on whether the agreements are extended by the counter party. The recognition of income or expense in any given quarter, and the magnitude of that item, is dependent on interest rates and the remaining term of the contracts. Upon expiration of any such contract, the cumulative earnings impact from the changes in fair value of the instruments will be zero. Income Taxes. Our effective income tax rate was 40.0% for the years ended July 31, 2002 and 2001. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. 17 Net Income. As a result of the foregoing, net income, excluding special items, increased $6.4 million to $21.2 million, or $1.10 per diluted share, for the year ended July 31, 2002, compared to $14.8 million, or $0.79 per diluted share, for the year ended July 31, 2001. Net income, including special items, increased $3.9 million to $17.2 million, or $0.89 per diluted share, for the year ended July 31, 2002 compared to $13.4 million, or $0.71 per diluted share, for the year ended July 31, 2001. We expect earnings per diluted share, excluding any special items, in the range of $1.18 - $1.20 for all of fiscal 2003 and in the $0.26 - $0.28 range for the quarter ended October 31, 2002. The following table details the amounts and effects of the special items discussed on the preceding page: - -------------------------------------------------------------------------------- Year Ended July 31, 2002 Pretax Per diluted (In thousands, except per share data) Income Net of Tax share ------ ---------- ----- Income, excluding special items: $35,409 $21,245 $1.10 Less: Special Items Change in value of financial instruments 4,331 2,599 0.13 Relocation and startup costs (included in operating expenses) 1,972 1,183 0.06 Asset impairment charges 424 254 0.01 - -------------------------------------------------------------------------------- U.S. GAAP Income, including special items: $28,682 $17,209 $0.89 ================================================================================ - ------------------------------------------------------------------------------- Year Ended July 31, 2001 Pretax Per diluted (In thousands, except per share data) Income Net of Tax share ------ ---------- ----- Income, excluding special items: $24,746 $14,848 $0.79 Less: Special Items Change in value of financial instruments 1,290 774 0.04 Expansion costs (operating expenses) 391 235 0.01 Restructuring and asset impairment charges 801 481 0.03 - -------------------------------------------------------------------------------- U.S. GAAP Income, including special items: $22,264 $13,358 $0.71 ================================================================================ YEAR ENDED JULY 31, 2001 COMPARED TO YEAR ENDED JULY 31, 2000 Net Sales. Our net sales increased approximately 11.9%, or $108.1 million, to $1.0 billion for the year ended July 31, 2001 from $908.7 million for the year ended July 31, 2000. This increase was primarily due to increased sales throughout all divisions and distribution channels including super naturals, independents and mass market. We also experienced market share gains during fiscal year 2001 by selling to a greater number of new customers. Sales to our two largest customers, Whole Foods Market, Inc. and Wild Oats, Inc. represented approximately 17% and 14%, respectively, of net sales for the year ended July 31, 2001. Whole Foods Market, Inc. represented approximately 16% and Wild Oats, Inc. represented approximately 13%, of net sales for the year ended July 31, 2000. Gross Profit. Gross profit increased approximately 14.2%, or $24.8 million, to $198.8 million for the year ended July 31, 2001 from $174.0 million for the year ended July 31, 2000. Gross profit as a percentage of net sales increased to 19.6% for the year ended July 31, 2001 from 19.2% for the year ended July 31, 2000. The increase in gross profit resulted primarily from our recovery in our Eastern Region as customer returns and allowances, inventory shrink, pricing errors and inbound transportation costs decreased significantly. This increase was partially offset by inventory loss at an outside storage location, as well as reduced margins in our Albert's division. Additionally, the gain in our gross profit was further offset by a change in our channel mix as the percentage of our sales to super naturals, which are at lower gross margins, increased. 18 Operating Expenses. Our total operating expenses, excluding special charges, increased approximately 1.9%, or $3.2 million, to $168.0 million for the year ended July 31, 2001 from $164.8 million for the year ended July 31, 2000. As a percentage of net sales, operating expenses, excluding special charges, decreased to 16.5% for the year ended July 31, 2001 from 18.1% for the year ended July 31, 2000. The reduction in operating expenses as a percentage of net sales was due primarily to increased labor productivity in our distribution centers, increased efficiencies in our transportation departments as a result of better routing and successfully leveraging our fixed expenses against a higher sales base. The improved labor productivity was due primarily to a more favorable labor market nationwide and higher retention rate of experienced warehouse employees. The improved transportation routing resulted in fewer miles traveled by our fleet, and corresponding reductions in expenses. Operating expenses for the year ended July 31, 2001 included special charges of $0.8 million related to the expansion of our New Oxford, Pennsylvania distribution facility, and $0.4 million of asset impairment charges, primarily goodwill, associated with the closing of an unprofitable retail store. Our operating expenses for the year ended July 31, 2000 were impacted by several special charges. These charges included approximately $3.0 million of executive severance costs and the write-off of current assets in the Eastern Region and Chicago and approximately $2.4 million of restructuring and asset impairment charges related to the write-off of certain Eastern Region fixed assets and the closing of our Chicago facility. Operating expenses, including special charges, decreased approximately 0.6% or $1.1 million, to $169.1 million for the year ended July 31, 2001 from $170.2 million for the year ended July 31, 2000. As a percentage of sales, operating expenses, including special charges, decreased to 16.6% for the year ended July 31, 2001 from 18.7% for the twelve months ended July 31, 2000. Operating Income. Operating income, excluding the special charges discussed above, increased $21.1 million to $30.8 million for the year ended July 31, 2001 compared to $9.7 million for the year ended July 31, 2000. As a percentage of sales, operating income, excluding special charges, increased to 3.0% for the year ended July 31, 2001 compared to 1.1% for the year ended July 31, 2000. Operating income, including special charges, increased $25.8 million to $29.6 million for the year ended July 31, 2001 compared to $3.9 million for the comparable prior period. Other (Income)/Expense. The $1.5 million increase in other expense for the year ended July 31, 2001 compared to the year ended July 31, 2000 was attributable to slightly higher debt levels and non-cash expense related to an interest rate swap that were partially offset by lower interest rates. Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" requires recognition in the financial statements of the change in fair value during the year of certain interest rate protection contracts and other derivatives. We recorded FAS 133 expense of $1.3 million on our interest rate swap agreement resulting from the significant decline in interest rates during the year. We will continue to recognize this income or expense for the duration of the swap contract until either October 2003 or 2005, depending on whether the contract is extended. We entered into a second interest rate swap agreement effective August 2001, with a termination date of either August 2005 or August 2007. Whether we recognize income or expense in any given quarter, and the magnitude of that item, is dependent on interest rates and the remaining term of the contract. Upon expiration of the swap contract, the cumulative earnings impact will be zero. Income Taxes. Our effective income tax rates (benefit) were 40% and (39.5%) for the years ended July 31, 2001 and 2000, respectively. The effective rates for 2001 and 2000 were higher than the federal statutory rate primarily due to state and local income taxes. Net (Loss) Income. As a result, net income was $13.4 million for the year ended July 31, 2001, compared to a net loss of ($1.2) million in the year ended July 31, 2000, an increase of $14.6 million. Excluding the $1.3 million SFAS No. 133 expense ($0.8 million, net of tax), the $0.8 million special charge related to the expansion of our New Oxford distribution center ($0.5 million, net of tax), and $0.4 million of asset impairment related primarily to the closing of an unprofitable retail store ($0.2 million, net of tax) in fiscal 2001 and $3.0 million in other special charges ($1.8 million, net of tax) and $2.4 million in restructuring costs ($1.4 million net of tax) in fiscal 2000, net income would have been $14.8 million and $2.0 million in 2001 and 2000 respectively, resulting in an increase of approximately $12.6 million for the year ended July 31, 2001. 19 LIQUIDITY AND CAPITAL RESOURCES We finance operations and growth primarily with cash flows from operations, borrowings under our credit facility, seller financing of acquisitions, operating and capital leases, trade payables, bank indebtedness and the sale of equity and debt securities. In September 2001, we entered into an agreement to increase our secured revolving credit facility to $150 million from $100 million at an interest rate of LIBOR plus 1.50%, maturing on June 30, 2005. This additional access to capital will provide for working capital requirements in the normal course of business and the opportunity to grow our business organically or through acquisitions. As of July 31, 2002, our borrowing base, based on accounts receivable and inventory levels, was $113.0 million with remaining availability of $19.7 million. As of October 11, 2002, the date of acquisition of Blooming Prairie, our borrowing base was $136.5 million with an availability of $22.4 million and included availability from the Blooming Prairie acquisition of approximately $10.8 million. Net cash provided by operations was $11.0 million for the year ended July 31, 2002 and was the result of cash collected from customers net of cash paid to vendors, partially offset by investments in inventory. The increases in inventory levels relate to supporting increased sales with wider product assortment combined with our ability to capture purchasing efficiency opportunities in excess of total carrying costs, as well as the opening of our Fontana, California facility. Days in inventory decreased to 48 days at July 31, 2002 from 49 days at July 31, 2001. Days sales outstanding at July 31, 2002 was 28 days compared to 29 days at July 31, 2001. Net cash provided by operations was $22.0 million for the year ended July 31, 2001 and was due to cash collected from customers, net of cash paid to vendors, exceeding our investments in accounts receivable and inventory. On June 19, 2002, we announced that our contract as primary distributor to Wild Oats, Inc., would not be renewed past its expiration date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and expect revenue of approximately $10 million to $15 million in fiscal 2003. Working capital at July 31, 2002 was $51.7 million. Net cash used in investing activities was $27.8 million for the year ended July 31, 2002 and was due primarily to capital expenditures for the purchase of our new Atlanta, Georgia facility and equipment purchases for our Fontana, California facility, compared to $18.2 million for the same period last year that was due primarily to the purchase of our secondary facility in Auburn, California, the expansion of our New Oxford, Pennsylvania distribution facility and payments for the purchase of Palm Harbor Natural Foods. Net cash provided by financing activities was $21.5 million for the year ended July 31, 2002 due to increased borrowings on our line of credit and our equipment financing lines, offset by repayment of long-term debt as a result of the establishment of our $150 million secured revolving credit facility. Net cash provided by financing activities was $0.7 million for the year ended July 31, 2001 due to proceeds from the exercise of stock options, mostly offset by repayment of long-term debt. In October 1998, we entered into an interest rate swap agreement. The agreement provides for us to pay interest for a five-year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing the Company's effective rate at 6.50%. The five-year term of the swap agreement may be extended to seven years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." We entered into an additional interest rate swap agreement effective August 1, 2001. The additional agreement provides for us to pay interest for a four-year period at a fixed rate of 4.81% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing our effective rate on the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given period the agreement is suspended for that period. LIBOR was 1.81% as of July 31, 2002. The four-year term of the swap agreement may be extended to six years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No. 133. IMPACT OF INFLATION Historically, we have been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of our operations or profitability. SEASONALITY Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. 20 RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In June 2002, the Financial Accounting Standards Board issued SFAS No 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (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)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. In April 2002, the Financial Accounting Standards Board issued SFAS No 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". The provisions related to the rescission of Statement 4 shall be applied in financial years beginning after May 15, 2002. The provisions of the Statement related to Statement 13 were effective for transactions occurring after May 15, 2002. All other provisions of Statement 145 were effective for financial statements issued on or after May 15, 2002. The adoption of this Statement is not expected to have a material impact on our consolidated financial position or results of operations. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement is effective for fiscal years beginning after December 15, 2001. The adoption of this Statement is not expected to have a material impact on our consolidated financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for fiscal years beginning after June 15, 2002. The adoption of this Statement is not expected to have a material impact on our consolidated financial position or results of operations. Certain Factors That May Affect Future Results This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial position or state other "forward-looking" information. The important factors listed below as well as any cautionary language in this Annual Report on Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. You should be aware that the occurrence of the events described in the risk factors below and elsewhere in this Annual Report on Form 10-K could have an adverse effect on our business, results of operations and financial position. Any forward-looking statements in this Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statement in this section. Our business could be adversely affected if we are unable to integrate our acquisitions and mergers A significant portion of our historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. Successful integration of mergers is critical to our future operating and financial performance. Integration requires, among other things: the optimization of delivery routes, coordination of administrative, distribution and finance functions, the integration of management information systems and personnel and maintaining customer base. 21 The integration process has and could divert the attention of management and any difficulties or problems encountered in the transition process could have a material adverse effect on our business, financial condition or results of operations. In addition, the process of combining companies has and could cause the interruption of, or a loss of momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. We may also lose key employees of the acquired company. There can be no assurance that we will realize any of the anticipated benefits of mergers. We may have difficulty in managing our growth The growth in the size of our business and operations has placed and is expected to continue to place a significant strain on our management. Our future growth is limited in part by the size and location of our distribution centers. There can be no assurance that we will be able to successfully expand our existing distribution facilities or open new distribution facilities in new or existing markets to facilitate growth. In addition, our growth strategy to expand our market presence includes possible additional acquisitions. To the extent our future growth includes acquisitions, there can be no assurance that we will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. Our ability to compete effectively and to manage future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our work force. There can be no assurance that our personnel, systems, procedures and controls will be adequate to support our operations. Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition or results of operations. We have significant competition from a variety of sources We operate in competitive markets, and our future success will be largely dependent on our ability to provide quality products and services at competitive prices. Our competition comes from a variety of sources, including other distributors of natural products as well as specialty grocery and mass market grocery distributors. There can be no assurance that mass market grocery distributors will not increase their emphasis on natural products and more directly compete with us or that new competitors will not enter the market. These distributors may have been in business longer than us, may have substantially greater financial and other resources than us and may be better established in their markets. There can be no assurance that our current or potential competitors will not provide services comparable or superior to those provided by us or adapt more quickly than United Natural Foods to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may develop and rapidly acquire significant market share or that certain of our customers will increase distribution to their own retail facilities. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect our business, financial condition or results of operations. There can be no assurance that we will be able to compete effectively against current and future competitors. We depend heavily on our principal customer Our current distribution arrangement with our top customer, Whole Foods Market, Inc., is effective through August 31, 2004. On June 19, 2002, we announced that our contract as primary distributor to Wild Oats, Inc., would not be renewed past its expiration date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and expect revenue of approximately $10 million to $15 million from such distribution in fiscal 2003. Whole Foods Market, Inc. and Wild Oats, Inc. accounted for approximately 19% and 14%, respectively, of our net sales during the fiscal year ended July 31, 2002. On October 11, 2002 we acquired substantially all of the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest region of the United States. Whole Foods Market, Inc. is a member of Blooming Prairie and we expect Whole Foods Market, Inc. to represent approximately 25% of our total sales in fiscal 2003. As a result of this concentration of our customer base, the loss or cancellation of business from Whole Foods Market, Inc. could materially and adversely affect our business, financial condition or results of operations. We sell products under purchase orders, and we generally have no agreements with or commitments from our customers for the purchase of products. No assurance can be given that our customers will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Our profit margins may decrease due to consolidation in the grocery industry The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry and the growth of super natural chains may reduce our profit margins in the future as more customers qualify for greater volume discounts. 22 Our operations are sensitive to economic downturns The grocery industry is also sensitive to national and regional economic conditions, and the demand for our products may be adversely affected from time to time by economic downturns. In addition, our operating results are particularly sensitive to, and may be materially adversely affected by: difficulties with the collectibility of accounts receivable, difficulties with inventory control, competitive pricing pressures, and unexpected increases in fuel or other transportation-related costs. There can be no assurance that one or more of such factors will not materially adversely affect our business, financial condition or results of operations. We are dependent on a number of key executives Management of our business is substantially dependent upon the services of Michael S. Funk, Chief Executive Officer, Steven Townsend, President, Todd Weintraub, Chief Financial Officer, Kevin T. Michel, President of our Western Region, Dan Atwood, Senior Vice President and Secretary, Rick Antonelli, Eastern Region President and other key management employees. Loss of the services of any officers or any other key management employee could have a material adverse effect on our business, financial condition or results of operations. Our operating results are subject to significant fluctuations Our net sales and operating results may vary significantly from period to period due to: changes in our operating expenses, management's ability to execute our business and growth strategies, personnel changes, demand for natural products, supply shortages, general economic conditions, changes in customer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues, fluctuation of natural product prices due to competitive pressures, lack of an adequate supply of high-quality agricultural products due to poor growing conditions, natural disasters or otherwise, volatility in prices of high-quality agricultural products resulting from poor growing conditions, natural disasters or otherwise, and future acquisitions, particularly in periods immediately following the consummation of such acquisition transactions while the operations of the acquired businesses are being integrated into our operations. Due to the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance. 23 We are subject to significant governmental regulation Our business is highly regulated at the federal, state and local levels and our products and distribution operations require various licenses, permits and approvals. In particular: our products are subject to inspection by the U.S. Food and Drug Administration, our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities, and The U.S. Department of Transportation and the U.S. Federal Highway Administration regulate our trucking operations. The loss or revocation of any existing licenses, permits or approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where we intend to do business could have a material adverse effect on our business, financial condition or results of operations. Union-organizing activities could cause labor relations difficulties As of July 31, 2002, approximately 235 employees, representing approximately 8% of our approximately 3,000 employees, were union members. We have in the past been the focus of union-organizing efforts. As we increase our employee base and broaden our distribution operations to new geographic markets, our increased visibility could result in increased or expanded union-organizing efforts. Although we have not experienced a work stoppage to date, if additional employees were to unionize, we could be subject to work stoppages and increases in labor costs, either of which could materially adversely affect our business, financial condition or results of operations. On October 11, 2002 we acquired substantially all the assets of Blooming Prairie, adding approximately 280 employees. Approximately 100 of these employees are covered by a collective bargaining agreement. This agreement expires in June of 2003. Our financial condition could be diminished based on access to capital and the cost of that capital In September 2001 we entered into an agreement to increase our secured revolving credit facility to $150 million from $100 million at an interest rate of LIBOR plus 1.5% maturing on June 30, 2005. The proceeds were used to refinance our existing credit facility, several fixed term mortgage loans, and an equipment loan. This additional access to capital will provide for working capital requirements in the normal course of business and the opportunity to grow our business organically or through acquisitions. As of July 31, 2002, our borrowing base, based on accounts receivable and inventory levels, was $113.0 million with remaining availability of $19.7 million. As of October 11, 2002, the date of acquisition of Blooming Prairie, our borrowing base was $136.5 million with an availability of $22.4 million and included availability from the Blooming Prairie acquisition of approximately $10.8 million. In order to maintain our profit margins, we rely on strategic investment buying initiatives, such as discounted bulk purchases, which require spending significant amounts of working capital. In the event that capital market turmoil significantly increases our cost of capital or limits our ability to borrow funds or raise equity capital, we could suffer reduced profit margins and be unable to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. We do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements listed below are filed as part of this Annual Report on Form 10-K. INDEX TO FINANCIAL STATEMENTS United Natural Foods, Inc. and Subsidiaries: Page Independent Auditors' Report 26 Consolidated Balance Sheets 27 Consolidated Statements of Operations 28 Consolidated Statements of Stockholders' Equity 29 Consolidated Statements of Cash Flows 30 Notes to Consolidated Financial Statements 31 25 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders United Natural Foods, Inc.: We have audited the accompanying consolidated balance sheets of United Natural Foods, Inc. and Subsidiaries as of July 31, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Natural Foods, Inc. and Subsidiaries as of July 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP KPMG LLP Providence, Rhode Island September 4, 2002 26 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
JULY 31, 2002 JULY 31, 2001 ------------- ------------- ASSETS - ------ Current assets: Cash and cash equivalents $ 11,184 $ 6,393 Accounts receivable, net of allowance of $5,767 and $4,540, respectively 84,303 81,559 Notes receivable, trade 513 685 Inventories 131,932 110,653 Prepaid expenses 4,493 5,394 Deferred income taxes 4,612 3,513 Refundable income taxes 58 366 --------------------------- Total current assets $ 237,095 $ 208,563 Property & equipment, net 82,702 62,186 Notes receivable, trade, net 956 1,050 Goodwill 31,399 27,500 Covenants not to compete, net of accumulated amortization of $222 and $250, respectively 248 180 Deferred taxes 800 276 Other, net 1,257 689 --------------------------- Total assets $ 354,457 $ 300,444 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Notes payable $ 106,109 $ 68,056 Current installments of long-term debt 1,658 19,625 Current installments of obligations under capital leases 1,037 1,120 Accounts payable 52,789 53,169 Accrued expenses 18,185 11,952 Financial instruments 5,620 1,290 --------------------------- Total current liabilities $ 185,398 $ 155,212 Long-term debt, excluding current installments 7,677 7,805 Obligations under capital leases, excluding current installments 995 1,484 --------------------------- Total liabilities $ 194,070 $ 164,501 --------------------------- Stockholders' equity: Preferred stock, $.01 par value, authorized 5,000 shares; none issued or outstanding -- -- Common stock, $.01 par value, authorized 50,000 shares; issued and outstanding 19,106 at July 31, 2002 issued and outstanding 18,653 at July 31, 2001 191 187 Additional paid-in capital 79,711 72,644 Unallocated shares of Employee Stock Ownership Plan (2,094) (2,258) Retained earnings 82,579 65,370 --------------------------- Total stockholders' equity 160,387 135,943 --------------------------- Total liabilities and stockholders' equity $ 354,457 $ 300,444 ===========================
See notes to consolidated financial statements. 27 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31, ------------------- (In thousands, except per share data) 2002 2001 2000 ---- ---- ---- Net sales $ 1,175,393 $ 1,016,834 $ 908,688 Cost of sales 944,777 818,040 734,673 --------------------------------------- Gross profit 230,616 198,794 174,015 --------------------------------------- Operating expenses 190,047 167,325 166,673 Merger, restructuring and asset impairment expenses 424 801 2,420 Amortization of intangibles 180 1,036 1,070 --------------------------------------- Total operating expenses 190,651 169,162 170,163 --------------------------------------- Operating income 39,965 29,632 3,852 --------------------------------------- Other expense (income): Interest expense 7,233 6,939 6,412 Change in value of financial instruments 4,331 1,290 -- Other, net (281) (861) (527) --------------------------------------- Total other expense 11,283 7,368 5,885 --------------------------------------- Income (loss) before income taxes (benefit) 28,682 22,264 (2,033) Income taxes (benefit) 11,473 8,906 (802) --------------------------------------- Net income (loss) $ 17,209 $ 13,358 $ (1,231) ======================================= Basic per share data: Net income (loss) $ 0.91 $ 0.72 $ (0.07) ======================================= Weighted average basic shares of common stock 18,933 18,482 18,264 ======================================= Diluted per share data: Net income (loss) $ 0.89 $ 0.71 $ (0.07) =========== =========== ========= Weighted average diluted shares of common stock 19,334 18,818 18,264 =======================================
See notes to consolidated financial statements. 28 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Outstanding Unallocated Total Number of Common Additional Paid Shares of Retained Stockholders' Shares Stock in Capital ESOP Earnings Equity ---------------------------------------------------------------------------------------- (In thousands) Balances at July 31, 1999 18,249 $182 $67,740 $(2,584) $53,243 $118,581 Allocation of shares to ESOP -- -- -- 163 -- 163 Issuance of common stock, net 34 1 328 -- -- 329 Tax effect of exercises of stock options -- -- 112 -- -- 112 Net (loss) -- -- -- -- (1,231) (1,231) ---------------------------------------------------------------------------------------- Balances at July 31, 2000 18,283 $183 $68,180 $(2,421) $52,012 $117,954 ---------------------------------------------------------------------------------------- Allocation of shares to ESOP -- -- -- 163 -- 163 Issuance of common stock, net 370 4 3,505 -- -- 3,509 Tax effect of exercises of stock options -- -- 959 -- -- 959 Net income -- -- -- -- 13,358 13,358 ---------------------------------------------------------------------------------------- Balances at July 31, 2001 18,653 $187 $72,644 $(2,258) $65,370 $135,943 ---------------------------------------------------------------------------------------- Allocation of shares to ESOP -- -- -- 164 -- 164 Issuance of common stock, net 254 2 2,405 -- -- 2,407 Tax effect of exercises of stock options -- -- 415 -- -- 415 Issuance of common stock in connection with acquisition 199 2 4,247 4,249 Net income -- -- -- -- 17,209 17,209 ---------------------------------------------------------------------------------------- Balances at July 31, 2002 19,106 $191 $79,711 $(2,094) $82,579 $160,387 ========================================================================================
See notes to consolidated financial statements. 29 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31, (In thousands) 2002 2001 2000 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 17,209 $ 13,358 $ (1,231) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,206 7,908 7,601 Change in fair value of financial instruments 4,331 1,290 -- Loss on impairment of intangible asset -- 255 -- Loss on disposals of property & equipment 307 640 1,977 Deferred income tax expense (1,099) (1,529) (930) Provision for doubtful accounts 1,806 2,903 1,992 Changes in assets and liabilities, net of acquired companies: Accounts receivable (3,867) (14,887) (10,854) Inventory (21,091) (5,719) (13,761) Prepaid expenses 921 713 (425) Refundable income taxes 308 4,035 (461) Other assets (928) 42 (117) Notes receivable, trade 266 (514) 208 Accounts payable (692) 13,725 5,950 Accrued expenses 5,346 (234) (1,528) ------------------------------------ Net cash provided by (used in) operating activities 11,023 21,986 (11,579) ------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchases of subsidiaries, net of cash acquired (16) (2,393) (1,200) Proceeds from disposals of property and equipment 33 46 57 Capital expenditures (27,789) (15,891) (15,870) ------------------------------------ Net cash used in investing activities (27,772) (18,238) (17,013) ------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 38,053 49 26,854 Repayments on long-term debt (21,062) (2,742) (3,846) Proceeds from long-term debt 2,967 89 5,287 Principal payments of capital lease obligations (1,240) (1,162) (1,045) Proceeds from exercise of stock options 2,822 4,468 440 ------------------------------------ Net cash provided by financing activities 21,540 702 27,690 ------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,791 4,450 (902) Cash and cash equivalents at beginning of period 6,393 1,943 2,845 ------------------------------------ Cash and cash equivalents at end of period $ 11,184 $ 6,393 $ 1,943 ==================================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 7,089 $ 6,822 $ 5,746 ==================================== Income taxes, net of refunds $ 12,883 $ 5,709 $ 795 ====================================
In 2002, 2001 and 2000, the Company incurred capital lease obligations of approximately $ 667, $923, and $1,634, respectively. The fair value of common stock issued for an acquisition of a subsidiary was $4,249. See notes to consolidated financial statements. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Business United Natural Foods, Inc. and Subsidiaries (the "Company") is a distributor and retailer of natural and organic products. The Company sells its products throughout the United States. (b) Basis of Consolidation The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (c) Cash Equivalents Cash equivalents consist of highly liquid investment instruments with original maturities of three months or less. (d) Inventories Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. (e) Property and Equipment Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments at the inception of the lease. Depreciation and amortization are principally provided using the straight-line method over the estimated useful lives. (f) Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Intangible Assets and Other Long-Lived Assets Intangible assets consist principally of goodwill and covenants not to compete. Goodwill represents the excess purchase price over fair value of net assets acquired in connection with purchase business combinations. Covenants not to compete are initially recorded at fair value and are amortized using the straight-line method over the lives of the respective agreements, generally five years. In assessing potential impairment of goodwill, the Company has determined the implied fair value of each of its reporting units using a discounted cash flow analysis and compared such values to the respective reporting units' carrying amounts. SFAS 142 requires goodwill to be tested annually and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has elected to perform its annual tests for indications of goodwill impairment as of July 31 of each year. As of July 31, 2002, the Company's annual assessment of each of its reporting units indicated that goodwill was not impaired. The Company evaluates impairment of long-lived assets annually, or more frequently if events or changes in circumstances indicate that carrying amounts may no longer be recoverable. Impairment losses are determined based upon the excess of carrying amounts over expected future cash flows (undiscounted) of the underlying business. The assessment of the recoverability of long-lived assets will be impacted if estimated future cash flows are not achieved. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (h) Revenue Recognition and Trade Receivables The Company records revenue upon shipment of products. Revenues are recorded net of applicable sales discounts. The Company's sales are with customers located throughout the United States. The Company had two customers in 2002, 2001 and 2000, Whole Foods Market, Inc. and Wild Oats, Inc., which provided 10% or more of the Company's revenue. Total net sales to Whole Foods Market, Inc. and Wild Oats, Inc. in 2002 were approximately $224.6 and $162.8, respectively. Total sales to Whole Foods Market, Inc. and Wild Oats, Inc. in 2001 were approximately $169.0 million and $147.0 million, respectively. Total net sales to Whole Foods Market, Inc. and Wild Oats, Inc. in 2000 were approximately $147 million and $121 million, respectively. On June 19, 2002, the Company announced that its contract as primary distributor to Wild Oats, Inc., would not be renewed past its expiration date of August 31, 2002. However, the Company continues to distribute to Wild Oats, Inc. in fiscal 2003. (i) Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments including cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of notes receivable, long-term debt and capital lease obligations are based on the instruments' interest rate, terms, maturity date and collateral, if any, in comparison to the Company's incremental borrowing rate for similar financial instruments. (j) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (k) Notes Receivable, Trade The Company issues notes receivable, trade to certain customers under two basic circumstances, inventory purchases for initial store openings and overdue accounts receivable. Initial store opening notes are generally receivable over a period not to exceed twelve months. The overdue accounts receivable notes may extend for periods greater than one year. All notes are issued at a market interest rate and contain certain guarantees and collateral assignments in favor of the Company. (l) Employee Benefit and Stock Option Plans The Company sponsors various defined contribution plans that cover substantially all employees. Pursuant to certain stock incentive plans, the Company has granted stock options to key employees and to non-employee directors. The Company accounts for stock option grants using the intrinsic value based method. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (m) Earnings Per Share Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated by adding the dilutive potential common shares to the weighted average number of common shares that were outstanding during the period. For purposes of the diluted earnings per share calculation, outstanding stock options are considered common stock equivalents, using the treasury stock method. A reconciliation of the weighted average number of shares outstanding used in the computation of the basic and diluted earnings per share for all periods presented follows:
YEAR ENDED JULY 31, (In thousands) 2002 2001 2000 ---- ---- ---- Basic weighted average shares outstanding 18,933 18,482 18,264 Net effect of dilutive stock options based upon the treasury stock method 401 336 -- ----------------------- Diluted weighted average shares outstanding 19,334 18,818 18,264 ----------------------- Antidilutive potential common shares excluded from the computation above 601 -- 1,578 =======================
(n) Financial Instruments In October 1998, the Company entered into an interest rate swap agreement that provides for it to pay interest for a five-year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. This swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing the Company's effective rate at 6.50%. The five-year term of the swap agreement may be extended to seven years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under Statement of Financial Accounting Standards No. 133 ("SFAS" No. 133), "Accounting for Derivative Instruments and Hedging Activities." The Company entered into an additional interest rate swap agreement effective August 1, 2001. The additional agreement provides for the Company to pay interest for a four-year period at a fixed rate of 4.81% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing the Company's effective rate on the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given period the agreement is suspended for that period. The four-year term of the swap agreement may be extended to six years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No. 133. (2) ACQUISITION On November 6, 2001, the Company's wholly owned subsidiary, Albert's Organics, Inc., purchased the assets of Boulder Fruit Express, a distributor of high quality organic produce and perishables. In connection with the acquisition of Boulder Fruit Express, the Company issued 199,436 of common stock with a fair value of approximately $4.3 million and paid cash of approximately $0.8 million. This acquisition was accounted for as a purchase resulting in recording of goodwill of approximately $3.9 million. Operating results of Boulder Fruit Express have been included in our consolidated financial statements beginning with the acquisition date. Pro formas have not been included as the acquisition was not deemed to be significant. (3) STOCK OPTION PLAN The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, companies can elect to account for stock-based compensation using a fair value based method or continue to measure compensation expense using the intrinsic value method. The Company has elected to continue to apply APB No. 25 accounting treatment for stock-based compensation. If the fair value method of accounting had been used, net income (loss) would have been $14.4 million, $11.6 million and $(1.8) million for 2002, 2001 and 2000, respectively, basic earnings (loss) per share would have been $0.76, $0.63 and $(0.10) for 2002, 2001 and 2000, respectively, and diluted earnings (loss) per share would have been $0.75, $0.62 and $(0.10) for 2002, 2001 and 2000, respectively. The weighted average grant date fair value of options granted during 2002, 2001 and 2000 is shown on the following page. The fair value of each option grant was estimated using the Black-Sholes Option Pricing Model with the following weighted average assumptions for 2002, 2001 and 2000: dividend yields of 0.0% for all years, risk free interest rates of 4.7%, 5.1% and 6.1% respectively and expected lives of 5 years for fiscal 2002 and 8 years for fiscal years 2001 and 2000. The expected volatility was 64.0%, 76.8% and 77.5% for 2002, 2001 and 2000, respectively. The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of future amounts. On July 29, 1996, the Board of Directors adopted and the stockholders approved, the 1996 Stock Option Plan, which provides for grants of stock options to employees, officers, directors and others. These options are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code or options not intended to qualify as incentive stock options ("non-statutory stock options"). A total of 2,500,000 shares of common stock may be issued upon the exercise of options granted under the 1996 Stock Option Plan. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following table summarizes the stock option activity for the fiscal years ended July 31, 2002, 2001 and 2000:
2002 2001 2000 ---- ---- ---- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 1,418,884 $12.26 1,578,140 $10.76 985,259 $14.05 Granted 594,000 $22.78 486,750 $15.38 839,500 $ 9.38 Exercised (253,076) $ 9.51 (369,881) $ 9.48 (34,119) $ 9.64 Forfeited (67,000) $15.78 (276,125) $12.93 (212,500) $20.74 --------- --------- --------- Outstanding at end of year 1,692,808 $16.22 1,418,884 $12.26 1,578,140 $10.76 ========= ========= ========= Options exercisable at year-end 617,246 $11.68 600,509 $10.09 604,113 $10.12 Weighted average fair value of options granted during the year: Exercise price equals stock price $13.20 $11.91 $7.38 Exercise price exceeds stock price -- -- -- Stock price exceeds exercise price -- -- --
The following table summarizes the stock option activity of the 1996 Stock Option Plan since its inception through July 31, 2002: Shares ------ Authorized 2,500,000 Granted 3,017,096 Cancelled 565,625 --------- Remaining authorized 48,529 ========= The 1,692,808 options outstanding at July 31, 2002 had exercise prices and remaining contractual lives as follows:
Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Shares Contractual Life Exercise Shares Exercise Prices Outstanding (years) Price Exercisable Price ------ ----------- ------- ----- ----------- ----- $ 6.38 - $ 8.97 352,500 5.8 $ 7.83 243,250 $ 7.44 $ 9.64 - $14.25 248,875 7.1 $11.25 215,438 $10.99 $15.50 - $22.80 1,091,433 8.1 $20.06 158,558 $19.12
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (4) GOODWILL AND INTANGIBLE ASSETS: ADOPTION OF STATEMENT 142 In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually (or more frequently if impairment indicators arise). The Company adopted SFAS No. 142 on August 1, 2001. The Company completed the required transitional and annual goodwill impairment tests for each of its identified reporting units during the quarters ended January 31 and July 31, 2002. Based on the results of these tests, there was no indication of goodwill impairment. The Company has also reassessed the useful lives and carrying values of other intangibles, and will continue to amortize these assets over their remaining useful lives. The following table details the pro forma disclosures in accordance with SFAS No. 142. As of July 31, 2001, the Company had goodwill of $30.9 million less accumulated amortization of $3.4 million. The Company recorded additional goodwill in its Distribution operating segment of $3.9 million during the year ended July 31, 2002 as a result of its acquisition of Boulder Fruit Express. Total goodwill as of July 31, 2002 was $31.4 million. Goodwill for the Distribution operating segment totaled $18.4 as of July 31, 2002. Year Ended July 31, (In thousands, except per share data) 2002 2001 2000 -------- -------- ------- Operating income (loss): Distribution segment $ 43,899 $ 30,974 $ 8,333 Other segment (3,978) (1,339) (4,549) Eliminations 44 (3) 68 -------- -------- ------- Total reported operating income 39,965 29,632 3,852 -------- -------- ------- Add back: Distribution goodwill amortization -- 480 454 Add back: Other goodwill amortization -- 405 384 -------- -------- ------- Add back: Total goodwill amortization -- 885 838 -------- -------- ------- Adjusted distribution operating income 43,899 31,454 8,787 Adjusted other operating (loss) (3,978) (934) (4,165) Eliminations operating income (loss) 44 (3) 68 -------- -------- ------- Adjusted total operating income $ 39,965 $ 30,517 $ 4,690 ======== ======== ======= Net income: Reported net income (loss) $ 17,209 $ 13,358 $(1,231) Add back: goodwill amortization, net of tax -- 625 591 -------- -------- ------- Adjusted net income (loss) $ 17,209 $ 13,983 $ (640) ======== ======== ======= Basic earnings per share: Reported net income (loss) $ 0.91 $ 0.72 $ (0.07) Goodwill amortization, net of tax -- 0.03 0.03 -------- -------- ------- Adjusted net income (loss) $ 0.91 $ 0.75 $ (0.04) ======== ======== ======= Diluted earnings per share: Reported net income (loss) $ 0.89 $ 0.71 $ (0.07) Goodwill amortization, net of tax -- 0.03 0.03 -------- -------- ------- Adjusted net income (loss) $ 0.89 $ 0.74 $ (0.04) ======== ======== ======= 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Other intangibles consist of covenants not to compete with the weighted average amortization period of four and a half years. The Company had other intangibles less related accumulated amortization of $0.5 million and $0.2 million at July 31, 2002, respectively, and $0.5 million and $0.3 million at July 31, 2001, respectively. Amortization expense was $0.1 million for 2002, 2001 and 2000. Estimated amortization expense for the next four fiscal years is as follows: Year In thousands 2003 $ 95 2004 63 2005 40 2006 10 Thereafter -- ----- $ 248 ===== (5) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at July 31, 2002 and 2001: Estimated Useful Lives (Dollars in thousands) (Years) 2002 2001 ------- ---- ---- Land $ 4,816 $ 3,824 Buildings 20-40 45,852 38,279 Building Improvements 20-40 12,386 6,939 Leasehold improvements 5-30 11,216 7,174 Warehouse equipment 5-20 26,558 21,360 Office equipment 3-10 12,235 9,870 Motor vehicles 3-5 6,489 6,164 Equipment under capital leases 5 5,644 5,581 Construction in progress 1,707 1,278 ------------------- 126,903 100,469 Less accumulated depreciation and amortization 44,201 38,283 ------------------- Net property and equipment. $ 82,702 $ 62,186 =================== (6) NOTES PAYABLE The Company entered into a new line of credit with its bank effective September 4, 2001. The agreement increased the amount of the credit facility to $150 million from $100 million. Interest accrues, at the Company's option, at the New York Prime Rate (4.75% at July 31, 2002 and 6.75% at July 31, 2001) or 1.50% above the banks' London Interbank Offered Rate ("LIBOR" 1.81% and 3.78% at July 31, 2002 and 2001, respectively) and the Company has the option to fix the rate for all or a portion of the debt in increments of 30 days. The Company opted to pay 1.50% above LIBOR for substantially all of fiscal 2002. At July 31, 2002 and 2001, the weighted average interest rate on the line of credit was 3.38% and 5.06%, respectively. As of July 31, 2002, the Company's outstanding borrowings under the credit agreement totaled $113.0 million, which included $6.9 million in letters of credit, with an availability of $19.7 million. The credit agreement contains certain restrictive covenants. The Company was in compliance with all restrictive covenants at July 31, 2002. The agreement also provides for the primary bank to syndicate the credit facility to other banks and lending institutions. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. The borrowing base is based on accounts receivable and inventory levels. The proceeds received from the new credit facility were used to refinance the Company's existing credit facility consisting of a revolving loan balance of $61.8 million and fixed rate mortgages of $18.3 million. An additional fixed rate mortgage of $1.5 million has been paid in full. The agreement has had two subsequent amendments. The Company amended the agreement with its bank to define the term "Capital Expenditures" to exclude the purchase of its new building located in Atlanta, Georgia in June 2002. The Company amended the agreement with its bank, in September 2002, to waive the negative covenants in order to purchase Blooming Prairie. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (7) LONG-TERM DEBT
July 31, July 31, Long-term debt consisted of the following: (dollars in thousands) 2002 2001 ---- ---- Real estate term loans payable to bank and others, secured by building and other assets, due monthly and maturing at various dates from August 2002 through April 2015, at rates ranging from 7.50 % to 8.60 % $ 2,867 4,679 Equipment financing loans payable to bank, secured by assets, due monthly and maturing at various dates from March 2006 through July 2007, at rates ranging from 6.49% to 7.23% 2,844 - Term loan for employee stock ownership plan, secured by stock of the Company, due $14 monthly plus interest at 10%, balance due May 1, 2015 2,094 2,258 Term loans payable to bank, secured by assets, due monthly and maturing at various dates from October 2003 through June 2005, at rates ranging from 8.85% to 11.57% 1,530 1,973 Term loan payable to bank, secured by substantially all assets of the Company, due $235 quarterly plus interest at 1.25% above LIBOR, balance repaid in September 2001 -- 3,075 Real estate term loan payable to bank, secured by land and building, due $28 monthly plus interest at 7.36%, balance repaid in September 2001 -- 5,555 Term loan payable to bank, secured by substantially all assets of the Company, with monthly principal payments of $50, balance repaid in September 2001 -- 9,890 ------------------ 9,335 27,430 Less: current installments 1,658 19,625 ------------------ Long-term debt, excluding current installments $ 7,677 $ 7,805 ==================
Certain debt agreements contain restrictive covenants. The Company was in compliance with all of its restrictive covenants at July 31, 2002. Aggregate maturities of long-term debt for the next five years and thereafter are as follows at July 31, 2002: Year (In thousands) 2003 $ 1,658 2004 1,714 2005 1,691 2006 1,024 2007 645 Thereafter 2,603 ------- $ 9,335 ======= (8) FINANCIAL INSTRUMENTS In October 1998, the Company entered into an interest rate swap agreement that provides for it to pay interest for a five-year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. This swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing the effective rate at 6.50%. The five-year term of the swap agreement may be extended to seven years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under Statement of Financial Accounting Standards No. 133 ("SFAS" No. 133), "Accounting for Derivative Instruments and Hedging Activities." The Company entered into an additional interest rate swap agreement effective August 1, 2001. The additional agreement provides for the Company to pay interest for a four-year period at a fixed rate of 4.81% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing the effective rate on the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given period the agreement is suspended for that period. The four-year term of the swap agreement may be extended to six years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No. 133. As of July 31, 2002 the fair value of the financial instruments totaled $(5.6) million. During fiscal 2002, the Company recorded other expenses of $4.3 million to reflect the change in fair market value. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (9) CAPITAL LEASES The Company leases computer, office and warehouse equipment under capital leases expiring in various years through 2007. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the shorter of their related lease terms or their estimated productive lives. Total capital leased assets for fiscal year 2002 and 2001 were $5,644, and $5,581, respectively, less accumulated depreciation of $3,453 and $2,898, respectively. Minimum future lease payments under capital leases as of July 31, 2002 for each of the next five fiscal years and in the aggregate are: Year ended July 31 (In thousands) 2003 $ 1,161 2004 680 2005 316 2006 77 2007 3 ------- Total minimum lease payments 2,237 Less: Amount representing interest 205 ------- Present value of net minimum lease payments 2,032 Less: current installments 1,037 ------- Capital lease obligations, excluding current installments $ 995 ======= (10) COMMITMENTS AND CONTINGENCIES The Company leases various facilities under operating lease agreements with varying terms. Most of the leases contain renewal options and purchase options at several specific dates throughout the terms of the leases. Rent and other lease expense for the years ended July 31, 2002, 2001 and 2000 totaled approximately $14.3 million, $9.7 million and $8.5 million, respectively. Future minimum annual fixed payments required under non-cancelable operating leases having an original term of more than one year as of July 31, 2002 are as follows: Year (In thousands) 2003 $ 10,759 2004 10,004 2005 8,832 2006 6,831 2007 5,543 2008 and thereafter 18,157 -------- $ 60,126 ======== Outstanding commitments as of July 31, 2002 for the purchase of inventory were approximately $4.3 million. The Company had outstanding letters of credit of approximately $6.9 million at July 31, 2002. The Company may from time to time be involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. (11) PROFIT SHARING / SALARY REDUCTION PLANS The Company has several profit sharing/salary reduction plans, generally called "401(k) Plans" ("the Plans"), covering various employee groups. Under these types of Plans the employees may choose to reduce their compensation and have these amounts contributed to the Plans on their behalf. In order to become a participant in the Plans, employees must meet certain eligibility requirements as described in the respective Plan's document. In addition to amounts contributed to the Plans by employees, the Company makes contributions to the Plans on behalf of the employees. The Company contributions to the Plans were approximately $1.3 million, $1.3 million and $1.0 million for the years ended July 31, 2002, 2001 and 2000, respectively. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (12) EMPLOYEE STOCK OWNERSHIP PLAN The Company adopted the UNFI Employee Stock Ownership Plan (the "Plan") for the purpose of acquiring outstanding shares of the Company for the benefit of eligible employees. The Plan was effective as of November 1, 1988 and has received notice of qualification by the Internal Revenue Service. In connection with the adoption of the Plan, a Trust was established to hold the shares acquired. On November 1, 1988, the Trust purchased 40% of the outstanding Common Stock of the Company at a price of $4,080,000. The trustees funded this purchase by issuing promissory notes to the initial stockholders, with the Trust shares pledged as collateral. These notes bear interest at 10% and are payable through May 2015. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans," in November 1993. The statement provides guidance on employers' accounting for ESOPs and is required to be applied to shares purchased by ESOPs after December 31, 1992, that have not been committed to be released as of the beginning of the year of adoption. In accordance with SOP 93-6, the Company elected not to adopt the guidance in SOP 93-6 for the shares held by the ESOP, all of which were purchased prior to December 31, 1992. The debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. During each of 2002, 2001 and 2000 contributions totaling approximately $0.4 million were made to the Trust. Of these contributions, approximately $0.2 million represented interest in 2002 and 2001 and approximately $0.3 million represented interest in 2000. The ESOP shares were classified as follows: July 31, July 31, (In thousands) 2002 2001 ---- ---- Allocated shares 990 902 Shares released for allocation 88 88 Shares distributed to employees (443) (376) Unreleased shares 1,122 1,210 ----- ----- Total ESOP shares 1,757 1,824 ===== ===== The fair value of unreleased shares was approximately $20.7 million at July 31, 2002. (13) INCOME TAXES Total federal and state income tax (benefit) expense from continuing operations consists of the following: (In thousands) Current Deferred Total ------- -------- ----- Fiscal year ended July 31, 2002: U.S. Federal $11,560 $(2,083) $ 9,477 State and local 1,537 459 1,996 ------- ------- ------- $13,097 $(1,624) $11,473 ======= ======= ======= Fiscal year ended July 31, 2001: U.S. Federal $ 9,212 $(1,399) $ 7,813 State and local 1,499 (406) 1,093 ------- ------- ------- $10,711 $(1,805) $ 8,906 ======= ======= ======= Fiscal year ended July 31, 2000: U.S. Federal $ (141) $ 79 $ (62) State and local 269 (1,009) (740) ------- ------- ------- $ 128 $ (930) $ (802) ======= ======= ======= Total income tax expense (benefit) was different than the amounts computed using the United States statutory income tax rate (35%) applied to income before income taxes as a result of the following: July 31, July 31, July 31, (In thousands) 2002 2001 2000 ---- ---- ---- Computed "expected" tax expense (benefit) $10,039 $7,792 $(712) State and local income tax, net of Federal income tax (expense) benefit 1,307 710 (481) Non-deductible expenses 177 137 119 Non-deductible amortization -- 94 88 Increase in valuation allowance 642 -- -- Other, net (692) 173 184 ------- ------ ----- $11,473 $8,906 $(802) ======= ====== ===== 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Total income tax expense (benefit) for the years ended July 31, 2002, 2001, and 2000 was allocated as follows: July 31, July 31, July 31, (In thousands) 2002 2001 2000 ---- ---- ---- Statement of operations $11,473 $8,906 $(802) Stockholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial statement purposes $ (415) $ (959) $(112) ------- ------ ----- $11,058 $7,947 $(914) ======= ====== ===== The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets and deferred tax liabilities at July 31, 2002 and 2001 are presented below: (In thousands) 2002 2001 ---- ---- Deferred tax assets: Change in financial instruments $2,186 -- Inventories, principally due to additional costs inventoried for tax purposes 1,546 1,315 Compensation and benefit related 707 886 State net operating loss carryforward 778 682 Accounts receivable, principally due to allowances for uncollectible accounts 1,067 545 Reserve for LIFO inventory 55 45 Accrued expenses 1,464 750 Other 246 237 ------ ------ Total gross deferred tax assets 8,049 4,460 ------ ------ Less valuation allowance 642 -- ------ ------ Net deferred tax assets 7,407 4,460 ------ ------ Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation 920 33 Reserve for LIFO inventory method -- -- Intangible assets 1,009 564 Other 66 74 ------ ------ Total deferred tax liabilities 1,995 671 ------ ------ Net deferred income taxes $5,412 $3,789 ====== ====== Current deferred income tax assets $4,612 $3,513 Non-current deferred income tax assets 800 276 ------ ------ Net deferred income taxes $5,412 $3,789 ====== ====== At July 31, 2002, the Company had net operating loss carryforwards of approximately $20 million for state income tax purposes that expire in years 2003 through 2022. In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to the fact that the Company has sufficient taxable income in the federal carryback period and anticipates sufficient future taxable income over the periods which the deferred tax assets are deductible, the ultimate realization of deferred tax assets for, with the exception of certain state operating loss carryforwards, federal and state tax purposes appears more likely than not. (14) BUSINESS SEGMENTS The Company has several operating divisions aggregated under the distribution segment, which is the Company's only reportable segment. These operating divisions have similar products and services, customer types, distribution methods and historical margins. The distribution segment is engaged in national distribution of natural foods and related products in the United States. Other operating segments include the retail segment, which engages in the sale of natural foods and related products to the general public through retail storefronts on the east coast of the United States, and a segment engaging in trading, roasting and packaging of nuts, seeds, dried fruit and snack items. These other operating segments do not meet the quantitative thresholds for reportable segments and are therefore included in an "other" caption in the segment information. The "other" caption also includes corporate expenses that are not allocated to operating segments. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Following is business segment information for the periods indicated:
(In thousands) Distribution Other Eliminations Consolidated ------------ ----- ------------ ------------ 2002 - ---- Revenue $1,133,678 $62,918 $(21,203) $1,175,393 Operating Income 43,899 (3,978) 44 39,965 Amortization and Depreciation 7,097 1,109 -- 8,206 Capital Expenditures 25,465 2,324 -- 27,789 Assets 459,997 42,984 (148,524) 354,457 2001 - ---- Revenue 977,199 58,464 (18,829) 1,016,834 Operating Income 30,974 (1,339) (3) 29,632 Amortization and Depreciation 6,625 1,283 -- 7,908 Capital Expenditures 14,457 1,434 -- 15,891 Assets 440,187 1,266 (141,009) 300,444 2000 - ---- Revenue 870,307 56,131 (17,750) 908,688 Operating Income 8,333 (4,549) 68 3,852 Amortization and Depreciation 6,431 1,170 -- 7,601 Capital Expenditures 15,190 680 -- 15,870 Assets 400,538 7,129 (137,433) 270,234
(15) QUARTERLY FINANCIAL DATA (UNAUDITED) Following is a summary of quarterly operating results and share data. There were no dividends paid or declared during 2002 and 2001 and the Company anticipates that it will continue to retain earnings for use in its business and not pay cash dividends in the foreseeable future.
(In thousands except per share data) First Second Third Fourth Full Year - --------------------------------------------------------------------------------------------- 2002 - ---- Net sales $280,315 $285,461 $300,362 $309,255 $1,175,393 Gross profit 55,001 56,512 58,314 60,789 230,616 Income before income taxes 4,336 8,690 8,798 6,858 28,682 Net income 2,602 5,214 5,279 4,114 17,209 Per common share income Basic: $ 0.14 $ 0.28 $ 0.28 $ 0.22 $ 0.91 Diluted: $ 0.14 $ 0.27 $ 0.27 $ 0.21 $ 0.89 Weighted average basic Shares outstanding 18,665 18,915 19,049 19,106 18,933 Weighted average diluted Shares outstanding 19,060 19,371 19,493 19,423 19,334 Market Price High $ 24.11 $ 25.25 $ 26.38 $ 24.13 $ 26.38 Low $ 15.64 $ 20.21 $ 21.34 $ 14.25 $ 14.25
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands except per share data) First Second Third Fourth Full Year - --------------------------------------------------------------------------------------------- 2001 - ---- Net sales $244,141 $244,422 $258,536 $269,735 $1,016,834 Gross profit 48,051 47,790 49,683 53,270 198,794 Income before income taxes 5,442 4,345 5,470 7,007 22,264 Net income 3,265 2,607 3,282 4,204 13,358 Per common share income Basic: $ 0.18 $ 0.14 $ 0.18 $ 0.23 $ 0.72 Diluted: $ 0.18 $ 0.14 $ 0.17 $ 0.22 $ 0.71 Weighted average basic Shares outstanding 18,320 18,414 18,580 18,616 18,482 Weighted average diluted Shares outstanding 18,633 18,784 18,839 19,027 18,818 Market Price High $ 15.25 $ 20.38 $ 19.50 $ 23.20 $ 23.20 Low $ 9.56 $ 11.38 $ 10.88 $ 13.94 $ 9.56
(16) SUBSEQUENT EVENTS (UNAUDITED) The Company amended the credit agreement with its bank on September 26, 2002 to waive the negative covenants in order to purchase Blooming Prairie. The Company acquired substantially all the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest region, on October 11, 2002 for approximately $30.0 million. Blooming Prairie, headquartered in Iowa City, IA and in business since 1974, had approximately $130 million in sales for its most recent fiscal year ended June 30, 2002. On October 23, 2002, the Company signed an agreement to purchase Northeast Cooperatives, a distributor of natural foods and products in the Eastern United States. Northeast Cooperatives, headquartered in Brattleboro, Vermont, and in business since 1973, had approximately $120 million in sales for the latest twelve months. Consummation of the transaction is contingent upon customary closing conditions, approval by the members of Northeast Cooperatives and approval from Northeast Cooperatives' lenders. 42 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 this item is contained in part under the caption "Executive Officers and Directors of the Registrant" in PART I hereof, and the remainder is contained in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held in December 2002 (the "2002 Proxy Statement") under the captions "PROPOSAL 1 - ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and is incorporated herein by this reference. Officers are elected on an annual basis and serve at the discretion of the Board of Directors. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained under the captions "Director Compensation," "Compensation of Executive Officers" and "Compensation Committee Interlocks and Insider Participation" in the 2002 Proxy Statement and is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in the 2002 Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners and Management" and is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained under the caption "Certain Relationships and Related Transactions" in the 2002 Proxy Statement and is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this Form 10-K. 1. Financial Statements. The Financial Statements listed in the Index to Financial Statements in Item 8 hereof are filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedules. Schedule II Valuation and Qualifying Accounts. Schedules other than those listed above have been omitted since they are either not required or the information required is included in the consolidated financial statements on the notes thereto. Independent Auditor's Report on Financial Statement Schedule. 3. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. None. 43 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. UNITED NATURAL FOODS, INC. /s/ TODD WEINTRAUB ----------------------------- Todd Weintraub Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Dated: October 25, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date - ---- ----- ---- /s/ THOMAS B. SIMONE Chair of the Board October 25, 2002 - -------------------- Thomas B. Simone /s/ MICHAEL S. FUNK Chief Executive Officer and October 25, 2002 - ------------------- Vice Chair of the Board Michael S. Funk (Principal Executive Officer) /s/ STEVEN TOWNSEND President, and Director October 25, 2002 - ------------------- Steven Townsend /s/ TODD WEINTRAUB Vice President, Chief Financial October 25, 2002 - ------------------ Officer and Treasurer (Principal Todd Weintraub Financial and Accounting Officer) /s/ KEVIN T. MICHEL President of Western Region, October 25, 2002 - ------------------- Assistant Secretary and Director Kevin T. Michel /s/ GORDON D. BARKER Director October 25, 2002 - -------------------- Gordon D. Barker /s/ JOSEPH M. CIANCIOLO Director October 25, 2002 - ----------------------- Joseph M. Cianciolo /s/ JAMES P. HEFFERNAN Director October 25, 2002 - ---------------------- James P. Heffernan GAIL A. GRAHAM Director October 25, 2002 - ------------------ Gail A. Graham 44 CERTIFICATION Each of the undersigned, in his capacity as the Chief Executive Officer and Chief Financial Officer of United Natural Foods, Inc., as the case may be, provides the following certifications required by 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer I, Michael S. Funk, hereby certify that: 1. I have reviewed this annual report on Form 10-K of United Natural Foods, Inc., a Delaware corporation (the "Company"); 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 Company as of, and for, the periods presented in this annual report. /s/ Michael S. Funk ------------------------- Michael S. Funk Chief Executive Officer October 25, 2002 Explanatory Note Regarding Certification. Representations 4, 5 and 6 consistent with the Transition Provisions of Securities and Exchange Commission Release No. 34-46427 have been omitted from this Certification for the Annual Report on Form 10-K since this Annual Report on Form 10-K covers a period ending before the Effective Date of such Release. Certification of Chief Financial Officer I, Todd Weintraub, hereby certify that: 1. I have reviewed this annual report on Form 10-K of United Natural Foods, Inc., a Delaware corporation (the "Company"); 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 Company as of, and for, the periods presented in this annual report. /s/ Todd Weintraub ------------------------- Todd Weintraub Chief Financial Officer October 25, 2002 45 Explanatory Note Regarding Certification. Representations 4, 5 and 6 consistent with the Transition Provisions of Securities and Exchange Commission Release No. 34-46427 have been omitted from this Certification for the Annual Report on Form 10-K since this Annual Report on Form 10-K covers a period ending before the Effective Date of such Release. 46 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant. 3.2 (2) Amendment to Amended and Restated Certificate of Incorporation of the Registrant. 3.3 * Amended and Restated By-Laws of the Registrant. 4.1 (1) Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant. 4.2 (4) Certificate of Designation of Preferences and Rights of Series A Preferred Stock of the Registrant. 4.3 (4) Rights Agreement between the Registrant and Continental Stock Transfer and Trust Company. 10.1 (1) 1996 Employee Stock Purchase Plan. 10.2 (1) Amended and Restated Employee Stock Ownership Plan. 10.3 (1) Employee Stock Ownership Trust Loan Agreement among Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood, Theodore Cloutier and the Employee Stock Ownership Plan and Trust, dated November 1, 1988. 10.4 (1) Stock Pledge Agreement between the Employee Stock Ownership Trust and Steven H. Townsend, Trustee for Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood and Theodore Cloutier, dated November 1, 1988. 10.5 (1) Trust Agreement among Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood, Theodore Cloutier and Steven H. Townsend as Trustee, dated November 1, 1988. 10.6 (1) Guaranty Agreement between the Registrant and Steven H. Townsend as Trustee for Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood and Theodore Cloutier, dated November 1, 1988. 10.7 (5) Amended and Restated 1996 Stock Option Plan. 10.8 (5) Amendment No. 1 to Amended and Restated 1996 Stock Option Plan. 10.9 (5) Amendment No. 2 to Amended and Restated 1996 Stock Option Plan. 10.11* Loan and Security Agreement with Fleet Capital Corporation dated August 31, 2001. 10.12 (15) First Amendment to Loan and Security with Fleet Capital Corporation dated April 16, 2002. 10.13* Second Amendment to Loan and Security with Fleet Capital Corporation dated September 26, 2002. 10.18 (11) Real estate Term Notes between the Registrant and City National Bank, dated April 28, 2000. 10.19* Lease between the Registrant and Two Seventy M Edison, a New Jersey general partnership, dated April 1, 2002. 10.20 (1) Distribution Agreement between Mountain People's Wine Distributing, Inc., and Mountain People's, dated August 23, 1994. 10.23 (1) Lease between the Registrant and Bradley Spear and Seattle First National Bank, co-executors of the estate of A.H. Spear, dated August 23, 1989. 10.24 (11) Lease between Dove Investments, Inc. and the Registrant, dated December 31, 1996. 10.25 (9) Lease between Valley Centre I, L.L.C. and the Registrant, dated August, 1998. 10.26 (7) Lease between AmberJack, Ltd. and the Registrant, dated July 11, 1997. 47 Exhibit No. Description - ----------- ----------- 10.27 (13) Lease between M.D. Hodges Enterprises, Inc. and the Registrant, dated June 6, 2001. 10.28 (13) Lease between Metropolitan Life Insurance Company and the Registrant, dated July 31, 2001. 10.29 (14) Employment Transition Agreement and Release for Norman A. Cloutier, dated December 8, 1999. 10.30 (11) Purchase and Sale agreement between the Registrant and Dynamic Builders, Inc., dated June 30, 1999, Amendments and attachment. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. Schedule II - Valuation and Qualifying Accounts and Report of Independent Accountants thereon. * Filed herewith (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-11349). (2) Incorporated by reference to the Registrant's Definitive Proxy Statement for the fiscal year ended July 31, 1998. (4) Incorporated by reference to the Registration Current Report on Form 8-K filed on March 2, 2000. (5) Incorporated by reference to the Registrant's Definitive Proxy Statement for the fiscal year ended July 31, 2000. (6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1997. (7) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1997. (8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1997. (9) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 1999. (10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2000. (11) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 2000. (12) Incorporated by reference to the Registrant's Definitive Proxy Statement for the fiscal year ended July 31, 1997. (13) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 31, 2001. (14) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2000. (15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2002. 48 INDEPENDENT AUDITORS' REPORT The Board of Directors United Natural Foods, Inc.: Under date of September 4, 2002, we reported on the consolidated balance sheets of United Natural Foods, Inc. and subsidiaries as of July 31, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 2002, as contained in the annual report on Form 10-K for the year 2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule. This 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, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP KPMG LLP Providence, Rhode Island September 4, 2002 49 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS
Additions Balance at charged to beginning of costs Balance at period and expenses Deductions end of period ------------------------------------------------------------------- Year ended July 31, 2002 $ 5,041 $ 1,806 $ 855 $ 5,992 Year ended July 31, 2001 $ 3,871 $ 2,903 $ 1,732 $ 5,041 Year ended July 31, 2000 $ 2,794 $ 1,992 $ 916 $ 3,871
50 EX-3.3 3 ex3-3.txt ================================================================================ AMENDED AND RESTATED BYLAWS OF UNITED NATURAL FOODS, INC. A DELAWARE CORPORATION AS APPROVED BY THE BOARD OF DIRECTORS OF THE CORPORATION ON OCTOBER 2, 2002 ================================================================================ ARTICLE I STOCKHOLDERS SECTION 1.1. Place of Meetings. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) or, if not so designated, at the registered office of the corporation. The board of directors may, in its sole discretion, determine that a meeting shall not be held at any place, but may instead be held either solely by means of remote communication or concurrently with a meeting held at a designated place in a manner consistent with the General Corporation Law of the State of Delaware. SECTION 1.2. Annual Meeting. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held within six months after the end of each fiscal year of the corporation on a date to be fixed by the Board of Directors or the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) (which date shall not be a legal holiday) at the time and place (if any) to be fixed by the Board of Directors or the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) and stated in the notice of the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these Bylaws to the annual meeting of the stockholders shall be deemed to refer to such special meeting. SECTION 1.3. Special Meetings. Special meetings of stockholders may be called at any time by the Chair of the Board of Directors, the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) or the Board of Directors. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. SECTION 1.4. Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. Without limiting the manner by which notice otherwise may be given to stockholders, any notice shall be effective if given by a form of electronic transmission consented to (in a manner consistent with the General Corporation Law of the State of Delaware) by the stockholder to whom the notice is given. The notices of all meetings shall state the place (if any), date and hour of the meeting and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation. If notice is given by electronic transmission, such notice shall be deemed given at the time specified in Section 232 of the General Corporation Law of the State of Delaware. SECTION 1.5. Voting List. The officer who has charge of the stock ledger of the corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, for a period of at least 10 days prior to the meeting, at a place within the city where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole of the meeting on a reasonable accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. SECTION 1.6. Quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person, present by means of remote communication in a manner, if any, authorized by the Board of Directors in its sole discretion, or represented by proxy, shall constitute a quorum for the transaction of business. SECTION 1.7. Adjournments. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these Bylaws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place (if any) of the adjourned meeting, and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting, are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. SECTION 1.8. Voting and Proxies. Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided by the General Corporation Law of the State of Delaware, the Certificate of Incorporation or these Bylaws. Each stockholder of record entitled to vote at a meeting of stockholders may vote in person (including by means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, if authorized by the Board of Directors) or may authorize another person or persons to vote or act for such stockholder by written proxy executed or transmitted in a manner permitted by the General Corporation Law of the State of Delaware by the stockholder or such stockholder's authorized agent and delivered (including by electronic transmission) to the Secretary of the corporation. No such proxy shall be voted or acted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period. 2 SECTION 1.9. Action at Meeting. When a quorum is present at any meeting, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on a matter) shall decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these Bylaws. Any election by stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote at the election. SECTION 1.10. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nomination for election to the Board of Directors of the corporation at a meeting of stockholders may be made by the Board of Directors or by any stockholder of the corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 1.10. Such nominations, other than those made by or on behalf of the Board of Directors, shall be made by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary, and received not less than 60 days nor more than 90 days prior to such meeting; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given to stockholders, such nomination shall have been mailed or delivered to the Secretary not later than the close of business on the 10th day following the date on which the notice of the meeting was mailed or such public disclosure was made, whichever occurs first. Such notice shall set forth (a) as to each proposed nominee (i) the name, age, business address and, if known, residence address of each such nominee, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the corporation which are beneficially owned by each such nominee, and (iv) any other information concerning the nominee that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to be named as a nominee and to serve as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. The chair of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if the chair should so determine, the chair shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 1.11. Notice of Business at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before an annual meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, if such business relates to the election of directors of the corporation, the procedures in Section 1.10 must be complied with. If such business relates to any other matter, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be 3 delivered to or mailed and received at the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 1.11 and except that any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Securities Exchange Act of 1934, as amended, and is to be included in the corporation's proxy statement for an annual meeting of stockholders shall be deemed to comply with the requirements of this Section 1.11. The chair of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 1.11, and if the chair should so determine, the chair shall so declare to the meeting that any such business not properly brought before the meeting shall not be transacted. SECTION 1.12. Action without Meeting. Stockholders may not take any action by written consent in lieu of a meeting. SECTION 1.13. Organization. The Chair of the Board, or in the Chair's absence the Vice Chair of the Board designated by the Chair of the Board, or the Chief Executive Officer (or, if there is no Chief Executive Officer, the President), in the order named, shall call meetings of the stockholders to order, and shall act as chair of such meeting; provided, however, that the Board of Directors may appoint any stockholder to act as chair of any meeting in the absence of the Chair of the Board. The Secretary of the corporation shall act as secretary at all meetings of the stockholders; but in the absence of the Secretary at any meeting of the stockholders, the presiding officer may appoint any person to act as secretary of the meeting. ARTICLE II DIRECTORS SECTION 2.1. General Powers. The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law, the Certificate of Incorporation or these Bylaws. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. SECTION 2.2. Number; Election and Qualification. The number of directors which shall constitute the whole Board of Directors shall be determined by resolution of the Board of 4 Directors, but in no event shall be less than three. The number of directors may be decreased at any time and from time to time by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders by such stockholders as have the right to vote on such election. Directors need not be stockholders of the corporation. SECTION 2.3. Classes of Directors. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. No one class shall have more than one director more than any other class. If a fraction is contained in the quotient arrived at by dividing the designated number of directors by three, then, if such fraction is one-third, the extra director shall be a member of Class I, and if such fraction is two-thirds, one of the extra directors shall be a member of Class I and one of the extra directors shall be a member of Class II, unless otherwise provided from time to time by resolution adopted by the Board of Directors. SECTION 2.4. Terms of Office. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, that each initial director in Class I shall serve for a term ending on the date of the annual meeting of stockholders in 1997; each initial director in Class II shall serve for a term ending on the date of the annual meeting of stockholders in 1998; and each initial director in Class III shall serve for a term ending on the date of the annual meeting of stockholders in 1999; and provided further, that the term of each director shall be subject to the election and qualification of such director's successor and to such director's earlier death, resignation or removal. SECTION 2.5. Allocation of Directors. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which such director is a member and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation, and any newly eliminated directorships shall be subtracted from those classes whose terms of offices are to expire at the earliest dates following such allocation, unless otherwise provided from time to time by resolution adopted by the Board of Directors. SECTION 2.6. Vacancies. Any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, shall be filled only by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of such director's predecessor in office, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of such director's successor and to such director's earlier death, resignation or removal. 5 SECTION 2.7. Resignation. Any director may resign by delivering a written resignation to the corporation at its principal office or to the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. SECTION 2.8. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. SECTION 2.9. Special Meetings. Special meetings of the Board of Directors may be held at any time and place, within or without the State of Delaware, designated in a call by the Chair of the Board, the Chief Executive Officer (or, if there is no Chief Executive Officer, the President), two or more directors, or by one director in the event that there is only a single director in office. SECTION 2.10. Notice of Special Meetings. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone at least 24 hours in advance of the meeting, (ii) by sending a telegram, telecopy, or telex, or delivering written notice by hand, to such director's last known business or home address at least 24 hours in advance of the meeting, or (iii) by mailing written notice to such director's last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. SECTION 2.11. Meetings by Telephone Conference Calls. Directors or any members of any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. SECTION 2.12. Quorum. A majority of the total number of the whole Board of Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. SECTION 2.13. Action at Meeting. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these Bylaws. 6 SECTION 2.14. Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board or committee. SECTION 2.15. Removal. Directors of the corporation may be removed only for cause by the affirmative vote of the holders of two-thirds of the shares of the capital stock of the corporation issued and outstanding and entitled to vote. SECTION 2.16. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not the member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these Bylaws for the Board of Directors. SECTION 2.17. Compensation of Directors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. ARTICLE III OFFICERS SECTION 3.1. Enumeration. The officers of the corporation shall consist of a President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including a Chair of the Board, a Vice Chair of the Board, a Chief Executive Officer and one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate. SECTION 3.2. Election. The President, Treasurer and Secretary shall be elected annually by the Board of Directors at its first meeting following the annual meeting of 7 stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting. SECTION 3.3. Qualification. No officer need be a stockholder. Any two or more offices may be held by the same person. SECTION 3.4. Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, each officer shall hold office until such officer's successor is elected and qualified, unless a different term is specified in the vote choosing or appointing such officer, or until such officer's earlier death, resignation or removal. SECTION 3.5. Resignation and Removal. Any officer may resign by delivering a written resignation to the corporation at its principal office or to the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following such officer's resignation or removal, or any right to damages on account of such removal, whether such officer's compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the corporation. SECTION 3.6. Vacancies. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of such officer's predecessor and until such officer's successor is elected and qualified, or until such officer's earlier death, resignation or removal. SECTION 3.7. Chair of the Board and Vice Chair of the Board. The Board of Directors may appoint a Chair of the Board. If the Board of Directors appoints a Chair of the Board, the Chair shall perform such duties and possess such powers as are assigned to the Chair by the Board of Directors. If the Board of Directors appoints a Vice Chair of the Board, the Vice Chair shall, in the absence or disability of the Chair of the Board, perform the duties and exercise the powers of the Chair of the Board and shall perform such other duties and possess such other powers as may from time to time be vested in the Vice Chair by the Board of Directors. SECTION 3.8. Chief Executive Officer and President. The Chief Executive Officer or, if there is no Chief Executive Officer, the President, shall, subject to the direction of the Board of Directors, have general charge and supervision of the business of the corporation. Unless the Board of Directors has designated the Chair of the Board or another officer as Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The Chief Executive Officer and President shall perform such other duties and have such other powers that the Board of Directors may from time to time prescribe. 8 SECTION 3.9. Vice Presidents. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the Chief Executive Officer (or, if there is no Chief Executive Officer, the President), the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) and when so performing shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. SECTION 3.10. Secretary and Assistant Secretaries. The Secretary shall perform such duties and shall have such powers as the Board of Directors or the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. SECTION 3.11. Treasurer and Assistant Treasurers. The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned to the Treasurer by the Board of Directors or the Chief Executive Officer (or, if there is no Chief Executive Officer, the President). In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these Bylaws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation. The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer. SECTION 3.12. Salaries. Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. 9 ARTICLE IV CAPITAL STOCK SECTION 4.1. Issuance of Stock. Unless otherwise voted by the stockholders and subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of any unissued balance of the authorized capital stock of the corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. SECTION 4.2. Certificates of Stock. Every holder of stock of the corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by such stockholder in the corporation. Each such certificate shall be signed by, or in the name of the corporation by, the Chair or Vice Chair, if any, of the Board of Directors, or the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation. Any or all of the signatures on the certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, the Bylaws, applicable securities laws or any agreement among any number of stockholders or among such holders and the corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction. SECTION 4.3. Transfers. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these Bylaws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these Bylaws. SECTION 4.4. Lost, Stolen or Destroyed Certificates. The corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the Board of Directors may require for the protection of the corporation or any transfer agent or registrar. SECTION 4.5. Record Date. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the 10 purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action to which such record date relates. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE V NOTICES SECTION 5.1. General; Electronic Transmission. Whenever, under the provisions of statute or of the certificate of incorporation of this corporation or these bylaws, notice is required to be given to any director or stockholder, it shall be construed to mean written notice by (a) personal delivery, by overnight courier, or by mail, addressed to such director or stockholder, at such stockholder's address as it appears on the records of this corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be delivered (in the case of personal delivery and overnight courier) or when the same shall be deposited in the United States mail (in the case of mail), or (b) by electronic transmission as set forth below. Notice to directors may also be given by telegram, telephone or electronic transmission. Without limiting the manner by which notice otherwise may be given to the stockholders, any notice given by this corporation to the stockholders shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to this corporation. Any such consent shall be deemed revoked if (a) this corporation is unable to deliver by electronic transmission two consecutive notices given by this corporation in accordance with such consent and (b) such inability becomes known to the secretary, an assistant secretary, transfer agent or other person responsible for giving such notice; provided, however, that the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given by electronic transmission shall be deemed given (i) if by facsimile, when directed to a number at which the stockholder has consented to receive notice, (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice, (iii) if by posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice, and (iv) if by any other form of electronic transmission, when directed to the stockholder. SECTION 5.2. Waiver of Notice. Whenever any notice whatsoever is required to be given by law, by the Certificate of Incorporation or by these Bylaws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized 11 attorney, or by telegraph, cable, electronic transmission or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. ARTICLE VI GENERAL PROVISIONS SECTION 6.1. Fiscal Year. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. SECTION 6.2. Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board of Directors. SECTION 6.3. Voting of Securities. Except as the directors may otherwise designate, the Chief Executive Officer (or, if there is no Chief Executive Officer, the President) or Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. SECTION 6.4. Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action. SECTION 6.5. Certificate of Incorporation. All references in these Bylaws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, as amended and in effect from time to time. SECTION 6.6. Transactions with Interested Parties. No contract or transaction between the corporation and one or more of the directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his, her or their votes are counted for such purpose, if: (a) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (b) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, 12 and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. SECTION 6.7. Severability. Any determination that any provision of these Bylaws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these Bylaws. SECTION 6.8. Pronouns. All pronouns used in these Bylaws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. ARTICLE VII AMENDMENT SECTION 7.1. By the Board of Directors. These Bylaws may be altered, amended or repealed or new bylaws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. SECTION 7.2. By the Stockholders. Except as otherwise provided in Section 7.3, these Bylaws may be altered, amended or repealed or new bylaws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at any regular or special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new bylaws shall have been stated in the notice of such regular or special meeting. SECTION 7.3. Certain Provisions. Notwithstanding any other provision of law, the Certificate of Incorporation or these Bylaws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least sixty-seven percent (67%) of the shares of the capital stock of the corporation issued and outstanding and entitled to vote shall be required to amend or repeal, or to adopt any provision inconsistent with Section 1.3, Section 1.10, Section 1.11, Section 1.12, Section 1.13, Article II or Article VII of these Bylaws. 13 EX-10.11 4 ex10-11.txt Table of Contents SECTION 1. CREDIT FACILITY..................................................3 1.1 REVOLVING CREDIT LOANS................................................3 1.1.1 Loans and Reserves................................................4 1.1.2 Borrowings........................................................4 1.1.3 Use of Proceeds...................................................4 1.2 LETTERS OF CREDIT; LC GUARANTIES......................................4 1.3 LC AMOUNT PARTICIPATIONS..............................................4 1.3.1 Purchase of Participations........................................4 1.3.2 Reimbursement by Participating Lenders............................5 1.3.3 Payments to Participating Lenders.................................5 1.3.4 Payment of Obligations............................................5 1.3.5 FCC Actions.......................................................5 SECTION 2. INTEREST, FEES AND CHARGES.......................................6 2.1 INTEREST..............................................................6 2.1.1 Rates of Interest.................................................6 2.1.2 Default Rate of Interest..........................................6 2.1.3 Maximum Interest..................................................6 2.2 COMPUTATION OF INTEREST AND FEES......................................7 2.3 LETTER OF CREDIT AND LC GUARANTY FEES.................................7 2.4 UNUSED LINE FEE.......................................................7 2.5 CLOSING FEE...........................................................7 2.6 AUDIT AND APPRAISAL FEES..............................................7 2.7 REIMBURSEMENT OF EXPENSES.............................................8 2.8 BANK CHARGES..........................................................8 2.9 AGENT AND ARRANGER MANAGER FEE LETTER.................................8 SECTION 3. LOAN ADMINISTRATION..............................................8 3.1 MANNER OF BORROWING REVOLVING CREDIT LOANS............................8 3.1.1 Loan Requests.....................................................8 3.1.2 Fundings by Lenders...............................................9 3.1.3 Settlement and SwingLine Loans...................................10 3.1.4 Disbursement.....................................................11 3.1.5 Authorization....................................................12 3.1.6 LIBOR Advances...................................................12 3.1.7 Conversion of Base Rate Advances.................................12 3.1.8 Continuation of LIBOR Advances...................................12 3.1.9 Inability to Make LIBOR Advances.................................13 3.2 PAYMENTS.............................................................13 3.2.1 Principal........................................................13 3.2.2 Interest.........................................................13 3.2.3 Costs, Fees and Charges..........................................13 3.2.4 Other Obligations................................................14 3.2.5 Prepayment of LIBOR Advances.....................................14 3.3 MANDATORY PREPAYMENTS................................................14 3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of Collateral.......................................................14 3.4 APPLICATION OF PAYMENTS AND COLLECTIONS..............................14 3.5 ALL LOANS TO CONSTITUTE ONE OBLIGATION...............................15 3.6 LOAN ACCOUNT.........................................................15 3.7 STATEMENTS OF ACCOUNT................................................15 3.8 INCREASED COSTS......................................................15 3.9 BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR.............16 3.10 BORROWERS' REPRESENTATIVE...........................................17 -i- Table of Contents SECTION 4. Payments; Pro Rata Treatment; Computations; Etc.................17 4.1 PAYMENTS.............................................................17 4.1.1 Payment of Principal and Interest................................17 4.1.2 Agent Authorized To Debit Borrowers' Account.....................18 4.1.3 Application of Payment...........................................18 4.1.4 Payment Received By Lender.......................................18 4.1.5 No Right of Offset By Borrowers..................................18 4.2 PRO RATA TREATMENT...................................................19 4.3 ALLOCATION OF PAYMENTS FROM BORROWERS................................19 4.4 NON-RECEIPT OF FUNDS BY THE AGENT; DELINQUENT LENDERS................20 4.4.1 Non-Receipt of Funds.............................................20 4.4.2 Delinquent Lenders...............................................21 4.5 WITHHOLDING TAX EXEMPTION............................................21 SECTION 5. TERM AND TERMINATION............................................22 5.1 TERM OF AGREEMENT....................................................22 5.2 TERMINATION..........................................................22 5.2.1 Termination by Lenders...........................................22 5.2.2 Termination by Borrowers.........................................22 5.2.3 Effect of Termination............................................22 SECTION 6. SECURITY INTERESTS..............................................23 6.1 SECURITY INTEREST IN COLLATERAL......................................23 6.2 OTHER COLLATERAL.....................................................25 6.2.1 Commercial Tort Claims...........................................25 6.2.2 Other Collateral.................................................25 6.3 LIEN PERFECTION; FURTHER ASSURANCES..................................25 6.4 LIEN ON REALTY.......................................................25 SECTION 7. COLLATERAL ADMINISTRATION.......................................26 7.1 GENERAL..............................................................26 7.1.1 Location of Collateral...........................................26 7.1.2 Insurance of Collateral..........................................26 7.1.3 Protection of Collateral.........................................27 7.2 ADMINISTRATION OF ACCOUNTS...........................................27 7.2.1 Records, Schedules and Assignments of Accounts...................27 7.2.2 Discounts, Allowances, Disputes..................................27 7.2.3 Taxes............................................................28 7.2.4 Account Verification.............................................28 7.2.5 Maintenance of Cash Management System............................28 7.2.6 Collection of Accounts, Proceeds of Collateral...................29 7.3 ADMINISTRATION OF INVENTORY..........................................29 7.3.1 Records and Reports of Inventory.................................29 7.3.2 Returns of Inventory.............................................29 7.4 ADMINISTRATION OF EQUIPMENT..........................................29 7.4.1 Records and Schedules of Equipment...............................29 7.4.2 Dispositions of Equipment........................................29 7.5 PAYMENT OF CHARGES...................................................30 SECTION 8. REPRESENTATIONS AND WARRANTIES...................................30 8.1 GENERAL REPRESENTATIONS AND WARRANTIES...............................30 8.1.1 Organization and Qualification...................................30 8.1.2 Corporate Power and Authority....................................30 8.1.3 Legally Enforceable Agreement....................................31 8.1.4 Capital Structure................................................31 -ii- 8.1.5 Corporate Names, Etc............................................31 8.1.6 Business Locations; Agent for Process...........................31 8.1.7 Title to Properties; Priority of Liens..........................31 8.1.8 ACCOUNTS........................................................32 8.1.9 Equipment.......................................................33 8.1.10 Financial Statements; Fiscal Year...............................33 8.1.11 Full Disclosure.................................................33 8.1.12 Solvent Financial Condition.....................................33 8.1.13 Surety Obligations..............................................33 8.1.14 Taxes...........................................................34 8.1.15 Brokers.........................................................34 8.1.16 Patents, Trademarks, Copyrights and Licenses....................34 8.1.17 Governmental Consents...........................................34 8.1.18 Compliance with Laws............................................34 8.1.19 Restrictions....................................................34 8.1.20 Litigation......................................................35 8.1.21 No Defaults.....................................................35 8.1.22 Leases..........................................................35 8.1.23 Pension Plans...................................................35 8.1.24 Trade Relations.................................................35 8.1.25 Labor Relations.................................................36 8.1.26 Bank Accounts...................................................36 8.2 CONTINUOUS NATURE OF REPRESENTATIONS AND WARRANTIES..................36 8.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES...........................36 SECTION 9. COVENANTS AND CONTINUING AGREEMENTS.............................36 9.1 AFFIRMATIVE COVENANTS................................................36 9.1.1 Visits and Inspections...........................................36 9.1.2 Notices..........................................................37 9.1.3 Financial Statements.............................................37 9.1.4 Landlord and Storage Agreements..................................38 9.1.5 Guarantor Financial Statements...................................38 9.1.6 Projections......................................................38 9.1.7 Taxes and Liens..................................................38 9.1.8 Tax Returns......................................................39 9.1.9 Business and Existence...........................................39 9.1.10 Maintain Properties.............................................39 9.1.11 Compliance and Laws.............................................39 9.1.12 ERISA Compliance................................................39 9.1.13 Further Assurances..............................................39 9.2 NEGATIVE COVENANTS...................................................40 9.2.1 Mergers; Consolidations; Acquisitions............................40 9.2.2 Loans............................................................40 9.2.3 Total Indebtedness...............................................41 9.2.4 Affiliate Transactions...........................................41 9.2.5 Limitation on Liens..............................................41 9.2.6 Subordinated Debt................................................42 9.2.7 Distributions....................................................42 9.2.8 Intentionally Omitted............................................42 9.2.9 Disposition of Assets............................................42 9.2.10 Stock of Subsidiaries...........................................43 9.2.11 Bill-and-Hold Sales, Etc........................................43 9.2.12 Restricted Investment...........................................43 9.2.13 Intentionally Omitted...........................................43 9.2.14 Tax Consolidation...............................................43 -iii- 9.2.15 Business Locations..............................................43 9.2.16 Guaranties......................................................43 9.2.17 Adverse Transactions............................................43 9.2.18 Subsidiaries....................................................44 9.2.19 Change of Business..............................................44 9.2.20 Name of Borrowers...............................................44 9.2.21 Use of Agent's of any Lender's Name.............................44 9.2.22 Margin Securities...............................................44 9.3 SPECIFIC FINANCIAL COVENANTS.........................................44 9.3.1 Fixed Charge Coverage Ratio......................................44 9.3.2 Minimum Net Worth...............................................44 SECTION 10. CONDITIONS PRECEDENT...........................................45 10.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSIONS...................45 10.1.1 Documentation...................................................45 10.1.2 No Default......................................................45 10.1.3 Other Loan Documents............................................45 10.1.4 Availability....................................................45 10.1.5 Corporate Documents.............................................45 10.1.6 Borrowing Notice................................................45 10.1.7 Opinions of Counsel to the Borrowers............................45 10.1.8 Notes...........................................................45 10.1.9 Repayment of Existing Indebtedness..............................46 10.1.10 No Adverse Litigation or Proceeding............................46 10.1.11 Consents, Etc..................................................46 10.1.12 Payment of Fees................................................46 10.1.13 Capital Structure..............................................46 10.1.14 Due Diligence..................................................46 10.1.15 Labor Relations................................................46 10.1.16 Financial Statements...........................................47 10.1.17 Cash Management................................................47 10.1.18 Satisfaction of Conditions in Other Loan Documents.............47 10.1.19 No Material Adverse Change.....................................47 10.1.20 Insurance......................................................47 10.1.21 Other Documents................................................47 10.2. CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.......................47 10.2.1 No Defaults....................................................47 10.2.2 Representations and Warranties.................................47 10.2.3 No Litigation..................................................48 10.2.4 No Material Adverse Effect.....................................48 SECTION 11. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT..............48 11.1 EVENTS OF DEFAULT...................................................48 11.1.1 Payment of Notes................................................48 11.1.2 Payment of Other Obligations....................................48 11.1.3 Misrepresentations..............................................48 11.1.4 Breach of Specific Covenants....................................48 11.1.5 Breach of Other Covenants.......................................48 11.1.6 Default Under Security Documents/Other Agreements...............48 11.1.7 Other Defaults..................................................49 11.1.8 Uninsured Losses................................................49 11.1.9 Adverse Changes.................................................49 11.1.10 Insolvency and Related Proceedings.............................49 11.1.11 Business Disruption; Condemnation..............................49 11.1.12 Fundamental Change.............................................49 -iv- 11.1.13 ERISA..........................................................50 11.1.14 Challenge to Agreement.........................................50 11.1.15 Repudiation of or Default Under Guaranty Agreement.............50 11.1.16 Criminal Forfeiture............................................51 11.1.17 Judgments......................................................51 11.2 ACCELERATION OF THE OBLIGATIONS.....................................51 11.3 OTHER REMEDIES......................................................51 11.4 REMEDIES CUMULATIVE.................................................53 SECTION 12. AGENT..........................................................53 12.1 APPOINTMENT, POWERS AND IMMUNITIES..................................54 12.1.1 Duties; Responsibilities........................................54 12.1.2 Recitals, Statements, Presentations, Warranties.................54 12.1.3 Litigation; Collection Proceedings..............................54 12.1.4 Actions or Omissions............................................54 12.2 RELIANCE BY AGENT...................................................54 12.3 DEFAULTS............................................................54 12.4 RIGHTS AS A LENDER..................................................55 12.5 INDEMNIFICATION.....................................................55 12.6 NON-RELIANCE ON AGENT AND OTHER LENDERS.............................55 12.7 FAILURE TO ACT......................................................56 12.8 RESIGNATION OR REMOVAL OF AGENT.....................................56 12.9 CONSENTS UNDER OTHER LOAN DOCUMENTS.................................57 12.10 ASSIGNMENTS AND PARTICIPATIONS.....................................57 12.10.1 Borrowers......................................................57 12.10.2 Lenders........................................................57 12.10.3 Participants...................................................58 12.10.4 Additional Permitted Assignments and Participations............58 12.10.5 Information....................................................58 12.10.6 No Assignment to Borrowers or Affiliates.......................58 SECTION 13. MISCELLANEOUS..................................................58 13.1 POWER OF ATTORNEY...................................................58 13.2 INDEMNITY...........................................................59 13.3 MODIFICATION OF AGREEMENT...........................................60 13.4 SEVERABILITY........................................................61 13.5 SUCCESSORS AND ASSIGNS..............................................61 13.6 CUMULATIVE EFFECT; CONFLICT OF TERMS................................61 13.7 EXECUTION IN COUNTERPARTS...........................................61 13.8 NOTICE..............................................................61 13.9 CREDIT INQUIRIES....................................................62 13.10 TIME OF ESSENCE....................................................62 13.11 JOINT AND SEVERAL LIABILITY........................................62 13.12 SURETYSHIP WAIVERS AND CONSENTS....................................63 13.13 CONTRIBUTION AGREEMENT.............................................65 13.14 ENTIRE AGREEMENT...................................................65 13.15 INTERPRETATION.....................................................66 13.16 GOVERNING LAW; CONSENT TO FORUM....................................66 13.17 WAIVERS BY BORROWERS...............................................67 13.18 WAIVER.............................................................67 13.19 PREJUDGEMENT REMEDIES................................................68 -v- -------------------------------------------------- UNITED NATURAL FOODS, INC. AND ITS SUBSIDIARIES, as Borrowers -------------------------------------------------- FLEET CAPITAL CORPORATION, as Administrative Agent CITIZENS BANK OF MASSACHUSETTS, as Syndication Agent U.S. BANK NATIONAL ASSOCIATION, as Documentation Agent FLEET SECURITIES, INC., as Arranger THE FINANCIAL INSTITUTIONS PARTY HEREBY FROM TIME TO TIME, as Lenders -------------------------------------------------- -------------------------------------------------- LOAN AND SECURITY AGREEMENT Dated: August 31, 2001 $150,000,000.00 -------------------------------------------------- -------------------------------------------------- -1- [LOGO] Fleet Capital A FleetBoston Financial Company LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT is made this 31st day of August, 2001, by and among UNITED NATURAL FOODS, INC., a Delaware corporation with its chief executive office and principal place of business located at 260 Lake Road, Dayville, Connecticut 06241 ("UNF"), MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED, a California corporation with its chief executive office and principal place of business located at 12745 Earhart Avenue, Auburn, California 95602 ("MPW"), NUTRASOURCE, INC., a Washington corporation with its chief executive office and principal place of business located at 12745 Earhart Avenue, Auburn, California 95602 ("NutraSource"), RAINBOW NATURAL FOODS, INC., a Colorado corporation with its chief executive office and principal place of business located at 260 Lake Road, Dayville, Connecticut 06241 ("Rainbow"), STOW MILLS, INC., a Vermont corporation with its chief executive office and principal place of business located at 70 Stow Drive, Chesterfield, New Hampshire 03443 ("SMI"), UNITED NATURAL FOODS PENNSYLVANIA, INC., a Pennsylvania corporation with its chief executive office and principal place of business located at 70 Stowe Drive, Chesterfield, New Hampshire 03443 ("UNFPA" and together with UNF, MPW, NutraSource, Rainbow, SMI, and UNFPA the "Borrowers"); each of the Lenders identified under the caption "Lenders" on the signature pages hereto or that may hereafter become a "Lender" pursuant to Section 12.10 hereof (together with its successors and assigns, individually, a "Lender" and, collectively, the "Lenders"); FLEET CAPITAL CORPORATION, a Rhode Island corporation with a place of business located at 200 Glastonbury Boulevard, Glastonbury, Connecticut 06033, as the exclusive administrative and collateral agent for the Lenders (in such capacity, together with any successors in such capacity, the "Administrative Agent" or "Agent"); Citizens Bank of Massachusetts, with a place of business at 53 State Street, Boston, Massachusetts 02109 as the syndication agent (in such capacity, together with any successors (in such capacity, the "Syndication Agent"); U.S. Bank National Association, with a place of business at 950 17th Street, Suite 350, Denver, Colorado 80202 as the documentation agent (in such capacity, together with any successors in such capacity, the "Documentation Agent") and FLEET SECURITIES, INC., with a place of business at 590 Madison Avenue, 31st Floor, New York, New York 10022 as the exclusive syndication arranger for the Lenders (in such capacity, together with any successors in such capacity, the "Arranger"). Capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions. -2- Accounting terms not otherwise specifically defined herein shall be construed in accordance with GAAP consistently applied. WHEREAS, the Borrowers have requested that the Lenders extend credit to the Borrowers in an aggregate principal or stated amount of up to ONE HUNDRED FIFTY MILLION DOLLARS ($150,000,000); and WHEREAS, to induce the Lenders to extend such credit, the Borrowers, the Lenders and the Agent propose to enter into this Agreement pursuant to which the Lenders will make loans and otherwise extend credit to the Borrowers. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, each Lender severally agrees to make its respective Pro Rata share of a Total Credit Facility of up to ONE HUNDRED FIFTY MILLION DOLLARS ($150,000,000) available upon Borrowers' request therefor, as follows: 1.1 Revolving Credit Loans. 1.1.1 Loans and Reserves. Each Lender severally agrees, for so long as no Default or Event of Default exists and subject to the terms of this Agreement, to make Revolving Credit Loans to Borrowers from time to time, as requested by Borrowers in the manner set forth in subsection 3.1.1 hereof, up to a maximum principal amount at any time outstanding equal to such Lender's Revolving Credit Commitment; provided, however, that Lenders shall have no obligations to Borrowers whatsoever to make any Revolving Credit Loan if at the time of the proposed funding thereof the aggregate principal amount of all of the Revolving Credit Loans plus pending and requested Revolving Credit Loans exceeds or would exceed, after giving effect to such request, the Borrowing Base at such time minus the LC Amount and reserves, if any. Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent shall deem reasonably necessary or appropriate, against the amount of Revolving Credit Loans which Borrowers may otherwise request under this subsection 1.1.1, including, without limitation, with respect to (i) price adjustments, damages, unearned discounts, returned products or other matters for which credit memoranda are issued in the ordinary course of Borrowers' business; (ii) shrinkage, spoilage and obsolescence of Inventory; (iii) slow moving Inventory; (iv) other sums chargeable against Borrowers' Loan Account as Revolving Credit Loans under any section of this Agreement; (v) amounts owing by Borrowers to any Person to the extent secured by a Lien on, or trust over, any Property of Borrowers including, without limitation pursuant to the Perishable Agricultural Commodities Act (7 USC ss. 499 et seq.) and the Packers and Stockyards Act (7 USC ss. 196 et seq.); and (vi) such other matters, events, conditions or contingencies as to which Agent , in its reasonable credit judgment, determine reserves should be established from time to time hereunder. The Revolving Credit Loans shall be further evidenced -3- by Revolving Credit Notes issued to each Lender in the amount of their respective Commitments and shall be secured by all of the Collateral. 1.1.2 Borrowings. Borrowers shall give the Agent notice of each borrowing hereunder, and the Agent shall promptly give each Lender notice thereof, each as provided in Section 3.1 hereof. 1.1.3 Use of Proceeds. The Revolving Credit Loans shall be used solely to refinance the existing Indebtedness of Borrowers under the Amended and Restated Loan and Security Agreement dated as of February 26, 1996, as amended, by and among Borrowers, Fleet Capital Corporation, First Union National Bank and Bank of America, N.A. (successor in interest to Nations Bank, N.A.) (the "Existing Loan Agreement") and for Borrowers' general operating capital needs, and for other general corporate purposes, in a manner consistent with the provisions of this Agreement and all applicable laws. 1.2 Letters of Credit; LC Guaranties. FCC agrees, for so long as no Default or Event of Default exists, subject to the terms of this Agreement and if requested by Borrowers, to (i) issue, or cause to be issued by its Affiliates, Letters of Credit for the account of Borrowers or (ii) execute LC Guaranties by which its Affiliates shall guaranty the payment or performance by Borrowers of its reimbursement obligations with respect to Letters of Credit and letters of credit issued for Borrowers' account by other Persons in support of Borrowers' obligations (other than obligations for the repayment of Money Borrowed), provided that the LC Amount at any time shall not exceed TEN MILLION DOLLARS ($10,000,000). No Standby Letter of Credit may have an expiration date that is later than the earlier of (i) 365 days after its date of issuance or (ii) the Maturity Date and no Commercial Letter of Credit may have an expiration date that is later than the earlier of (i) 180 days after its date of issuance or (ii) the Maturity Date. Any amounts paid by FCC under any LC Guaranty or in connection with any Letter of Credit shall be treated as Revolving Credit Loans or SwingLine Loans, as the case may be, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolving Credit Loans or SwingLine Loans, as the case may be. Borrowers jointly and severally agree to reimburse FCC for drawings under any Letter of Credit or LC Guaranty and the amounts of all other liabilities and obligations payable in connection therewith on the same Business Day irrespective of any claim, set off, defense or other right any or all the Borrowers may have or assert against the issuer thereof, FCC, any Lender or any other Person. The obligation of Borrowers to reimburse FCC for any payment made by FCC under any Letter of Credit or LC Guaranty shall be absolute, unconditional, irrevocable and joint and several and shall be paid without regard to any lack of validity or enforceability of any Letter of Credit. 1.3 LC Amount Participations. 1.3.1 Purchase of Participations. Immediately upon the issuance any Letter of Credit or LC Guaranty, each Lender (other than FCC) shall be deemed to have irrevocably and unconditionally purchased and received from FCC, without recourse or warranty, an undivided interest and participation equal to the Pro Rata share of such Lender (a "Participating Lender") -4- in the LC Amount arising in connection with such Letter of Credit or LC Guaranty and any security therefor or guaranty pertaining thereto, but in no event greater than an amount which, when added to such Lender's Pro Rata share of all Revolving Credit Loans and LC Amounts then outstanding, equals such Participating Lender's Revolving Credit Commitment. 1.3.2 Reimbursement by Participating Lenders. If FCC makes any payment under an LC Guaranty or Letter of Credit and Borrowers do not repay or cause to be repaid the amount of such payment, FCC shall promptly notify Agent, which shall promptly notify each Participating Lender, of such payment and each Participating Lender shall promptly and unconditionally pay to Agent, for the account of FCC, in Dollars in immediately available funds, the amount of such Participating Lender's Pro Rata share of such payment, and Agent shall promptly pay such amounts to FCC. If a Participating Lender does not make its Pro Rata share of the amount of such payment available to Agent, such Lender agrees to pay to Agent for the account of FCC, forthwith on demand, such amount together with interest thereon at the Federal Funds Rate. The failure of any Participating Lender to make available to Agent for the account of FCC such Participating Lender's Pro Rata share of such payments shall not relieve any other Participating Lender of its obligation hereunder to make available to Agent its Pro Rata share of such payments, but no Participating Lender shall be responsible for the failure of any other Participating Lender to make available to Agent its Pro Rata share of such payments on the date such payment is to be made. 1.3.3 Payments to Participating Lenders. Whenever FCC receives a payment on account of the LC Amount, including any interest thereon, as to which Agent has previously received payments from any Participating Lender for the account of FCC, FCC shall promptly pay to each Participating Lender which has made such payments, in immediately available funds, an amount equal to such Participating Lender's Pro Rata share thereof. 1.3.4 Payment of Obligations. The obligation of each Participating Lender to make payments to Agent for the account of FCC in connection with FCC's payment under a Letter of Credit or LC Guaranty shall be absolute, unconditional and irrevocable, not subject to any counterclaim, setoff, qualification or exception whatsoever (other than for FCC's gross negligence or willful misconduct), and shall be made in accordance with the terms and conditions of this Agreement under all circumstances and irrespective of whether or not any or all Borrowers may assert or have any claim for any lack of validity or unenforceability of this Agreement or any of the other Loan Documents; the existence of any Default or Event of Default; any draft, certificate or other document presented under a Letter of Credit having been determined to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or the existence of any setoff or defense any Borrower may have with respect to any of the Obligations. 1.3.5 FCC Actions. Neither FCC, its Affiliates nor any of their respective officers, directors, employees or agents shall be liable to any Participating Lenders for any action taken or omitted to be taken under or in connection with any Letter of Credit unless it is determined by a final and nonappealable judgment or court order binding thereon, that such action or omission constituted actual gross negligence or willful misconduct. FCC does not assume any responsibility for any failure or delay in performance or breach by any or all -5- Borrowers or any other Person of any of its obligations under any Letter of Credit. FCC does not make to Participating Lenders any express or implied warranty, representation or guaranty with respect to the Collateral, any Letter of Credit or any Borrower. FCC shall not be responsible to any Participating Lender for any recitals, statements, information, representations or warranties contained in, or for the execution, validity, genuineness, effectiveness or enforceability of or any of the documents relating to any Letter of Credit; the validity, genuineness, enforceability, collectibility, value or sufficiency of any of the Collateral or the perfection of any Lien therein; or the assets, liabilities, financial condition, results of operations, business, creditworthiness or legal status of any Borrower. In connection with its administration of and enforcement of rights or remedies under any of the documents relating to any Letter of Credit, FCC shall be entitled to act, and shall be fully protected in acting upon, any certification, notice or other communication in whatever form believed by FCC, in good faith, to be genuine and correct and to have been signed or sent or made by a proper Person. FCC may consult with and employ legal counsel, accountants and other experts to advise it concerning its rights, powers and privileges under the documents relating to any Letter of Credit and shall be entitled to act upon, and shall be fully protected in any action taken in good faith reliance upon, any advice given by such experts. FCC may employ agents and attorneys-in-fact in connection with any matter relating to the documents relating to any Letter of Credit and shall not be liable for the negligence, default or misconduct of any such agents or attorneys-in-fact selected by FCC with reasonable care. FCC shall not have any liability to any Participating Lender by reason of FCC's refraining to take any action under any of the LC Documents without having first received written instructions from the Required Lenders to take such action. SECTION 2. INTEREST, FEES AND CHARGES 2.1 Interest. 2.1.1 Rates of Interest. Interest shall accrue on the Revolving Credit Loans in accordance with the terms of the Revolving Credit Notes and this Agreement. Interest shall accrue on the principal amount of the Base Rate Advances outstanding at the end of each day at a fluctuating rate per annum equal to the Base Rate plus the Applicable Base Rate Margin. Interest shall accrue on the principal amount of each of the LIBOR Advances outstanding at the end of each day at a fixed rate per annum equal to LIBOR for the applicable Interest Period plus the Applicable LIBOR Margin. The rate of interest applicable to Base Rate Advances shall increase or decrease by an amount equal to any increase or decrease in the Base Rate, effective as of the opening of business on the day that any such change in the Base Rate occurs. Interest shall be payable monthly in arrears on the first day of each month. 2.1.2 Default Rate of Interest. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of all Loans shall bear interest at a rate per annum equal to two percent (2%) above the interest rate otherwise applicable thereto (the "Default Rate"). 2.1.3 Maximum Interest. In no event whatsoever shall the aggregate of all amounts deemed interest under the Revolving Credit Notes, or this Agreement and charged or collected pursuant to the terms of this Agreement exceed the highest rate permissible under any -6- law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. If any provisions of this Agreement or the Notes, are in contravention of any such law, such provisions shall be deemed amended to conform thereto. 2.2 Computation of Interest and Fees. Interest, Letter of Credit fees, LC Guaranty fees and unused line fees hereunder shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. For the purpose of computing interest hereunder, all items of payment received by Agent for the account of each Lender shall be deemed applied by Agent for the account of each Lender on account of the Obligations (subject to final payment of such items) on the first (1st) Business Day after receipt by Agent for the account of each Lender of such items. 2.3 Letter of Credit and LC Guaranty Fees. Borrowers shall pay to Agent for the Pro Rata account of each Lender for (a) all standby Letters of Credit and LC Guaranties of standby Letters of Credit, a per annum rate equal to one and one half percent (1.5%) of the aggregate face amount of such Letters of Credit and LC Guaranties outstanding from time to time during the term of this Agreement, and (b) all documentary Letters of Credit and LC Guaranties of documentary Letters of Credit, an amount equal to one percent (1%) of the face amount of such Letters of Credit and LC Guaranties plus for the account of the Letter of Credit issuer only all normal and customary charges associated with the issuance thereof, which fees and charges shall be deemed fully earned upon issuance of each such Letter of Credit or LC Guaranty, shall be due and payable, for standby Letter of Credit and LC Guaranties therefor, monthly in arrears and, for documentary Letters of Credit and LC Guaranties therefor, when advised upon issuance and amendment thereof, and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. 2.4 Unused Line Fee. Borrowers shall pay to Agent for the Pro Rata account of each Lender a fee equal to one quarter of one percent (.25%) of the average daily amount by which the Total Credit Facility exceeds the sum of the outstanding principal balance of the Revolving Credit Loans plus the LC Amount. The unused line fee shall be payable quarterly in arrears on the first day of each October, January, April, and July hereafter. 2.5 Closing Fee. Borrowers shall pay to Agent for the Pro Rata account of each Lender a closing fee equal to one quarter of one percent (.25%) of the Total Credit Facility, which closing fee shall be deemed to be fully earned and payable upon the making of the Initial Revolving Credit Loans hereunder. 2.6 Audit and Appraisal Fees. Borrowers shall pay to Agent for the account of Agent all reasonable audit and appraisal fees and expenses incurred by Agent with respect to third parties retained by Agent to conduct audits and appraisals or, if such audits and appraisals are conducted by the Agent's personnel, in accordance with Agent's current schedule of reasonable fees in effect from time to time in connection with audits and appraisals of Borrowers' books and records and such other matters as Agent shall deem appropriate, plus all out-of-pocket expenses incurred by Agent in connection with such audits and appraisals. Audit fees shall be payable on the first day of the month following the date of issuance by Agent of a request for payment thereof to Borrowers. -7- 2.7 Reimbursement of Expenses. If, at any time or times regardless of whether or not an Event of Default then exists, Agent incurs legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (i) the negotiation and preparation of this Agreement or any of the other Loan Documents, any amendment of or modification of this Agreement or any of the other Loan Documents, or any sale or attempted sale of any interest herein to any Lender; (ii) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (iii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Agent, any Lender, Borrowers or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or Borrowers' affairs; (iv) any attempt to enforce any rights of any Agent or Lender against Borrowers or any other Person which may be obligated to such Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors; or (v) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then all such reasonable legal and reasonable accounting expenses, other costs and out of pocket expenses of such Agent shall be charged to Borrowers. After the occurrence and during the continuance of an Event of Default, if any of the costs and expenses described in the preceding sentence are incurred by any Lender, all such costs and expenses shall be charged to Borrowers. All amounts chargeable to Borrowers under this Section 2.7 shall be Obligations secured by all of the Collateral, shall be payable on demand to Agent or each such Lender, as the case may be, and shall bear interest from the date such demand is made until paid in full at the rate applicable to Base Rate Advances from time to time. Borrowers shall also reimburse Agent for expenses incurred by Agent in its administration of the Collateral to the extent and in the manner provided in Section 7 hereof. 2.8 Bank Charges. Borrowers shall pay to Agent or Lender, on demand, any and all fees, costs or expenses which Agent or any Lender pays to a bank or other similar institution (including, without limitation, any fees paid by Agent to any Lender) arising out of or in connection with (i) the forwarding to Borrowers or any other Person on behalf of Borrowers, by Agent, of Loans made by Lenders pursuant to this Agreement and the forwarding by Agent to Lenders of payments on Loans pursuant to this Agreement and (ii) the depositing for collection, by Agent , of any check or item of payment received or delivered to Agent on account of the Obligations. 2.9 Agent and Arranger Fee Letter. Borrowers shall pay to the Agent and the Arranger the fees payable thereto pursuant to the fee letter therewith. SECTION 3. LOAN ADMINISTRATION 3.1 Manner of Borrowing Revolving Credit Loans. Borrowings under the credit facility established pursuant to Section 1 hereof shall be as follows: 3.1.1 Loan Requests. A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) Borrowers may give Agent notice of their intention to borrow, in which notice Borrowers shall specify the amount of the proposed -8- borrowing and the proposed borrowing date, no later than 1:00 p.m. (Eastern Time) on the Business Day prior to the proposed borrowing date and Agent will promptly advise Lenders of such notice, provided, however, that no such request may be made at a time when there exists a Default or an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement, whether as interest or for any other Obligation, shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount required to pay such interest or other Obligation. As an accommodation to Borrowers, Agent may permit telephonic or electronic requests for loans and electronic transmittal of instructions, authorizations, agreements or reports to Agent by Borrowers. Unless Borrowers specifically direct Agent in writing not to accept or act upon telephonic or electronic communications from Borrowers, neither Agent nor any Lender shall have any liability to Borrowers for any loss or damage suffered by Borrowers as a result of Agent's or any Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to them telephonically or electronically and purporting to have been sent to Agent or Lenders by Borrowers unless it is determined by a final and nonappealable judgment or court order binding on the Agent and Lenders that such loss or damage was solely the result of the gross negligence or willful misconduct of Agent. Neither Agent nor any Lender shall have any duty to verify the origin of any such communication or the authority of the person sending it. 3.1.2 Fundings by Lenders. Subject to its receipt of notice from Agent of a borrowing notice as provided in Section 3.1.1 (except in the case of a deemed request by a Borrower for a Revolving Credit Loan as provided in Sections 3.1.1(ii) or 3.1.3(ii) hereof, in which event no borrowing notice need be submitted), each Lender shall timely honor its Commitment by funding its Pro Rata share of each borrowing of Revolving Credit Loans that is properly requested by a Borrower and that such Borrower is entitled to receive under the Loan Agreement. Agent shall notify Lenders of each borrowing notice by 3:00 p.m. (Eastern Time) on the Business Day prior to the proposed funding date (in the case of Base Rate Advances) or by 3:00 p.m. (Eastern Time) at least three (3) Business Days before the proposed funding date (in the case of LIBOR Advances). Each Lender shall deposit with Agent an amount equal to its Pro Rata share of the Revolving Credit Loan requested by such Borrower at Agent's designated account in immediately available funds not later than 1:00 p.m. (Eastern Time) on the Business Day next following the date of the notice of the funding of such Revolving Credit Loan, unless Agent's notice to Lenders is received after 3:00 p.m. (Eastern Time) on the proposed funding date of a Base Rate Advance, in which event Lenders shall deposit with Agent their respective Pro Rata shares of the requested Loan on or before 1:00 p.m. (Eastern Time) of the second (2nd) Business Day following the date of the notice of the funding of such Revolving Credit Loan. Subject to its receipt of such amounts from Lenders, Agent shall, provided it has not received notice from a Lender that one or more of the applicable conditions set forth in Section 10 is not satisfied, make the proceeds of the Revolving Credit Loans received by it available to Borrowers by disbursing such proceeds as provided in Section 3.1.4 hereof. Unless Agent shall have been notified in writing by a Lender prior to the proposed time of funding that such Lender does not intend to deposit with Agent an amount equal such Lender's Pro Rata share of the requested Revolving Credit Loan, Agent may assume that such Lender has deposited or promptly will deposit its share with Agent and Agent may in its discretion disburse a corresponding amount to such Borrower on the applicable funding date. If a Lender's Pro Rata share of such Revolving -9- Credit Loan is not in fact deposited with Agent, then, if Agent has disbursed to such Borrower an amount corresponding to such share, then such Lender agrees to pay, and in addition Borrowers jointly and severally agree to repay, to Agent forthwith on demand such corresponding amount, together with interest thereon, for each day from the date such amount is disbursed by Agent to or for the benefit of such Revolving Credit Loan until the date such amount is paid or repaid to Agent, (a) in the case of Borrowers, at the interest rate applicable to such Loan and (b) in the case of such Lender, at the Federal Funds Rate. If such Lender repays to Agent such corresponding amount, such amount so repaid shall constitute a Revolving Credit Loan, and if both such Lender and Borrowers shall have repaid such corresponding amount, Agent shall promptly return to Borrowers such corresponding amount. 3.1.3 Settlement and SwingLine Loans. (i) In order to facilitate the administration of the Revolving Credit Loans under this Agreement, Lenders agree (such agreement shall not be for the benefit of or enforceable by any Borrower) that settlement among them with respect to the Revolving Credit Loans may take place on a periodic basis on dates determined from time to time by Agent (each a "Settlement Date"), which may occur before or after the occurrence or during the continuance of a Default or Event of Default and whether or not all of the conditions set forth in Section 10 of this Agreement have been met, provided that Agent has not received notice from a Lender that one or more of the conditions set forth in Section 10 is not satisfied. On each Settlement Date, payment shall be made by or to each Lender in the manner provided herein and in accordance with the settlement report delivered by Agent to Lenders with respect to such Settlement Date so that, as of each Settlement Date and after giving effect to the transaction to take place on such Settlement Date, each Lender shall hold its Pro Rata share of all Revolving Credit Loans and participations in the LC Amount then outstanding. Unless a Default or an Event of Default exists or has occurred and is continuing, Agent shall request settlement with the Lenders on a basis not less frequently than once every five (5) Business Days. (ii) Between Settlement Dates, Agent may request FCC to advance, and FCC may, but shall in no event be obligated to, advance to Borrowers out of FCC's own funds the entire principal amount of any Revolving Credit Loans that are Base Rate Advances requested or deemed requested pursuant to this Agreement (any such Revolving Credit Loan funded exclusively by FCC being referred to as a "SwingLine Loan") provided that the aggregate principal amount of SwingLine Loans outstanding at any time shall not exceed Ten Million Dollars ($10,000,000.00) (the "SwingLine Loan Ceiling"). Each SwingLine Loan shall constitute a Revolving Credit Loan hereunder and shall be subject to all of the terms, conditions and security applicable to other Revolving Credit Loans, except that all SwingLine Loans shall be made as Base Rate Advances only and all payments thereon shall be payable to FCC solely for its own account. The obligation of Borrowers to repay such SwingLine Loans to FCC shall be evidenced by the records of FCC and the SwingLine Note. Agent shall not -10- request FCC to make any SwingLine Loan if (A) Agent shall have received written notice from any Lender that one or more of the applicable conditions precedent set forth in Section 10 hereof will not be satisfied on the requested funding date for the applicable Loan or (B) Agent has knowledge that the requested Revolving Credit Loans would exceed the amount of Availability on the funding date. Except as it may be notified by the Agent and the actual knowledge of its officers that are directly responsible for the management of the Loans with Borrowers, FCC shall not otherwise be required to determine whether the applicable conditions precedent set forth in Section 10 hereof have been satisfied or the requested Revolving Credit Loan would exceed the amount of Availability on the funding date applicable thereto prior to making, in its sole discretion, any SwingLine Loan. On each Settlement Date, or, if earlier, upon demand by Agent or FCC for payment thereof, the then outstanding SwingLine Loans shall be immediately due and payable. Borrowers shall be deemed to have requested Revolving Credit Loans to be made on each Settlement Date in the amount of all outstanding SwingLine Loans and the proceeds of such Revolving Credit Loans shall be applied to the repayment of such SwingLine Loans. Agent shall notify the Lenders of the outstanding balance of Revolving Credit Loans prior to 1:00 p.m. (Eastern Time) on each Settlement Date and each Lender shall deposit with Agent an amount equal to its Pro Rata share of the amount of Revolving Loans deemed requested in immediately available funds not later than 4:00 p.m. (Eastern Time) on such Settlement Date, and without regard to whether any Default or Event of Default exists or any of the conditions in Section 10 are not satisfied. If any SwingLine Loan is not repaid on the due date thereof, then on the second Business Day after FCC's request each Lender (other than FCC) shall purchase a participating interest in such SwingLine Loan in an amount equal to its Pro Rata share of such SwingLine Loan by transferring to FCC, in immediately available funds, the amount of such participation, without duplication for any payment previously made. The proceeds of SwingLine Loans may be used solely for purposes for which Revolving Credit Loans generally may be used in accordance with Section 1.1.3 hereof. If any amounts received by FCC in respect of any SwingLine Loans are later required to be returned or repaid by FCC to any or all Borrowers or any other Guarantor or their respective representatives or successors-in-interest, whether by court order, settlement or otherwise, the other Lenders shall, upon demand by FCC with notice to Agent, pay to Agent for the account of FCC and Agent shall, upon receipt thereof, pay to FCC, an amount equal to each other Lender's Pro Rata share of all such amounts required to be returned by FCC. 3.1.4 Disbursement. Borrowers hereby irrevocably authorize Agent to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, pursuant to subsections 3.1.1 and 3.1.5 as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(i) shall be disbursed by Agent in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrowers, and in the case of each subsequent -11- borrowing, by wire transfer to such bank account as may be agreed upon by Borrowers and Agent from time to time or elsewhere if pursuant to a written direction from Borrowers; and (ii) the proceeds of each Revolving Credit Loan requested under subsections 3.1.1(ii) or 3.1.5 shall be disbursed by Agent by way of direct payment of the relevant interest or other Obligation. 3.1.5 Authorization. Borrowers hereby irrevocably authorize Agent, in Agent's sole discretion, to advance to Borrowers, and to charge to Borrowers' Loan Account hereunder as a Base Rate Advance, a sum sufficient to pay all interest accrued on the Obligations during the immediately preceding month and to pay all costs, fees and expenses at any time owed by Borrowers to Agent or any Lender hereunder. 3.1.6 LIBOR Advances. Notwithstanding the provisions of subsection 3.1.1, in the event Borrowers desire to obtain a LIBOR Advance, Borrowers shall give Agent prior, written, irrevocable notice no later than 11:00 A.M. Eastern Time on the third (3rd) Business Day prior to the requested borrowing date specifying (i) Borrowers' election to obtain a LIBOR Advance, (ii) the date of the proposed borrowing (which shall be a Business Day) and (iii) the amount to be borrowed, which amount shall be in a minimum principal amount of $1,000,000 and may increase in integral multiples of $1,000,000. In no event shall Borrowers be permitted to have outstanding at any one time LIBOR Advances with more than eight (8) different Interest Periods. 3.1.7 Conversion of Base Rate Advances. Provided that no Default or Event of Default has occurred which is then continuing, Borrowers may, on any Business Day, convert any Base Rate Advance into a LIBOR Advance. If Borrowers desire to convert a Base Rate Advance, Borrowers shall give Agent not less than three (3) Business Days' prior written notice (prior to 11:00 A.M. Eastern Time on such Business Day), specifying the date of such conversion and the amount to be converted. Each conversion into or conversion of a LIBOR Advance shall be in a minimum principal amount of $1,000,000 and may increase in integral multiples of $1,000,000 in excess thereof. After giving effect to any conversion of Base Rate Advances to LIBOR Advances, Borrowers shall not be permitted to have outstanding at any one time LIBOR Advances with more than eight (8) different Interest Periods. 3.1.8 Continuation of LIBOR Advances. Borrowers shall have the right on three (3) Business Days' prior irrevocable written notice given to Agent by Borrowers (prior to 11:00 A.M. Eastern Time on such Business Day), subject to the provisions hereof, to continue any LIBOR Advance into a subsequent Interest Period of the same or a different permitted duration, in each case subject to the satisfaction of the following conditions: (i) in the case of a continuation of less than all LIBOR Advances, the LIBOR Advances continued shall each be in a minimum principal amount of $1,000,000 and may increase in integral multiples of $1,000,000; and (ii) no LIBOR Advance (or portion thereof) may be continued as a LIBOR Advance if a Default has occurred which is then continuing or if, after giving effect to such continuation, Borrowers shall have outstanding more than eight (8) separate LIBOR Advances in the aggregate. -12- If Borrowers shall fail to give timely notice of its election to continue any LIBOR Advance or portion thereof as provided above, or if such continuation shall not be permitted, such LIBOR Advance or portion thereof, unless such LIBOR Advance shall be repaid, shall automatically be converted into a Base Rate Advance at the end of the Interest Period then in effect with respect to such LIBOR Advance. 3.1.9 Inability to Make LIBOR Advances. Notwithstanding any other provision hereof, if any applicable law, treaty, regulation or directive, or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender (for purposes of this subsection 3.1.9, the term "Lender" shall include the office or branch where any Lender or any corporation or bank then controlling any Lender makes or maintains any LIBOR Advances) to make or maintain its LIBOR Advances, or if with respect to any Interest Period, Agent is unable to determine the LIBOR relating thereto, or adverse or unusual conditions in, or changes in applicable law relating to, the London interbank market make it, in the reasonable judgment of such Lender, impracticable to fund therein any of the LIBOR Advances, or make the projected LIBOR unreflective of the actual costs of funds therefor to such Lender, the obligation of such Lender to make LIBOR Advances hereunder shall forthwith be suspended during the pendency of such circumstances and Borrowers shall, if any affected LIBOR Advances are then outstanding, promptly upon request from such Lender, convert such affected LIBOR Advances into Base Rate Advances. 3.2 Payments. The Obligations shall be payable as follows (in the event that the following provisions conflict with any notes or other instruments issued to evidence the Obligations, the following provisions shall govern and control): 3.2.1 Principal. Principal payable on account of Revolving Credit Loans shall be payable by Borrowers to the Agent for the account of each Lender immediately upon the earliest of (i) the receipt by the Agent or any Lender or Borrower of any proceeds of any of the Collateral other than Equipment permitted to be replaced under subsection 7.4.2(ii) hereof, to the extent of said proceeds, (ii) the occurrence of an Event of Default which results in the acceleration of the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 5 hereof; provided, however, that if an Overadvance shall exist at any time, Borrowers shall, on demand by Agent, repay the Overadvance. Each payment (including principal prepayment) by Borrowers on account of principal of the Revolving Credit Loans shall be applied first to Base Rate Advances, then to LIBOR Advances. 3.2.2 Interest. Interest accrued on the Revolving Credit Loans shall be due on the earliest of (i) the first calendar day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default which results in the acceleration of the maturity and payment of the Obligations or (iii) termination of this Agreement pursuant to Section 5 hereof. 3.2.3 Costs, Fees and Charges. Costs, fees and charges payable pursuant to this Agreement shall be payable by Borrowers as and when provided in Section 2 hereof or upon demand, to the Agent for the account of each Lender or to any other Person designated by the Agent in writing. -13- 3.2.4 Other Obligations. The balance of the Obligations (exclusive of the Obligations set forth in subsections 3.2.1, 3.2.2 and 3.2.3 above) requiring the payment of money, if any, shall be payable by Borrowers to the Agent for the account of each Lender or to such other Person as and when provided in this Agreement, the Other Agreements or the Security Documents, or on demand, whichever is later. 3.2.5 Prepayment of LIBOR Advances. Borrowers may prepay a LIBOR Advance only upon at least three (3) Business Days prior written notice to Agent (which notice shall be irrevocable), and any such prepayment shall occur only on the last day of the Interest Period for such LIBOR Advance. Borrowers shall pay to Agent, upon request of Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of Agent) to compensate Lenders for any loss, cost, or expense incurred as a result of: (i) any payment of a LIBOR Advance on a date other than the last day of the Interest Period for such Loan; (ii) any failure by Borrowers to borrow a LIBOR Advance on the date specified by Borrowers' written notice; or (iii) any failure by Borrowers to pay a LIBOR Advance on the date for payment specified in Borrowers' written notice. Without limiting the foregoing, Borrowers shall pay to Lenders a "yield maintenance fee" in an amount computed as follows: the current rate for United States Treasury securities (bills on a discounted basis shall be converted to a bond equivalent) with a maturity date closest to the Interest Period chosen pursuant to the LIBOR Advance as to which the prepayment is made, shall be subtracted from the LIBOR in effect at the time of prepayment. If the result is zero or a negative number, there shall be no yield maintenance fee. If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid. The resulting amount shall be divided by 360 and multiplied by the number of days remaining in the Interest Period chosen pursuant to the LIBOR Advance as to which the prepayment is made. Said amount shall be reduced to present value calculated by using the above-referenced United States Treasury securities rate and the number of days remaining in the term chosen pursuant to the LIBOR Advance as to which prepayment is made. The resulting amount shall be the yield maintenance fee due to Lenders upon the prepayment of a LIBOR Advance. If by reason of an Event of Default, Lenders elect to declare the Obligations to be immediately due and payable, then any yield maintenance fee with respect to a LIBOR Advance shall become due and payable in the same manner as though the Borrowers had exercised such right of prepayment. 3.3 Mandatory Prepayments. 3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of Collateral. Except as provided in subsection 7.4.2 hereof, if any of the Collateral is lost or destroyed or taken by condemnation, Borrowers shall pay to Agent for the account of each Lender, unless otherwise agreed by Lenders, as and when received by Borrowers and as a mandatory prepayment of the Revolving Loan, as determined by Agent, a sum equal to the proceeds (including insurance payments) received by Borrowers from such loss, destruction or condemnation. 3.4 Application of Payments and Collections. All items of payment received by Agent for the account of each Lender by 12:00 noon, Eastern time, on any Business Day shall be deemed received on that Business Day. All items of payment -14- received after 12:00 noon, Eastern time, on any Business Day shall be deemed received on the following Business Day. Borrowers irrevocably waive the right to direct the application of any and all payments and collections at any time or times hereafter received by Agent or Lenders from or on behalf of Borrowers, and Borrowers do hereby irrevocably agree that Agent and Lenders shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lenders or Agent against the Obligations, in such manner as Agent or Lenders may deem advisable, notwithstanding any entry by Agent or Lenders upon any of their respective books and records. If as the result of collections of Accounts as authorized by subsection 7.2.6 hereof a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrowers, but shall be available to Borrowers at any time or times for so long as no Default or Event of Default exists. 3.5 All Loans to Constitute One Obligation. The Loans and LC Guaranties shall constitute one general Obligation of Borrower, and shall be secured by Agent's Lien upon all of the Collateral. 3.6 Loan Account. Agent on behalf of each Lender shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrowers on any Obligations and all proceeds of Collateral which are finally paid to Agent for the account of each Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses chargeable to Borrowers under this Agreement and the other Loan Documents. 3.7 Statements of Account. Agent will account to Borrowers monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Agent shall be deemed final, binding and conclusive upon Borrowers unless Agent is notified by Borrowers in writing to the contrary within thirty (30) days of the date each accounting is mailed to Borrowers. Such notice shall only be deemed an objection to those items specifically objected to therein. 3.8 Increased Costs. If any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) adopted after the date of this Agreement and having general applicability to all banks within the jurisdiction in which any Lender operates (excluding, for the avoidance of doubt, the effect of and phasing in of capital requirements or other regulations or guidelines passed prior to the date of this Agreement), or any interpretation or application thereof by any governmental authority charged with the interpretation or application thereof, or the compliance of any Lender therewith, shall: (i) (1) subject any Lender to any tax with respect to this Agreement (other than (a) any tax based on or measured by net income or otherwise in the nature of a net income tax, including, without limitation, any franchise tax or any similar tax based on capital, net worth or comparable basis for measurement and (b) any tax collected by a withholding on payments and which neither is computed by reference to the net income of the payee nor is in the -15- nature of an advance collection of a tax based on or measured by the net income of the payee) or (2) change the basis of taxation of payments to any Lender of principal, fees, interest or any other amount payable hereunder or under any Loan Documents (other than in respect of (a) any tax based on or measured by net income or otherwise in the nature of a net income tax, including, without limitation, any franchise tax or any similar tax based on capital, net worth or comparable basis for measurement and (b) any tax collected by a withholding on payments and which neither is computed by reference to the net income of the payee nor is in the nature of an advance collection of a tax based on or measured by the net income of the payee); (ii) impose, modify or hold applicable any reserve (except any reserve taken into account in the determination of the applicable LIBOR), special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by, any office of any Lender, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (iii) impose on any Lender or the London interbank market any other condition with respect to any Loan Document; and the result of any of the foregoing is to increase the cost to any Lender of making, renewing or maintaining Loans hereunder by an amount that Required Lenders deem to be material or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the Loans by an amount that Required Lenders deem to be material, then, in any such case, Borrowers shall pay Agent for the account of each such Lender, upon demand and certification not later than sixty (60) days following its receipt of notice of the imposition of such increased costs, such additional amount as will compensate any such Lender for such additional cost or such reduction, as the case may be, to the extent such Lender has not otherwise been compensated, with respect to a particular Loan, for such increased cost as a result of an increase in the Base Rate or LIBOR. An officer of each such Lender shall determine the amount of such additional cost or reduced amount using reasonable averaging and attribution methods and shall certify the amount of such additional cost or reduced amount to Agent and Borrowers, which certification shall include a written explanation of such additional cost or reduction to Agent and Borrowers. Such certification shall be conclusive absent manifest error. If any Lender claims any additional cost or reduced amount pursuant to this Section 3.8, then such Lender shall use reasonable efforts (consistent with legal and regulatory restrictions) to designate a different lending office or to file any certificate or document reasonably requested by Borrowers if the making of such designation or filing would avoid the need for, or reduce the amount of, any such additional cost or reduced amount and would not, in the sole discretion of Required Lenders, be otherwise disadvantageous to such Lender. 3.9 Basis for Determining Interest Rate Inadequate or Unfair. In the event that Agent shall have determined that: -16- (i) reasonable means do not exist for ascertaining the LIBOR for any Interest Period; or (ii) Dollar deposits in the relevant amount and for the relevant maturity are not available in the London interbank market with respect to a proposed LIBOR Advance, or a proposed conversion of a Base Rate Advance into a LIBOR Advance; then Agent shall give Borrowers prompt written, telephonic or electronic notice of the determination of such effect. If such notice is given, (i) any such requested LIBOR Advance shall be made as a Base Rate Advance, unless Borrowers shall notify Agent no later than 10:00 A.M. (Eastern Time) two (2) Business Days prior to the date of such proposed borrowing that the request for such borrowing shall be canceled or made as an unaffected type (if any) of LIBOR Advance, and (ii) any Base Rate Advance which was to have been converted to an affected type of LIBOR Advance shall be continued as or converted into a Base Rate Advance, or, if Borrowers shall notify Agent, no later than 10:00 A.M. (Eastern Time) two (2) Business Days prior to the proposed conversion, shall be maintained as an unaffected type (if any) of LIBOR Advance. 3.10 Borrowers' Representative. Borrowers hereby irrevocably appoint UNF, and UNF agrees to act under this Agreement, as the agent and representative of itself and the other Borrowers for all purposes under this Agreement, including requesting Loans, selecting whether any Loan or portion thereof is to bear interest as a Base Rate Advance or a LIBOR Advance, and receiving account statements and other notices and communications to Borrowers (or any of them) from Agent or Lenders and sending notices to Agent or Lenders. Agent and Lenders may rely, and shall be fully protected in relying, on any notice of borrowing, or of conversion/continuation, disbursement instructions, reports, information or any other notice or communication made or given by UNF, whether in its own name, or on behalf of the Borrowers, and neither Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of any Borrower as to the binding effect on Borrowers of any such request, instruction, report, information, notice or communication, nor shall the joint and several character of Borrowers' liability for the Loans be affected, provided that the provisions of this Section 3.10 shall not be construed so as to preclude any Borrower from directly requesting Loans or taking other actions permitted to be taken by "a Borrower" hereunder. Agent and Lenders may maintain a single Loan Account in the name of UNF hereunder, and each Borrower expressly agrees to such arrangement and confirms that such arrangement shall have no effect on the absolute, unconditional and joint and several character of such Borrower's liability for the Obligations. SECTION 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC 4.1 Payments. 4.1.1 Payment of Principal and Interest. Except to the extent otherwise provided in this Agreement, all payments of principal, interest, and other amounts to be made by the Borrowers under this Agreement and the Notes, and, except to the extent otherwise provided therein, all payments to be made by the Borrowers under any other Loan Document, shall be -17- made in Dollars, in immediately available funds, without counterclaim or setoff and free and without deduction or withholding for any taxes or any other payments, to the Agent at account number 9369337579 at the Bank or at any other account designated in writing by the Agent ("Payment Account"), not later than 1:00 p.m. Eastern Time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Borrowers authorize the Agent to debit such account for all such payments. 4.1.2 Agent Authorized To Debit Borrowers' Account. If any payment owing to any Lender or Agent by Borrowers is not made when due (beyond any applicable grace period), each Lender or Agent may (but shall not be obligated to) debit the amount of any such payment to any ordinary deposit account of such Borrowers with such Lender or Bank (with notice to such Borrowers and the Agent). 4.1.3 Application of Payment. Borrowers shall, at the time of making each payment under this Agreement or any Note for account of any Lender specify to the Agent (which shall so notify the intended recipient(s) thereof) the amount payable on the Loans, or other amounts payable by such Borrowers hereunder to which such payment is to be applied (and in the event that the Borrowers fail to so specify, or if an Event of Default has occurred and is continuing, the Agent may distribute such payment to the Lenders for application in such manner as it may determine to be appropriate). 4.1.4 Payment Received By Lender. Each payment received by the Agent under this Agreement or any Note for account of any Lender shall be paid by the Agent promptly to such Lender, in immediately available funds, for account of such Lender's Applicable Lending Office for the Loan or other Obligation in respect of which such payment is made. 4.1.5 No Right of Offset By Borrowers. All payments by the Borrowers hereunder and under any of the other Loan Documents shall be made without recoupment, setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrowers are compelled by law to make such deduction or withholding. If any such obligation is imposed upon the Borrowers with respect to any amount payable by it hereunder or under any of the other Loan Documents, the Borrowers will pay to the Agent, for the account of the Lenders or (as the case may be) the Agent, on the date on which such amount is due and payable hereunder or under such other Loan Document, such additional amount in Dollars as shall be necessary to enable the Lenders or the Agent to receive the same net amount which the Lenders or the Agent would have received on such due date had no such obligation been imposed upon the Borrowers. The Borrowers will deliver promptly to the Agent certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Borrowers hereunder or under such other Loan Document. -18- 4.2 Pro Rata Treatment. Except to the extent otherwise provided herein: (i) each borrowing of Loans from the Lenders shall be made from the Lenders, and each termination or reduction of the amount of the Revolving Credit Commitments shall be applied to the respective Revolving Credit Commitments of the Lenders, on a Pro Rata basis according to the amounts of their respective Revolving Credit Commitments; (ii) except as otherwise provided in Section 3 hereof, LIBOR Advances having the same Interest Period shall be allocated on a Pro Rata basis among the Lenders according to the amounts of their respective Revolving Credit Commitments (in the case of the making of Loans) or their respective Revolving Credit Loans (in the case of conversions and continuations of Loans); (iii) each payment or prepayment of principal of Revolving Credit Loans by any Borrower shall be made for account of the Lenders on a Pro Rata basis in accordance with the respective unpaid principal amounts of the Loans made to such Borrower held by them; and (iv) each payment of interest on Revolving Credit Loans by any Borrower shall be made for account of the Lenders on a Pro Rata basis in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders. Notwithstanding anything to the contrary contained herein, to the extent there shall then be outstanding any SwingLine Loans, and any sums shall be due and payable thereunder, then the first priority of any payment for the account of Borrowers (then owing any sum under one or more SwingLine Loans) received by Agent or FCC at the time such payment is so received shall be to apply such payment on account of the sums then due and owing on such SwingLine Loans, in such order as the FCC shall determine. 4.3 Allocation of Payments from Borrowers. All monies to be applied to the Obligations, whether such monies represent voluntary payments by any Borrower or any Guarantor or are received pursuant to demand for payment or realized from any disposition of Collateral, shall be allocated among Agent and such of the Lenders as are entitled thereto (and, with respect to monies allocated to Lenders, on a Pro Rata basis unless otherwise provided herein): (i) first, to Agent to pay principal and accrued interest on any portion of the Revolving Credit Loans which Agent may have advanced on behalf of any Lender in accordance with the terms of this Agreement and for which Agent has not been reimbursed by such Lender or Borrowers; (ii) second, to FCC to pay the principal and accrued interest on any portion of the SwingLine Loans outstanding, to be shared with Lenders that have acquired a participating interest in such SwingLine Loans; (iii) third, to FCC to pay the principal amount of and any accrued interest on any payment made by FCC under a Letter of Credit or LC Guaranty to the extent that FCC has not been reimbursed in full and has not received from each Participating Lender a participation payment as required by Section 1.3.2 hereof; (iv) fourth, to Agent and FCC to pay the amount of expenses that have not -19- been reimbursed to Agent or FCC by Borrowers or Lenders, together with interest accrued thereon at the rate applicable to Revolving Credit Loans that are Base Rate Advances; (v) fifth, to Agent to pay any amount payable under the indemnification provisions hereof that has not been paid to Agent by Borrowers or Lenders and to Lenders on a Pro Rata basis for any amount payable under the indemnification provisions hereof that they have paid to Agent and any expenses that they have reimbursed to Agent, together with interest accrued thereon at the rate applicable to Revolving Credit Loans that are Base Rate Advances; (vi) sixth, to Agent to pay any fees due and payable to Agent, to the extent that Lenders have not been reimbursed by Borrowers therefor; (vii) seventh, to the Participating Lenders to pay principal and interest on their participations in the LC Amount outstanding (or, to the extent any of the LC Amount is contingent and an Event of Default then exists, deposited in a cash collateral account to provide security for the payment of the LC Amount); and (viii) eighth, to Lenders in payment of the accrued interest and unpaid principal in respect of the Revolving Credit Loans and any other Obligations then outstanding to be shared among Lenders on a Pro Rata basis, or on such other basis as may be agreed upon in writing by Lenders (which agreement or agreements may be entered into without notice to or the consent or approval of Borrowers). The allocations set forth in this Section 4.3 are solely to determine the rights and priorities of Agent and Lenders as among themselves and may be changed by Agent and Lenders without notice to or the consent or approval of Borrowers or any other Person. 4.4 Non-Receipt of Funds by the Agent; Delinquent Lenders. 4.4.1 Non-Receipt of Funds. Unless the Agent shall have been notified by a Lender or a Borrower (the "Payor") prior to the date on which the Payor is to make payment to the Agent of (in the case of a Lender) the proceeds of a Loan to be made by such Lender hereunder or (in the case of the Borrowers) a payment to the Agent for account of one or more of the Lenders hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Agent and the Agent has made the payment to the recipient(s), the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the "Advance Date") such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid, provided that if neither the recipient(s) nor the Payor shall return the Required Payment to the Agent within three (3) Business Days of the date of the notice from the Agent, then the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by Borrowers to the Lenders, Borrowers and the recipient(s) shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required -20- Payment at the Default Rate (without duplication of the obligation of the Borrowers under Section 2.1 hereof to pay interest on the Required Payment at the Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Agent shall not limit such obligation of Borrowers under said Section 2.1 to pay interest at the Default Rate in respect of the Required Payment; and (ii) if the Required Payment shall represent proceeds of a Loan to be made by the Lenders to Borrowers, the Payor and Borrowers shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment pursuant to Section 2.1 hereof (without duplication of the obligation of Borrowers under Section 2.1 hereof to pay interest on the Required Payment), it being understood that the return by Borrowers of the Required Payment to the Agent shall not limit any claim Borrowers may have against the Payor in respect of such Required Payment. 4.4.2 Delinquent Lenders. If for any reason any Lender shall fail or refuse to abide by its obligations under this Loan Agreement, including, without limitation, its obligation to make available to Agent its share of any Revolving Credit Loans, expenses, or setoff (a "Delinquent Lender"), any non-delinquent Lender shall have the right, but not the obligation, in its respective, sole and absolute discretion, to acquire (x) for no cash consideration (pro rata, based on the respective Commitments of those Lenders electing to exercise such right) the Delinquent Lender's Commitment to fund future Revolving Credit Loans; and (y) for consideration equal to the amount of the outstanding Revolving Credit Loans from such Lender (pro rata, based on the respective Commitments of those Lenders electing to exercise such right) the Delinquent Lender's rights with respect to outstanding Revolving Credit Loans (the rights purchased under clauses (x) and (y), the "Purchased Rights"), but only if, in the aggregate, all of the Delinquent Lender's rights with respect to outstanding Revolving Credit Loans and Commitments are acquired hereunder by one or more non-delinquent Lender(s). Upon any such purchase of the pro rata share of any Delinquent Lender's Purchased Rights, the Delinquent Lender's rights with respect to outstanding Revolving Credit Loans, Commitment, share in future Revolving Credit Loans, and rights under the Loan Documents with respect thereto shall terminate on the day of purchase (other than indemnification rights that survive termination of the Commitments under Section 13.2 hereof and rights to receive accrued but unpaid interest and fees through the date of purchase), and the Delinquent Lender shall promptly execute all documents reasonably requested to surrender and transfer such interests (other than indemnification rights that survive termination of the Commitments under Section 13.2 hereof and rights to receive accrued but unpaid interest and fees through the date of purchase), including, if so requested, a Notice of Assignment (provided that the assignment fee in connection with such Notice of Assignment shall not be charged). 4.5 Withholding Tax Exemption. At least five (5) Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Lender, each Lender that is not incorporated under the laws of the United States or any state thereof agrees that it will deliver to Borrowers and Agent two (2) duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such -21- Lender is entitled to receive payment under this Agreement and its Notes without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to Borrowers and Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires (currently, three (3) successive calendar years for Form 1001 and one (1) calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by Borrowers or Agent, in each case, certifying that such Lender is entitled to receive payments under this Agreement and its Notes without deduction or withholding of any United States federal income taxes, unless an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required that renders all such forms inapplicable or that would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises Borrowers and Agent that it is not capable or receiving payments without any deduction or withholding of United States federal income taxes. SECTION 5. TERM AND TERMINATION 5.1 Term of Agreement. Subject to Lenders' right to cease making Loans to Borrowers upon or after the occurrence of any Default or Event of Default or failure to satisfy one or more of the conditions precedent in Section 10 hereof, this Agreement shall be in effect for a period commencing on the date hereof, through and including June 30, 2005 (the "Maturity Date"). 5.2 Termination. 5.2.1 Termination by Lenders. This Agreement shall terminate on the Maturity Date and Required Lenders may terminate this Agreement without notice upon or after the occurrence of an Event of Default. 5.2.2 Termination by Borrowers. Upon at least ninety (90) days prior written notice to Agent, Borrowers may, at their option, terminate this Agreement; provided, however, no such termination shall be effective until Borrowers have paid all of the Obligations in immediately available funds and all Letters of Credit and LC Guaranties have expired or have been cash collateralized to the satisfaction of Agent, FCC and the Required Lenders. Any notice of termination given by Borrowers shall be irrevocable unless Agent and the Required Lenders otherwise agree in writing, and Lenders shall have no obligation to make any Loans and FCC shall have no obligation to issue or procure any Letters of Credit or LC Guaranties on or after the termination date stated in such notice. Borrowers may elect to terminate this Agreement in its entirety only. No section of this Agreement or type of Loan available hereunder may be terminated singly. 5.2.3 Effect of Termination. All of the Obligations shall be immediately due and payable upon the Maturity Date or, if earlier, the termination date stated in any notice of termination of this Agreement or upon the action taken by the Required Lenders under subsection 5.2.1. All undertakings, agreements, covenants, warranties and representations of -22- Borrowers contained in the Loan Documents shall survive any such termination and Agent shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents for itself and the Pro Rata benefit of the Lenders notwithstanding such termination until Borrowers have paid the Obligations to Agent for the account of each Lender, in full, in immediately available funds. Notwithstanding the payment in full of the Obligations, Agent shall not be required to terminate its security interests in the Collateral unless, with respect to any loss or damage Agent may incur as a result of dishonored checks or other items of payment received by Agent from Borrowers or any Account Debtor and applied to the Obligations, Agent shall, at its option, (i) have received a written agreement, executed by Borrowers and by any Person whose loans or other advances to Borrowers are used in whole or in part to satisfy the Obligations, indemnifying Agent and Lenders from any such loss or damage; or (ii) have retained such cash collateral and Liens thereon for such period of time as Agent, in its reasonable discretion, may deem necessary to protect Agent and Lenders from any such loss or damage. SECTION 6. SECURITY INTERESTS 6.1 Security Interest in Collateral. To secure the prompt payment and performance of all of the Obligations, Borrowers hereby grant to Agent for the benefit of itself as Agent and for the Pro Rata benefit of each Lender a continuing Lien upon all of each Borrower's assets, including all of the following Property and interests in Property of each Borrower, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (i) Accounts; (ii) Certificated Securities; (iii) Chattel Paper; (iv) Computer Hardware and Software and all rights with respect thereto, including, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications, and any substitutions, replacements, additions or model conversions of any of the foregoing; (v) Contract Rights; (vi) Deposit Accounts; (vii) Documents; (viii) Equipment; (ix) Financial Assets; (x) Fixtures; -23- (xi) General Intangibles, including Payment Intangibles and Software; (xii) Goods (including all of its Equipment, Fixtures and Inventory), and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor; (xiii) Instruments; (xiv) Intellectual Property; (xv) Inventory; (xvi) Investment Property; (xvii) money (of every jurisdiction whatsoever); (xviii) Letter-of-Credit Rights; (xix) Payment Intangibles; (xx) Security Entitlements; (xxi) Software; (xxii) Supporting Obligations; (xxiii) Uncertificated Securities; and (xxiv) to the extent not included in the foregoing, all other personal property of any kind or description; together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, or evidencing, embodying, incorporating or referring to any of the foregoing, and all Proceeds, products, offspring, rents, issues, profits and returns of and from any of the foregoing; provided that to the extent that the provisions of any lease or license of Computer Hardware and Software or Intellectual Property expressly prohibit (which prohibition is enforceable under applicable law) any assignment thereof, and the grant of a security interest therein, Agent will not enforce its security interest in Borrowers' rights under such lease or license (other than in respect of the Proceeds thereof) for so long as such prohibition continues, it being understood that upon request of Agent Borrowers will in good faith use reasonable efforts to obtain consent for the creation of a security interest in favor of Agent for the account of each Lender (and to Agent's enforcement of such security interest for the account of each Lender) in Borrower's rights under such lease or license. -24- 6.2 Other Collateral. 6.2.1 Commercial Tort Claims. Borrowers shall promptly notify Agent in writing upon incurring or otherwise obtaining a Commercial Tort Claim after the Closing Date against any third party and, upon request of Agent, promptly enter into an amendment to this Agreement and do such other acts or things deemed appropriate by Agent to give Agent, for the Pro Rata benefit of the Lenders a security interest in any such Commercial Tort Claim. 6.2.2 Other Collateral. Borrowers shall promptly notify Agent in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Deposit Accounts, Investment Property, Letter-of-Credit Rights or Electronic Chattel Paper and, upon the request of Agent, promptly execute such other documents, and do such other acts or things deemed appropriate by Agent to deliver to Agent for the Pro Rata benefit of the Lenders control with respect to such Collateral; promptly notify Agent in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Documents or Instruments and, upon the request of Agent, will promptly execute such other documents, and do such other acts or things deemed appropriate by Agent to deliver to Agent possession of such Documents which are negotiable and Instruments, and, with respect to nonnegotiable Documents, to have such nonnegotiable Documents issued in the name of Agent for the Pro Rata benefit of the Lenders; and with respect to Collateral in the possession of a third party, other than Certificated Securities and Goods covered by a Document and obtain an acknowledgement from the third party that it is holding the Collateral for the benefit of Agent and the Lenders. 6.3 Lien Perfection; Further Assurances. Borrowers shall execute such UCC-1 financing statements as are required by the UCC and such other instruments, assignments or documents as are necessary to perfect Agents' Lien upon any of the Collateral and shall take such other action as may be required to perfect or to continue the perfection of Agents' Lien upon the Collateral. Unless prohibited by applicable law, Borrowers hereby irrevocably authorize Agent to execute and file any such financing statements, including, without limitation, financing statements that indicate the Collateral (i) as all assets of Borrowers or words of similar effect, or (ii) as being of an equal or lesser scope, or with greater or lesser detail, than as set forth in Section 6.1, on Borrowers' behalf. Borrowers also hereby ratify their authorization for Agent to have filed in any jurisdiction any like financing statements or amendments thereto if filed prior to the date hereof. The parties agree that a photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Agent's request, Borrowers shall also promptly execute or cause to be executed and shall deliver to Agent any and all documents, instruments and agreements deemed necessary by Agent to give effect to or carry out the terms or intent of the Loan Documents. 6.4 Lien on Realty. The due and punctual payment and performance of the Obligations shall also be secured by the Liens created by the Mortgages upon all Real Property of Borrowers or Guarantors. The Mortgages shall be executed by the respective Borrowers or Guarantors as the case may be in favor of Agent for the Pro Rata benefit of Lenders and shall be duly recorded, at Borrowers' expense, in each office where such recording is required to constitute a fully perfected first priority Lien on the Real Property -25- covered thereby. Borrowers shall deliver to Agent, at Borrower's expense, mortgagee title insurance policies issued by a title insurance company satisfactory to Agent, which policies shall be in form and substance satisfactory to Agent and shall insure a valid, first lien in favor of Agent, for the Pro Rata Benefit of the Lenders on the Real Property covered thereby, subject only to those exceptions acceptable to Agent. Borrower shall deliver to Agent such other documents, including, without limitation, as-built plans from ALTA surveys of the Real Property, as Agent may request relating to the Real Property subject to the mortgages. To the extent the covenants of the Borrowers and Guarantors pursuant to this Section 6.4 have not been completed as of the Closing Date, the Borrowers and Guarantors shall (a) execute Mortgages in favor of Agent and cause such Mortgages to be duly recorded as Borrower's expense, in each office where such recording is required to constitute a fully perfected first priority lien on the Real Property covered thereby and (b) expend commercially reasonable best efforts to complete all such other covenants set forth in Section 6.4 in each case, no later than sixty (60) days after the Closing Date. With respect to any Real Property subsequently acquired by the Borrowers or Guarantors, the covenants of this Section 6.4 shall be completed within thirty (30) days of the date of acquisition. The foregoing provision relating to after acquired Real Property shall not be deemed an implicit limitation or waiver of any covenants or restrictions under this Agreement applicable to the acquisition of Real Property by the Borrowers or Guarantors. SECTION 7. COLLATERAL ADMINISTRATION 7.1 General. 7.1.1 Location of Collateral. All Collateral, other than Inventory in transit and motor vehicles, will at all times be kept by Borrowers and their Subsidiaries at one or more of the business locations set forth in Exhibit C hereto and shall not, without the prior written approval of Agent, be moved therefrom except, prior to an Event of Default and Lenders' acceleration of the maturity of the Obligations in consequence thereof, for (i) sales of Inventory in the ordinary course of business; and (ii) removals in connection with dispositions of Equipment that are authorized by subsection 7.4.2 hereof. 7.1.2 Insurance of Collateral. Borrowers shall maintain and pay for insurance upon all Collateral wherever located and with respect to Borrowers' business, covering casualty, hazard, public liability and such other risks in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrowers shall deliver the originals of such policies to Agent with satisfactory lender's loss payable endorsements, naming Agent for the Pro Rata benefit of Lenders as loss payee, mortgagee, assignee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than thirty (30) days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever and a clause specifying that the interest of Lenders shall not be impaired or invalidated by any act or neglect of Borrowers or the owner of the Property or by the occupation of the premises for purposes more hazardous than are permitted by said policy. If -26- Borrowers fail to provide and pay for such insurance, Agent may, at its option, but shall not be required to, procure the same and charge Borrowers therefor. Borrowers agree to deliver to Agent, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. 7.1.3 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any state, federal, or local authority on any of the Collateral or in respect of the sale thereof shall be borne and paid by Borrowers. If Borrowers fail to promptly pay any portion thereof when due, Agent or any Lender may, at its option, but shall not be required to, pay the same and charge Borrowers therefor. Neither Agent nor any Lender shall be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Agent's or any Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same shall be at Borrowers' sole risk. 7.2 Administration of Accounts. 7.2.1 Records, Schedules and Assignments of Accounts. Each Borrower shall keep accurate and complete records of its Accounts and all payments and collections thereon and shall submit to Agent on such periodic basis as Agent shall request a sales and collections report for the preceding period, in form satisfactory to Agent. On or before the twentieth (20th) day of each month from and after the date hereof, Borrowers shall deliver to Agent, in form acceptable to Agent, a detailed, aged trial balance of all Accounts existing as of the last day of the preceding month, specifying the names, addresses, face value, dates of invoices and due dates for each Account Debtor obligated on an Account so listed ("Schedule of Accounts"), and, upon Agent's request therefor, copies of proof of delivery and the original copy of all documents, including, without limitation, repayment histories and present status reports relating to the Accounts so scheduled and such other matters and information relating to the status of then existing Accounts as Agent shall reasonably request. In addition, if Accounts in an aggregate face amount in excess of $250,000.00 become ineligible because they fall within one of the specified categories of ineligibility set forth in the definition of Eligible Accounts or otherwise established by Agent, Borrowers shall notify Agent of such occurrence on the first Business Day following such occurrence and the Borrowing Base shall thereupon be adjusted to reflect such occurrence. If requested by Agent, Borrowers shall execute and deliver to Agent for the Pro Rata benefit of Lenders formal written assignments of all of the Accounts weekly or daily, which shall include all Accounts that have been created since the date of the last assignment, together with copies of invoices or invoice registers related thereto. 7.2.2 Discounts, Allowances, Disputes. If Borrowers grant any discounts, allowances or credits that are not shown on the face of the invoice for the Account involved, Borrowers shall report such discounts, allowances or credits, as the case may be, to Agent as part of the next required Schedule of Accounts. If any amounts due and owing in excess of $250,000.00 are in dispute between Borrowers and any Account Debtor, Borrowers shall provide Agent with written notice thereof at the time of submission of the next Schedule of Accounts, -27- explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy. Upon and after the occurrence of an Event of Default, Agent shall have the right to settle or adjust all disputes and claims directly with the Account Debtor and to compromise the amount or extend the time for payment of the Accounts upon such terms and conditions as Agent may deem advisable, and to charge the deficiencies, costs and expenses thereof, including attorney's fees, to Borrowers. 7.2.3 Taxes. If an Account includes a charge for any tax payable to any governmental taxing authority, Agent is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of Borrowers and to charge Borrowers therefor, provided, however, that Agent shall not be liable for any taxes to any governmental taxing authority that may be due by Borrowers. 7.2.4 Account Verification. Whether or not a Default or an Event of Default has occurred, any of Agent's officers, employees or agents shall have the right, at any time or times hereafter, in the name of Agent, any designee of such Agent, or Borrowers, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, electronic communication or otherwise. Borrowers shall cooperate fully with Agent in an effort to facilitate and promptly conclude any such verification process. 7.2.5 Maintenance of Cash Management System. Borrowers shall maintain a cash management system acceptable to Agent with such banks as may be selected by Borrowers and be acceptable to Agent. All depository accounts in Borrower's cash management system and funds deposited in any deposit accounts shall be subject to the first priority lien of Agent for the Pro Rata account of Lenders and Borrowers shall obtain the agreement by such banks in favor of Agent for the account of Lenders as may be necessary or appropriate for Agent to obtain a perfected first priority Lien therein. On the Closing Date, Borrowers shall establish and maintain a Dominion Account pursuant to a lockbox arrangement acceptable to Agent with such banks as may be selected by Borrowers and be acceptable to Agent. Borrowers shall issue to any such banks an irrevocable letter of instruction directing such banks to deposit all payments or other remittances received in the lockbox to the Dominion Account and to comply with Agent's notice, given at any time and from time to time in its discretion (or when directed by the Required Lenders), directing such banks to transfer all such payments and remittances to the Payment Account for application on account of the Obligations; provided, however, that Borrowers acknowledge and agree that if at any time Availability is less than $10,000,000 and within ten (10) days of such occurrence Borrowers fail to provide or are unable to provide Availability projections demonstrating, to the satisfaction of the Required Lenders, that within sixty (60) days Availability will increase to be in excess of $10,000,000 and continue thereafter to exceed such amount, Agent shall give the foregoing notice to such banks to transfer all payments and remittances to the Payment Account. All funds deposited in the Dominion Account shall immediately become the property of Agent for the account of Lenders and Borrowers shall obtain the agreement by such banks in favor of Agent to waive any recoupment, setoff rights, and any security interest in, or against the funds so deposited. Agent agrees with Borrowers that Agent shall not give any such instructions or withhold any withdrawal rights from Borrowers unless a Default, or an Event of Default has occurred and is continuing. Agent assumes no responsibility -28- for such lockbox or blocked account arrangements, including, without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder. 7.2.6 Collection of Accounts, Proceeds of Collateral. To expedite collection, Borrowers shall endeavor in the first instance to make collection of their Accounts for Agent and Lenders. All remittances received by Borrowers on account of Accounts, together with the proceeds of any other Collateral, shall be held as Agent's property by Borrowers as trustee of an express trust for Agent's benefit and Borrowers shall immediately deposit same in kind in the Borrowers' cash management system or Dominion Account, as the case may be. Agent retains the right at all times after the occurrence of a Default or an Event of Default to notify Account Debtors that Accounts have been assigned to Agent for the account of each Lender and to collect Accounts directly, and to charge the collection costs and expenses, including attorneys' fees to Borrowers. 7.3 Administration of Inventory. 7.3.1 Records and Reports of Inventory. Borrowers shall keep accurate and complete records of Inventory. Borrowers shall agree to furnish to Agent and Lenders Inventory reports in form and detail satisfactory to Agent at such times as Agent may request, but at least once each month, not later than the twentieth (20th) day of such month. Borrowers shall conduct cycle counts and other inventory testing and control procedures in accordance with the Borrowers' policies in effect on the Closing Date and shall provide Agent and Lenders reports based on such cycle counts and tests promptly thereafter, together with such supporting information as Agent shall request. Upon and during the continuance of a Default or Event of Default Borrowers shall conduct physical inventory counts at such times as Agent may request, and shall provide to Agent and Lenders a report based on each such physical inventory promptly thereafter, together with such supporting information as Agent shall request. 7.3.2 Returns of Inventory. If at any time or times hereafter any Account Debtor returns any Inventory to a Borrower the shipment of which generated an Account on which such Account Debtor is obligated in excess of $250,000.00, Borrowers shall immediately notify Agent of the same, specifying the reason for such return and the location, condition and intended disposition of the returned Inventory. 7.4 Administration of Equipment. 7.4.1 Records and Schedules of Equipment. Borrowers shall keep accurate records itemizing and describing the kind, type, quality, quantity and value of its Equipment and all dispositions made in accordance with subsection 7.4.2 hereof, and shall furnish Agent and Lenders with a current schedule containing the foregoing information on at least an annual basis and more often if requested by Agent. Immediately on request therefor by Agent, Borrowers shall deliver to Agent any and all evidence of ownership, if any, of any of the Equipment. 7.4.2 Dispositions of Equipment. Borrowers will not sell, lease or otherwise dispose of or transfer any of the Equipment or any part thereof without the prior written consent of Agent and Required Lenders; provided, however, that the foregoing restriction shall not apply, -29- for so long as no Default or Event of Default exists, to (i) dispositions of Equipment which, in the aggregate during any consecutive twelve-month period, has a fair market value or book value, whichever is less, of $500,000.00 or less, provided that all proceeds thereof are remitted to Agent for the account of each Lender for application to the Loans, or (ii) replacements of Equipment that is substantially worn, damaged or obsolete with Equipment of like kind, function and value, provided that the replacement Equipment shall be acquired prior to or concurrently with any disposition of the Equipment that is to be replaced, the replacement Equipment shall be free and clear of Liens other than Permitted Liens that are not Purchase Money Liens, and Borrowers shall have given Agent at least five (5) days prior written notice of such disposition. 7.5 Payment of Charges. All amounts chargeable to Borrowers under Section 7 hereof shall be Obligations secured by all of the Collateral, shall be payable on demand and shall bear interest from the date such advance was made until paid in full at the rate applicable to Base Rate Advances from time to time. SECTION 8. REPRESENTATIONS AND WARRANTIES 8.1 General Representations and Warranties. To induce Agent and Lenders to enter into this Agreement and to make advances and extensions of credit hereunder, each Borrower warrants, represents and covenants to the Agent and the Lenders that: 8.1.1 Organization and Qualification. Each Borrower and its Subsidiaries is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization. Each Borrower and its Subsidiaries is duly qualified and is authorized to do business and is in good standing in each state or jurisdiction listed on Exhibit D hereto and in all other states and jurisdictions in which the failure of such Borrower or any of its Subsidiaries to be so qualified would have a material adverse effect on the financial condition, business or Properties of any such Borrower or any of such Borrower's Subsidiaries. 8.1.2 Corporate Power and Authority. Each Borrower and its Subsidiaries is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary action and do not and will not (i) require any consent or approval of the shareholders (or members, in the case of a limited liability company) of any Borrower or any of its Subsidiaries; (ii) contravene any Borrower's or any of its Subsidiaries' charter, articles or certificate of incorporation or by-laws in the case of a corporation or certificate of formation and limited liability company or operating agreement, in the case of a limited liability company; (iii) violate, or cause any Borrower or any of its Subsidiaries to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to any Borrower or any of its Subsidiaries; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower or any of its Subsidiaries is a party or by which it or its Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any -30- Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by any Borrower or any of its Subsidiaries. 8.1.3 Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of each Borrower and its Subsidiaries enforceable against it in accordance with its respective terms. 8.1.4 Capital Structure. Exhibit E hereto states (i) the correct name of each of the Subsidiaries of Borrowers, its jurisdiction of formation and the percentage interest owned by each Borrower, (ii) the name of each of Borrowers' corporate or joint venture Affiliates and the nature of the affiliation, (iii) the number, nature and holder of all outstanding Securities of each Borrower and each Subsidiary of each Borrower and (iv) the number of authorized, issued and treasury shares of each such Borrower and each Subsidiary of each such Borrower that is a corporation. Each Borrower has good title to all of the shares it purports to own of the stock of each of its Subsidiaries, free and clear in each case of any Lien other than Permitted Liens. Except as set forth on Exhibit E, all such shares have been duly issued and are fully paid and non-assessable. Except as set forth on Exhibit E there are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any Securities or obligations convertible into, or any powers of attorney relating to, shares of the capital stock of any Borrower or any of such Borrower's Subsidiaries. Except as set forth on Exhibit E, there are no outstanding agreements or instruments binding upon any of Borrowers' shareholders (or members, in the case of a limited liability company) relating to the ownership of its shares of capital stock (or membership interest, in the case of a limited liability company). 8.1.5 Corporate Names, Etc. No Borrower nor any Subsidiary of any Borrower has been known as or used any corporate, fictitious or trade names except those listed on Exhibit F hereto. Except as set forth on Exhibit F, no Borrower nor any Subsidiary of any Borrower has been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person. Each Borrower's and each Subsidiary's state(s) of incorporation or organization, Type of Organization and Organizational I.D. Number is set forth on Exhibit F. The exact legal name of each Borrower and each of such Borrower's Subsidiaries is set forth on Exhibit F. 8.1.6 Business Locations; Agent for Process. Each Borrower's and its Subsidiaries' chief executive office and other places of business are as listed on Exhibit C hereto. During the preceding one-year period, no Borrower nor any of their Subsidiaries has had an office, place of business or agent for service of process other than as listed on Exhibit C. Except as shown on Exhibit C, no Inventory having an aggregate value in excess of $100,000.00 is stored with a bailee, warehouseman or similar party, nor is any Inventory consigned to any Person without Agent's prior written consent. 8.1.7 Title to Properties; Priority of Liens. Each Borrower and each of their Subsidiaries has good, indefeasible and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its Real Property, and good title to all of the Collateral and all of its other Property, in each case, free and clear of all Liens except Permitted Liens. -31- Borrowers have paid or discharged all lawful claims which, if unpaid, might become a Lien against any of Borrowers' Properties that is not a Permitted Lien. The Liens granted to Agent under Section 6 hereof are first-priority Liens, subject only to Permitted Liens. 8.1.8 Accounts. Agent may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrowers with respect to any Account or Accounts. Unless otherwise indicated in writing to Agent , with respect to each Account: (i) It is genuine and in all respects what it purports to be, and it is not evidenced by a judgment; (ii) It arises out of a completed, bona fide sale and delivery of goods or rendition of services by a Borrower in the ordinary course of such Borrower's business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between such Borrower and the Account Debtor; (iii) It is for a liquidated amount maturing as stated in the duplicate invoice covering such sale or rendition of services, a copy of which has been furnished or is available to Agent; (iv) Such Account, and Agent's security interest therein, is not, and will not (by voluntary act or omission of a Borrower) be in the future, subject to any offset, Lien, deduction, recoupment, defense, dispute, counterclaim or any other adverse condition except for disputes resulting in returned goods where the amount in controversy is less than $250,000, and each such Account is absolutely owing to a Borrower and is not contingent in any respect or for any reason; (v) No Borrower has made an agreement with any Account Debtor thereunder for any extension, compromise, settlement or modification of any such Account or any deduction therefrom, except discounts or allowances which are granted by a Borrower in the ordinary course of business for prompt payment and which are reflected in the calculation of the net amount of each respective invoice related thereto and are reflected in the Schedules of Accounts submitted to Agent pursuant to subsection 7.2.1 hereof; (vi) To the best of Borrowers' knowledge, there are no facts, events or occurrences which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Agent with respect thereto; (vii) To the best of Borrowers' knowledge, the Account Debtor thereunder (1) had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (2) such Account Debtor is Solvent; and -32- (viii) To the best of Borrowers' knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor thereunder which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account. 8.1.9 Equipment. The Equipment is in good operating condition and repair, and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Equipment shall be maintained and preserved, reasonable wear and tear excepted. Borrowers will not permit any of the Equipment to become affixed to any real Property leased to a Borrower so that an interest arises therein under the real estate laws of the applicable jurisdiction unless the landlord of such real Property has executed a landlord waiver or leasehold mortgage in favor of and in form acceptable to Agent and Borrowers will not permit any of the Equipment to become an accession to any personal Property other than Equipment that is subject to first-priority (except for Permitted Liens) Liens in favor of Agent hereunder. 8.1.10 Financial Statements; Fiscal Year. The Consolidated and consolidating balance sheets of Borrowers and such other Persons described therein (including the accounts of all Subsidiaries of Borrowers for the respective periods during which a Subsidiary relationship existed) as of July 31, 2000, and the related statements of income, changes in stockholder's equity, and changes in financial position for the periods ended on such dates, have been prepared in accordance with GAAP, and present fairly the financial positions of Borrowers and such Persons at such dates and the results of Borrowers' and such Persons' operations for such periods. Since July 31, 2000, there has been no material change in the condition, financial or otherwise, of Borrowers and such other Persons as shown on the Consolidated balance sheet as of such date and no change in the aggregate value of Equipment and Real Property owned by Borrowers or such other Persons, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. The fiscal year of each Borrower and each of its respective Subsidiaries ends on July 31 of each year. 8.1.11 Full Disclosure. The financial statements referred to in subsection 8.1.10 hereof do not, nor does this Agreement or any other written statement of Borrowers to Agent or Lenders, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact which Borrowers have failed to disclose to Agent and Lenders in writing which materially affects adversely or, so far as Borrowers can now foresee, will materially affect adversely the Properties, business, prospects, profits or condition (financial or otherwise) of any Borrower or any of such Borrower's Subsidiaries or the ability of any Borrower or its Subsidiaries to perform this Agreement or the other Loan Documents. 8.1.12 Solvent Financial Condition. Each Borrower and its Subsidiaries is now and, after giving effect to the Loans to be made and the Letters of Credit and LC Guaranties to be issued hereunder, at all times will be, Solvent. 8.1.13 Surety Obligations. No Borrower nor any of its Subsidiaries is obligated as surety or indemnitor under any surety or similar bond or other contract, or has issued or -33- entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person other than as set forth on Exhibit G hereto. 8.1.14 Taxes. The federal tax identification number of each Borrower and its Subsidiaries is shown on Exhibit H hereto. Each Borrower and each of its Subsidiaries has filed all federal, state and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all material taxes, assessments, fees, levies and other governmental charges upon it, its income and Properties as and when such taxes, assessments, fees, levies and charges are due and payable, unless and to the extent any thereof are being actively contested in good faith and by appropriate proceedings and each Borrower maintains reasonable reserves on its books therefor. The provision for taxes on the books of each Borrower and each of its Subsidiaries are adequate for all years not closed by applicable statutes, and for its current fiscal year. 8.1.15 Brokers. There are no claims for brokerage commissions, finder's fees or investment banking fees in connection with the transactions contemplated by this Agreement. 8.1.16 Patents, Trademarks, Copyrights and Licenses. Each Borrower and its Subsidiaries owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without any known conflict with the rights of others. All such patents, trademarks, service marks, trade names, copyrights, licenses and other similar rights are listed on Exhibit I hereto. 8.1.17 Governmental Consents. Each Borrower and each of its Subsidiaries has, and is in good standing with respect to, all governmental consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it, except for those that would not have a material adverse effect on the business, prospects, profits, properties, or condition (financial or otherwise) of the Borrowers taken as a whole. 8.1.18 Compliance with Laws. Each Borrower and its Subsidiaries has duly complied with, and its Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all federal, state and local laws, rules and regulations including, without limitation, all Environmental Laws applicable to such Borrower or such Subsidiary, as applicable, its Properties or the conduct of its business and there have been no citations, notices or orders of noncompliance issued to any Borrower or any of its Subsidiaries under any such law, rule or regulation, except for those that would not have a material adverse effect on the business, prospects, profits, properties or condition (financial or otherwise) of the Borrowers taken as a whole. Each Borrower and its Subsidiaries has established and maintains an adequate monitoring system to insure that it remains in compliance with all federal, state and local laws, rules and regulations applicable to it. No Inventory has been produced in violation of the Fair Labor Standards Act (29 U.S.C. ss.201 et seq.), as amended. 8.1.19 Restrictions. No Borrower nor any of its Subsidiaries is a party or subject to any contract, agreement, or charter or other corporate restriction, which materially and -34- adversely affects its business or the use or ownership of any of its Properties. No Borrower nor any of its Subsidiaries is a party or subject to any contract or agreement which restricts its right or ability to incur Indebtedness, other than as set forth on Exhibit J hereto, none of which prohibit the execution of or compliance with this Agreement or the other Loan Documents by Borrowers or any of their Subsidiaries, as applicable. 8.1.20 Litigation. Except as set forth on Exhibit K hereto, there are no actions, suits, proceedings or investigations pending, or to the knowledge of any Borrower, threatened, against or affecting any Borrower or any of such Borrower's Subsidiaries, that would, if adversely determined, have a material adverse effect on the business, operations, Properties, prospects, profits or condition (financial or otherwise) of the Borrowers taken as a whole. No Borrower nor any of such Borrower's Subsidiaries is in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. 8.1.21 No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or Borrowers' performance hereunder, constitute a Default or an Event of Default. No Borrower nor any of its Subsidiaries is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed. 8.1.22 Leases. Exhibit L hereto is a complete listing of all capitalized leases of each Borrower and each of its Subsidiaries and Exhibit M hereto is a complete listing of all operating leases of each Borrower and each of its Subsidiaries. Each Borrower and each of its Subsidiaries is in full compliance with all of the terms of each of its respective capitalized and operating leases. 8.1.23 Pension Plans. Except as disclosed on Exhibit N hereto, no Borrower nor any of its Subsidiaries has any Plan. Each Borrower and each of such Borrower's Subsidiaries is in full compliance with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could result in a material adverse change in the financial condition of any Borrower or any of such Borrower's Subsidiaries exists in connection with any Plan. No Borrower nor any of such Borrower's Subsidiaries has any withdrawal liability in connection with a Multi-employer Plan. 8.1.24 Trade Relations. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between Borrowers or any of their Subsidiaries and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of Borrowers or any of their Subsidiaries, or with any material supplier, and there exists no present condition or state of facts or circumstances which would materially affect adversely any Borrower or any of such Borrower's Subsidiaries or prevent any Borrower or any of such Borrower's Subsidiaries from conducting such business after the consummation of the transaction contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. -35- 8.1.25 Labor Relations. Except as described on Exhibit O hereto, no Borrower nor any of its Subsidiaries is a party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of any Borrower's or any Borrower's Subsidiaries' employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 8.1.26 Bank Accounts. All of the deposit accounts, investment accounts or other accounts in the name of or used by Borrowers and each of their subsidiaries, maintained at any bank or other financial institution are set forth in Exhibit W, subject to the right of Borrowers and each of their subsidiaries to establish new accounts in accordance with Section 6.2 hereof. 8.2 Continuous Nature of Representations and Warranties. Each representation and warranty contained in this Agreement and the other Loan Documents shall be continuous in nature and shall remain accurate, complete and not misleading at all times during the term of this Agreement, except for changes in the nature of any Borrower's or any Borrower's Subsidiaries' business or operations that would render the information in any exhibit attached hereto either inaccurate, incomplete or misleading, so long as Agent and each Required Lender has consented to such changes or such changes are expressly permitted by this Agreement. Without limiting the generality of the foregoing, each loan request made pursuant to subsection 3.1.1 hereof shall constitute each Borrower's reaffirmation, as of the date of each such loan request, of each representation, warranty or other statement made or furnished to Agent by or on behalf of Borrowers, any Subsidiary of any Borrower, or Guarantor in this Agreement, any of the other Loan Documents, or any instrument, certificate or financial statement furnished in compliance with or in reference thereto. 8.3 Survival of Representations and Warranties. All representations and warranties of Borrowers contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 9. COVENANTS AND CONTINUING AGREEMENTS 9.1 Affirmative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Agent or any Lender, each Borrower covenants that, unless otherwise consented to by Required Lenders in writing, it shall: 9.1.1 Visits and Inspections. Permit representatives of Agent or any Lender, from time to time, as often as may be reasonably requested, but only during normal business hours or at any time and without notice if a Default or an Event of Default has occurred and is continuing, to visit and inspect the Properties of each Borrower and each of its Subsidiaries, inspect, audit and make extracts from its books and records, and discuss with its officers, employees and independent accountants, such Borrower's and its Subsidiaries' business, assets, liabilities, financial condition, business prospects and results of operations. Agent shall conduct at least two (2) commercial finance audits of the Borrowers, at Borrower's expense, during each twelve (12) month period and as many as the Agent or the Required Lenders may deem necessary -36- or appropriate, at Borrower's expense if a Default or an Event of Default has occurred and is continuing. 9.1.2 Notices. Promptly notify Agent in writing of the occurrence of any event or the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading. 9.1.3 Financial Statements. Keep, and cause each Subsidiary to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions; and cause to be prepared and furnished to Agent and each Lender the following (all to be prepared in accordance with GAAP on a first-in, first-out basis for Borrowers' interim financial statements and on a last-in, first-out basis for Borrowers' audited financial statements, applied on a consistent basis, unless Borrowers' certified public accountants concur in any change therein and such change is disclosed to Agent and Lenders and is consistent with GAAP): (i) not later than ninety (90) days after the close of each fiscal year of Borrowers, unqualified, audited financial statements of Borrowers and their Subsidiaries as of the end of such year, on a Consolidated basis, certified by a firm of independent certified public accountants of recognized standing selected by Borrowers but acceptable to Lenders (except for a qualification for a change in accounting principles with which the accountant concurs) together with consolidating financial statements prepared by management of Borrowers in accordance with GAAP; (ii) not later than thirty (30) days after the end of each month hereafter, including the last month of Borrowers' fiscal year, unaudited, interim financial statements of Borrowers and their Subsidiaries as of the end of such month and of the portion of Borrowers' financial year then elapsed, on a Consolidated and consolidating basis, certified by the principal financial officer of Borrowers as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations of Borrowers and their Subsidiaries for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iii) promptly upon Agent's request, but in any event, on the last Business Day of each month, a Borrowing Base Certificate which Borrowing Base Certificate will include a certification from the chief financial officer or other appropriate financial or accounting officer of the Borrowers that the information provided is accurate, complete and not misleading; (iv) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which any Borrower has made available to its shareholders (or members, in the case of a limited liability company) and copies of any regular, periodic and special reports or registration statements which any Borrower files with the Securities and -37- Exchange Commission or any governmental authority which may be substituted therefore, or any national securities exchange; (v) upon Agent's request promptly after the filing thereof, copies of any annual report to be filed with ERISA in connection with each Plan; and (vi) such other data and information (financial and otherwise) as Agent or any Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or Borrowers' and each of their Subsidiaries' financial condition or results of operations. Concurrently with the delivery of the financial statements described in clause (i) of this subsection 9.1.3, Borrowers shall forward to Agent and Lenders a copy of the accountants' letter to Borrowers' management that is prepared in connection with such financial statements. Concurrently with the delivery of the financial statements described in clauses (i) and (ii) of this subsection 9.1.3, or more frequently if requested by Agent, Borrowers shall cause to be prepared and furnished to Agent and Lenders a Compliance Certificate in the form of Exhibit P hereto executed by the Chief Financial Officer of UNF. 9.1.4 Landlord and Storage Agreements. Upon Agent's request, provide Agent with copies of all agreements between any Borrower or any of its Subsidiaries and any landlord or warehouseman which owns any premises at which any Inventory or Equipment may, from time to time, be kept. Borrowers will use commercially reasonable best efforts to obtain agreements, in form and substance satisfactory to Agent, from all such landlords and warehousemen waiving or subordinating any claim or lien such landlord or warehouseman may have in the Collateral, granting access to any such premises and to the Collateral thereon for the purpose of exercising Agent's rights and remedies, notifying Agent of breaches and defaults under such agreements and containing such other terms and conditions as Agent may reasonably request. In the event Borrowers are unable to obtain the foregoing agreements, Borrowers acknowledge that Agent may establish reserves for rent, charges and operating expenses with respect to such Premises, in Agent's discretion. 9.1.5 Guarantor Financial Statements. Deliver or cause to be delivered to Agent and Lenders financial statements for the Guarantors as consolidated as a group with NRG, in form and substance reasonably satisfactory to Agent at such intervals and covering such time periods as Agent may request. 9.1.6 Projections. No later than the first day of each fiscal year of Borrowers, deliver to Agent and Lenders Projections of Borrowers for the forthcoming three (3) years, year by year, and for the forthcoming fiscal year, month by month. 9.1.7 Taxes and Liens. Pay and discharge, and cause each Subsidiary to pay and discharge, all taxes, assessments and government charges upon it, its income and Properties as and when such taxes, assessments and charges are due and payable, unless and to the extent only that such taxes, assessments and charges are being contested in good faith and by appropriate proceedings and Borrowers maintain reasonable reserves on their books therefor. -38- Borrowers shall also pay and discharge any lawful claims which, if unpaid, might become a Lien against any of the Borrowers' Properties except for Permitted Liens. 9.1.8 Tax Returns. File, and cause each Subsidiary of the Borrowers to file, all federal, state and local tax returns and other reports the Borrowers or each Subsidiary of the Borrowers are required by law to file and maintain adequate reserves for the payment of all taxes, assessments, governmental charges, and levies imposed upon them, their income, or their profits, or upon any Properties belonging to them. 9.1.9 Business and Existence. Preserve and maintain, and cause each Subsidiary of the Borrowers to preserve and maintain, its separate corporate existence and all rights, privileges, and franchises in connection therewith, and maintain, and cause each Subsidiary of the Borrowers to maintain, its qualification and good standing in all states in which such qualification is necessary in order for the Borrower or their Subsidiaries to conduct business in such states. 9.1.10 Maintain Properties. Maintain and cause each Subsidiary of the Borrowers to maintain its Properties in good condition and make, and cause each Subsidiary of the Borrowers to make all necessary renewals, repairs, replacements, additions or improvements thereto. 9.1.11 Compliance with Laws. Comply, and cause each Subsidiary to comply, with all laws, ordinances, governmental rules and regulations to which it is subject, and obtain and keep in force any and all licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its Properties or the conduct of its business, which violation or failure to obtain might materially and adversely affect the business, prospects, profits, properties, or condition (financial or otherwise) of the Borrowers, taken as a whole. 9.1.12 ERISA Compliance. (i) At all times make prompt payment of contributions required to meet the minimum funding standard set forth in ERISA with respect to each Plan; and (ii) notify Agent as soon as practicable of any Reportable Event and of any additional act or condition arising in connection with any Plan which the Borrowers believe might constitute grounds for the termination thereof by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a Trustee to administer the Plan. 9.1.13 Further Assurances. At Agent's request, promptly execute or cause to be executed and delivered to Agent any and all documents, instruments and agreements deemed necessary by Agent to give effect to or carry out the terms or intent of this Agreement or any of the Loan Documents. Without limiting the generality of the foregoing, if any of the Accounts, the face value of which exceeds $100,000 arises out of a contract with the United States of America, or any department, agency, subdivision or instrumentality thereof, the Borrowers shall promptly notify Agent thereof in writing and shall execute any instruments and take any other action required or requested by Agent to comply with the provision of the Federal Assignment of Claims Act. -39- 9.2 Negative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to any Lender, each Borrower covenants that, unless, Agent and Required Lenders have first consented thereto in writing, it will not: 9.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate or permit any Subsidiary or of Borrowers to merge or consolidate, with any Person (except for mergers or consolidations among the Borrowers or mergers or consolidations of Subsidiaries with a Borrower or Borrowers); nor acquire or permit any of its Subsidiaries to acquire all or any substantial part of the Properties or stock or securities of any Person except that, so long as no Default or Event of Default exists or has occurred and is continuing, Borrowers may purchase businesses in the lines of business conducted by the Borrowers which Borrowers have determined, in their reasonable business judgment, would enhance the business, operations, prospects and condition (financial or otherwise) of the Borrowers provided that each of the following conditions are satisfied: (a) not more than $5,000,000 per fiscal year of Borrowers shall be paid in cash and/or incurred Indebtedness by Borrowers in respect of all acquisitions and/or investments made in any such fiscal year; (b) prior to entering into any agreement or undertaking with respect to any such acquisition or investment, Borrowers shall prepare and submit to Agent and Lenders pro forma balance sheets and income statements for the entity to be acquired and consolidated with the Borrowers demonstrating to the satisfaction of Agent and the Required Lenders continuing compliance with all the covenants in Section 9.3 for the next twelve (12) fiscal months; (c) Agent shall have determined, that after giving effect to all payments to be made by Borrowers in connection with such acquisition or investment, Borrowers shall have Availability of at least $10,000,000; (d) the Borrowers shall furnish to the Agent notice and copies of any letter of intent or other memorandum of understanding and purchase documents for any acquisition they may contemplate and allow Agent and its representatives reasonable access to financial information and the assets and Properties to be acquired which will, upon consummation of the acquisition, become Collateral for the Obligations; (e) if any such acquisition is structured as the acquisition of stock or other securities of a Person to be acquired or Borrowers create a Subsidiary to make the acquisition, Borrowers shall pledge the stock and securities to be purchased to Agent pursuant to a pledge agreement reasonably satisfactory to Agent and cause such entity to enter into a guaranty of the Obligations and to grant to Agent a security interest in its assets to secure such guaranty reasonably satisfactory to the Agent; and (f) if any indebtedness is to be issued to any seller in connection with any such transaction, the holder of such indebtedness shall enter into a subordination agreement in favor of the Agent and Lenders in form and substance satisfactory to Agent. The Agent agrees to enter into confidentiality agreements with the Persons that Borrower may acquire on terms mutually agreeable to Agent and such Person. 9.2.2 Loans. Make, or permit any Subsidiary of Borrowers to make, any loans or other advances of money (other than for salary, travel advances, advances against commissions and other similar advances in the ordinary course of business or as existing on the Closing Date and disclosed on Exhibits hereto) to any Person; provided, however, that Borrowers may accept promissory notes for loans to their customers in the normal course of business to the extent not prohibited by the terms of this Agreement and Borrowers may make loans or other advances of money between and among the Borrowers and the Guarantors in the ordinary course of business. -40- 9.2.3 Total Indebtedness. Create, incur, assume, or suffer to exist, or permit any Subsidiary of any Borrower to create, incur or suffer to exist, any Indebtedness, except: (i) Obligations owing to Agent, FCC or Lenders hereunder; (ii) Trade payables and normal expense accruals in the ordinary course of business, not yet due and payable, or with respect to which a Borrower is contesting in good faith the amount or the validity thereof in appropriate proceedings diligently pursued and with respect to which adequate reserves have been set aside on its books; (iii) Indebtedness attributable to the ESOP Notes to the extent that such Indebtedness is attributable to UNF in accordance with GAAP; (iv) Permitted Purchase Money Indebtedness; (v) Contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business; (vi) Indebtedness otherwise permitted under Subsection 9.2.1; (vii) Unsecured Indebtedness incurred among the Borrowers; and (viii) Indebtedness not included in paragraphs (i) through (vii) above which is not secured by any Lien and does not exceed at any time, in the aggregate $5,000,000 as to all Borrowers and their Subsidiaries. 9.2.4 Affiliate and Subsidiary Transactions. Enter into, or be a party to, or permit any Subsidiary of a Borrower to enter into or be a party to, any transaction with any Affiliate of any Borrower or stockholder of any Borrower except in the ordinary course of and pursuant to the reasonable requirements of such Borrowers or such Subsidiary's business and upon fair and reasonable terms which are set forth on Exhibit S or fully disclosed to Agent and are no less favorable to Borrower than would obtain in a comparable arm's length transaction with a Person not an Affiliate or stockholder of Borrowers or such Subsidiary. 9.2.5 Limitation on Liens. Create or suffer to exist, or permit any Subsidiary of Borrowers to create or suffer to exist, any Lien upon any Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Agent, FCC or any Lender pursuant hereto; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or being contested in the manner described in subsection 8.1.14 hereto, but only if in Agent's judgment such Lien does not adversely affect Agent's rights or the priority of Agent's Lien in the Collateral; -41- (iii) Liens arising in the ordinary course of Borrowers' business by operation of law or regulation, but only if payment in respect of any such Lien is not at the time required and such Liens do not, in the aggregate, materially detract from the value of the Property of Borrowers or materially impair the use thereof in the operation of Borrowers' business; (iv) Purchase Money Liens securing Permitted Purchase Money Indebtedness; (v) Liens securing Indebtedness of any one of Borrowers' Subsidiaries to Borrowers or another such Subsidiary; (vi) such other Liens as appear on Exhibit Q hereto; and (vii) attachment, judgment, and other similar non-tax liens arising in connection with court proceedings, but only if and for so long as the execution or other enforcement of such liens is and continues to be effectively stayed and bonded on appeal, the validity and amount of the claims secured thereby are being actively contended in good faith and by appropriate lawful proceedings and such liens do not, in the aggregate, materially detract from the value of the Property of the Borrowers or materially impair the use thereof in the operation of the Borrowers' business; (viii) reservations, exceptions, easements, rights of way, and other similar encumbrances effecting real property, provided that, in Agent's sole judgment, they do not in the aggregate materially detract from the value of said Properties or materially interfere with their use in the ordinary conduct of the Borrowers' business and, if said real property constitutes Collateral, Agent has consented thereto; and (ix) such other Liens as Agent and Required Lenders may hereafter approve in writing. 9.2.6 Subordinated Debt. Issue or enter into any agreement to issue Subordinated Debt except upon terms and provisions relating to the maturity and repayment thereof and terms relating to the subordination of payment thereof to the Obligations, in each case reasonably acceptable to the Agent. 9.2.7 Distributions. Declare or make, or permit any Subsidiary of Borrowers to declare or make, any Distributions except Distributions made by a wholly-owned Subsidiary of a Borrower to such Borrower in the ordinary course of business. 9.2.8 Intentionally Omitted. 9.2.9 Disposition of Assets. Sell, lease or otherwise dispose of any of, or permit any Subsidiary of any Borrower to sell, lease or otherwise dispose of any of, its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or -42- in favor of any Person, except (i) sales of Inventory in the ordinary course of business for so long as no Event of Default exists hereunder, (ii) a transfer of Property to any Borrower by a Subsidiary of such Borrower or (iii) dispositions expressly authorized by this Agreement. 9.2.10 Stock of Subsidiaries. Permit any of Borrowers' Subsidiaries to issue any additional shares of its capital stock except director's qualifying shares. 9.2.11 Bill-and-Hold Sales, Etc. Make a sale to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval or consignment basis, or any sale on a repurchase or return basis. 9.2.12 Restricted Investment. Make or have, or permit any Subsidiary of Borrowers to make or have, any Restricted Investment. 9.2.13 Intentionally Omitted. 9.2.14 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary of Borrowers. 9.2.15 Business Locations. Transfer its principal place of business or chief executive office, or open any new business location or maintain warehouses other than as set forth on Exhibit C hereto, except upon at least thirty (30) days prior written notice to Agent and after delivery to Agent of financing statements if required by Agent in form satisfactory to Agent to perfect or continue the perfection and priority of Agent's Lien and security interest hereunder. 9.2.16 Guaranties. Except as set forth in Exhibit G hereto, guaranty, assume, endorse or otherwise, in any way, become directly or contingently liable with respect to the Indebtedness of any Person except by endorsement or instrument or items of payment for deposit or collection, provided, however, that the Borrowers may (a) enter into guaranties in the ordinary course of business of indebtedness and obligations incurred by Borrower and their Subsidiaries and (b) make payments (but not prepayments) of principal and interest when due under the terms of the ESOP Notes to the extent that no Default or Event of Default shall have occurred and be continuing at the time of or hereafter giving effect to any such payment (c) guaranties on an unsecured basis of the obligations of Subsidiaries established to make acquisitions or investments permitted under Subsection 9.2.1 hereof. 9.2.17 Adverse Transactions. Enter into any transaction or permit any Subsidiary to enter into any transaction, which materially and adversely affects or may materially adversely affect the Collateral or the Borrowers' ability to repay the Obligations or permit to agree to any material extension, compromise or settlement or make any change or modification of any kind or nature with respect to any Account, including any of the terms relating thereto, other than discounts and allowances in the ordinary course of business, all of which shall be reflected in the Schedules of Accounts submitted to Agent pursuant to Subsection 7.2.1 of this Agreement. -43- 9.2.18 Subsidiaries. Hereafter create any Subsidiary except as provided in Subsections 9.2.1 hereof. 9.2.19 Change of Business. Enter into any new business or make any material change in any of Borrowers' business objectives, purposes and operations. 9.2.20 Name of Borrowers. Use any corporate name (other than its own) or any fictitious name, trade style or "d/b/a" except for the names disclosed on Exhibit F attached hereto. 9.2.21 Use of Agent's or any Lender's Name. Without prior written consent of Agent or any such Lender , use the name of Agent or any Lender or the name of any Affiliates of Agent or any such Lender in connection with any of the Borrowers' business or activities, except in connection with internal business matters, as required in dealings with governmental agencies and financial institutions and to trade creditors of the Borrowers solely for credit reference purposes. 9.2.22 Margin Securities. Own, purchase or acquire (or enter into any contracts to purchase or acquire) any "margin security" as defined by any regulation of the Federal Reserve Board as now in effect or as the same may hereafter be in effect unless, prior to any such purchase or acquisition or entering into any such contract, Agent shall have received an opinion of counsel satisfactory to Agent that the effect of such purchase or acquisition will not cause this Agreement to violate regulations (G) or (U) or any other regulations of the Federal Reserve Board then in effect. 9.3 Specific Financial Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Agent, each Borrower covenants that, unless otherwise consented to by Agent in writing, it shall: 9.3.1 Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio of not less than 1.5 to 1 calculated at the end of each fiscal quarter on a rolling four quarter basis. 9.3.2 Minimum Net Worth. Maintain a Net Worth of not less than the amounts set forth below determined at the end of each fiscal quarter: - -------------------------------------------------------------------------------- Net Worth Fiscal Quarter End --------- ------------------ - -------------------------------------------------------------------------------- $120,000,000 July 31, 2001 - -------------------------------------------------------------------------------- The amount for the prior fiscal quarter At each fiscal quarter end thereafter plus fifty percent (50%) of the Consolidated net earnings (but not loss) of the Borrowers for the prior fiscal quarter, as determined in accordance with GAAP - -------------------------------------------------------------------------------- -44- SECTION 10. CONDITIONS PRECEDENT 10.1 Conditions Precedent to Initial Credit Extensions. Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of each Lender and Agent under the other sections of this Agreement, no Lender shall not be required to make the initial Revolving Credit Loans under this Agreement unless and until each of the following conditions has been and continues to be satisfied: 10.1.1 Documentation. Agent and each Lender shall have received, in form and substance satisfactory to Agent and each such Lender, a duly executed copy of this Agreement and the other Loan Documents, together with such additional documents, instruments and certificates as Agent and each Lender shall require in connection therewith from time to time, all in form and substance satisfactory to Agent and such Lender and its counsel. 10.1.2 No Default. No Default or Event of Default shall exist. 10.1.3 Other Loan Documents. Each of the conditions precedent set forth in the other Loan Documents shall have been satisfied. 10.1.4 Availability. Agent shall have determined that immediately after Lenders have made the initial Loans, and FCC has issued the initial Letters of Credit and LC Guaranties, contemplated hereby, and all closing costs incurred in connection with the transactions contemplated hereby have been paid, Availability shall not be less than $10,000,000. 10.1.5 Corporate Documents. The receipt by the Agent of (i) certified copies of the charter and by-laws (or equivalent constitutional documents) of each Borrower, (ii) a long-form good standing certificate issued by the Secretary of State of the jurisdiction of incorporation or organization of each Borrower and (iii) certified copies of all corporate or partnership authority for each Borrower (including, without limitation, board of director resolutions and evidence of the incumbency, including specimen signatures, of officers) with respect to the execution, delivery and performance of such of the Loan Documents to which such Borrower is intended to be a party and each other document to be delivered by such Borrower from time to time in connection herewith and the extensions of credit hereunder (and the Agent and each Lender may conclusively rely on such certificate until it receives notice in writing from such Borrower to the contrary). 10.1.6 Borrowing Notice. The receipt by the Agent of the notice of borrowing required herein. 10.1.7 Opinions of Counsel to the Borrowers. The receipt by the Agent of an opinion, dated the Closing Date, of Cameron & Mittleman LLP, counsel to the Borrowers and Guarantors, covering such matters as the Agent may reasonably request. 10.1.8 Notes. The receipt by the Agent of Revolving Credit Notes and SwingLine Note, duly completed and executed for each Lender. -45- 10.1.9 Repayment of Existing Indebtedness. Evidence that the principal of and interest on, and all other amounts owing in respect of, the Indebtedness (including, without limitation, any contingent or other amounts payable in respect of letters of credit) that is to be repaid on the Closing Date shall have been (or shall be simultaneously) paid in full, that any commitments to extend credit under the agreements or instruments relating to such Indebtedness shall have been canceled or terminated and that all Guarantees in respect of, and all Liens securing, any such Indebtedness shall have been released (or arrangements for such release satisfactory to the Required Lenders shall have been made); in addition, the Agent shall have received from any Person holding any Lien securing any such Indebtedness, such Uniform Commercial Code termination statements, mortgage releases and other instruments, in each case in proper form for recording, as the Agent shall have requested to release and terminate of record the Liens securing such Indebtedness (or arrangements for such release and termination satisfactory to the Required Lenders shall have been made). 10.1.10 No Adverse Litigation or Proceeding. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby. 10.1.11 Consents, Etc. The receipt by the Agent of a certificate of a senior officer of each Borrower to the effect that, on and as of the Closing Date, all necessary governmental and third party consents and approvals in connection with the transactions contemplated by this Agreement have been obtained and remain in effect and that all applicable waiting periods have expired. 10.1.12 Payment of Fees. The payment by the Borrowers of such fees as the Borrowers shall have agreed to pay or deliver to any Lender or the Agent in connection herewith, including, without limitation, any and all arrangement and administrative, syndication, or documentation fees due to the Agent, up-front fees due to the Lenders, and the reasonable fees and expenses of Brown, Rudnick, Freed & Gesmer, special counsel to Agent in connection with the negotiation, preparation, execution and delivery of this Agreement and the Notes and the other Loan Documents and the making of the extensions of credit hereunder (to the extent that statements for such fees and expenses have been delivered to the Borrowers). 10.1.13 Capital Structure. Evidence that the capital structure of each of the Borrowers is satisfactory to Agent. 10.1.14 Due Diligence. Satisfactory completion by Agent of financial, business, environmental and collateral due diligence including, without limitation, a collateral exam conducted by Agent or its third party designee, and satisfactory completion of legal due diligence by Agent's legal counsel. 10.1.15 Labor Relations. All collective bargaining agreements are in full force and effect and no material grievances, disputes or controversies exist with any union or any other organization of any of Borrowers' or any Subsidiary of any Borrower's employees, and -46- there exist no threats of strikes, work stoppages or any asserted or pending demands for collective bargaining by any union or organization. 10.1.16 Financial Statements. Receipt by Agent of all financial information and projections requested by Agent in form, substance and detail satisfactory to Agent. 10.1.17 Cash Management. Implementation of blocked account and lockbox agreements and a cash management and collections system satisfactory to Agent. 10.1.18 Satisfaction of Conditions in Other Loan Documents. Each of the conditions precedent set forth in any other Loan Document shall have been and shall remain satisfied. 10.1.19 No Material Adverse Change. Since the last fiscal year end of each Borrower, there shall not have occurred any material adverse change in the business, operations or condition (financial or otherwise) of any Borrower or any of its Subsidiaries, or the existence or value of any Collateral or any event, condition or state of facts which would reasonably be expected to materially and adversely affect the business, operations or conditions (financial or otherwise) of any Borrower or any of its Subsidiaries. 10.1.20 Insurance. Borrowers shall deliver to Agent copies of Borrowers' casualty insurance policies, together with certificates of insurance evidencing loss payable endorsements on Agent's standard form of loss payee endorsement naming Agent as loss payee or mortgagee, as applicable, and certified copies of Borrowers' liability insurance policies, together with endorsements showing Agent as an additional insured. 10.1.21 Other Documents. Such other documents as the Agent Lender or counsel to Agent may reasonably request. 10.2 Conditions Precedent to all Credit Extensions. Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Agent and Lenders under the other sections of this Agreement, Lenders shall not be required to make any Loans or otherwise extend any credit to or for the benefit of Borrowers, unless and until each of the following conditions has been and continues to be satisfied: 10.2.1 No Defaults. No Default or Event of Default shall exist at the time of, or would result from, the funding of such Loan or other extension of credit. 10.2.2 Representations and Warranties. The representation and warranties made by Borrowers in this Agreement and in each of the Loan Documents shall be true and complete in all material respects on and as of the date of this Agreement and there are no material misstatements or omission contained in any of the materials provided to Agent or any Lender on behalf of the Borrowers. -47- 10.2.3 No Litigation. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of, this Agreement or the consummation of the transactions contemplated hereby. 10.2.4 No Material Adverse Effect. No event shall have occurred and no condition shall exist which has or may be reasonably likely to have a Material Adverse Effect. SECTION 11. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 11.1 Events of Default. The occurrence of one or more of the following events shall constitute an "Event of Default": 11.1.1 Payment of Notes. The Borrowers shall fail to pay any installment of principal, interest or premium, if any, owing on the Revolving Credit Notes, on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). 11.1.2 Payment of Other Obligations. Borrowers shall fail to pay any of the Obligations that are not evidenced by the Revolving Credit Notes on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). 11.1.3 Misrepresentations. Any representation, warranty or other statement made or furnished to Agent by or on behalf of any Borrower, any Subsidiary of any Borrower, or any Guarantor in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in connection with or in reference thereto proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 8.2 hereof. 11.1.4 Breach of Specific Covenants. Any Borrowers shall fail or neglect to perform, keep or observe any covenant contained in Sections 6.3, 7.1.1, 7.2, 7.3, 7.4, 9.1.1, 9.1.3, 9.2 or 9.3 hereof on the date that such Borrower is required to perform, keep or observe such covenant. 11.1.5 Breach of Other Covenants. Any Borrower shall fail or neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section 11.1 hereof) and the breach of such other covenant is not cured to Agent's and the Required Lenders' satisfaction within thirty (30) days after the sooner to occur of Borrowers' receipt of notice of such breach from Agent or the date on which such failure or neglect first becomes known to any officer of Borrowers. 11.1.6 Default Under Security Documents/Other Agreements. Any event of default shall occur under, or any Borrower or Guarantor shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents or the Other Agreements and such default shall continue beyond any applicable grace period. -48- 11.1.7 Other Defaults. There shall occur any default or event of default on the part of any Borrower under any agreement, document or instrument to which any Borrower is a party or by which any Borrower or any of its Property is bound, creating or relating to any Indebtedness (other than the Obligations) if the payment or maturity of such Indebtedness is accelerated in consequence of such event of default or demand for payment of such Indebtedness is made. 11.1.8 Uninsured Losses. Any material loss, theft, damage or destruction of any of the Collateral not fully covered (subject to such deductibles as Agent shall have permitted) by insurance, or a sale, lease or encumbrance of any collateral or the making of a levy, seizure, or attachment thereof or thereon except in all cases as may be specifically permitted by other provisions of this Agreement. 11.1.9 Adverse Changes. There shall occur any material adverse change in the financial condition or business prospects of Borrowers taken as a whole. 11.1.10 Insolvency and Related Proceedings. Any Borrower or any Guarantor shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against any Borrower or any Guarantor under the Bankruptcy Code (if against any Borrower or any Guarantor, the continuation of such proceeding for more than thirty (30) days), or any Borrower or any Guarantor shall make any offer of settlement, extension or composition to their respective unsecured creditors generally. 11.1.11 Business Disruption; Condemnation. There shall occur a cessation of a substantial part of the business of any Borrower, any Subsidiary of a Borrower or any Guarantor for a period which significantly affects such Borrower's, Subsidiary's or such Guarantor's capacity to continue its business, on a profitable basis; or any Borrower, any Subsidiary of a Borrower or any Guarantor shall suffer the loss or revocation of any license or permit now held or hereafter acquired by such Borrower, Subsidiary or Guarantor which is necessary to the continued or lawful operation of its business; or any Borrower or any Guarantor shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which any Borrower or any Guarantor leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term; or any part of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation. 11.1.12 Fundamental Change. (a) There shall occur a Fundamental Change with respect to UNF. A Fundamental Change shall mean any of the following: (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Stock of UNF entitled to exercise more than 50% of the total voting power of all outstanding Voting Stock of -49- UNF (including any right to acquire Voting Stock that are not then outstanding of which such person or group is deemed the beneficial owner); or (ii) a change in the Board of Directors in which the individuals who constituted the Board of Directors at the beginning of the one-year period immediately preceding such change (together with any other director whose election by the Board of Directors or whose nomination for election by the shareholders of UNF was approved by a vote of at least two-thirds of the directors then in office who either were 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 directors then in office; or (iii) any consolidation of UNF with, or merger of UNF into, any other Person, any merger of another Person into UNF, or any sale or transfer of all or substantially all of the assets of UNF to another Person (other than (v) a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of capital stock, (w) a merger which is effected solely to change the jurisdiction of incorporation of UNF, (x) any consolidation with or merger of UNF into a Subsidiary of UNF, or any sale or transfer by UNF of all or substantially all of its assets to one or more of its Subsidiaries, in any one transaction or a series of transactions, provided, in any such case, that the resulting corporation or each such Subsidiary assumes the Obligations under the Loan Documents; or (y) a merger or consolidation in which the holders of UNF's Voting Stock immediately prior to such event continue to hold more than 50% of the Voting Stock outstanding immediately after such event; or (z) a transaction permitted under subsection 9.2.1); or (iv) a change in Control or any change in the ownership of any Borrower other than UNF of any Subsidiary of any Borrower shall occur such that UNF shall cease to own and control directly or indirectly 100% of the issued and outstanding voting stock (or membership interest if such Borrower or Subsidiary is a limited liability company). 11.1.13 ERISA. A Reportable Event shall occur which Required Lenders or Agent, in their sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if any Borrower, any Subsidiary of any Borrower or any Guarantor is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multi-employer Plan resulting from Borrower's, such Subsidiary's or such Guarantor's complete or partial withdrawal from such Plan. 11.1.14 Challenge to Agreement. Any Borrower, any Subsidiary of any Borrower or any Guarantor, or any Affiliate of any of them, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Agent. 11.1.15 Repudiation of or Default Under Guaranty Agreement. Any Guarantor shall revoke or attempt to revoke the Guaranty Agreement signed by such Guarantor, -50- or shall repudiate such Guarantor's liability thereunder or shall be in default under the terms thereof. 11.1.16 Criminal Forfeiture. Any Borrower, any Subsidiary of any Borrower or any Guarantor shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Property of any Borrower, any Subsidiary of any Borrower or any Guarantor. 11.1.17 Judgments. Any money judgment, writ of attachment or similar process is filed against any Borrower, any Subsidiary of any Borrower, or any of their respective Property in an amount in excess of $250,000 and such judgment, attachment, or similar process is not satisfied or stayed on appeal within thirty (30) days. 11.2 Acceleration of the Obligations. Without in any way limiting the right of Agent to demand payment of any portion of the Obligations payable on demand in accordance with Section 3.2 hereof, upon or at any time after the occurrence of an Event of Default, and for so long as such Event of Default may exist, Agent may at its discretion (and, upon written instructions to do so from the Required Lender, shall) declare all or any portion of the Obligations to be whereupon the same shall become without presentment, demand, protest or further notice, at once due and payable and Borrowers shall forthwith pay to Agent for the Pro Rata benefit of Lenders, the full amount of such Obligations, provided, that upon the occurrence of an Event of Default specified in subsection 11.1.10 hereof, all of the Obligations shall become automatically due and payable without declaration, notice or demand by Agent or Required Lenders. 11.3 Other Remedies. Upon and after the occurrence of an Event of Default, Agent may in its discretion (and, upon receipt of written direction of Required Lenders shall) exercise from time to time the following other rights and remedies: 11.3.1 All of the rights and remedies of a secured party under the UCC or under other applicable law, and all other legal and equitable rights to which Agent may be entitled, all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive. 11.3.2 The right to take immediate possession of the Collateral, and to (i) require Borrowers to assemble the Collateral, at Borrowers' expense, and make it available to Agent at a place designated by Agent which is reasonably convenient to the parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of Borrowers, Borrowers agree not to charge Agent or Lenders for storage thereof). 11.3.3 The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Agent, in its sole discretion, may deem advisable. Agent may, at Agent's option, disclaim any -51- and all warranties regarding the Collateral in connection with any such sale. Borrowers agree that ten (10) days written notice to Borrowers of any public or private sale or other disposition of Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Agent may designate in said notice. Agent shall have the right to conduct such sales on Borrowers' premises, without charge therefore, and such sales may be adjourned from time to time in accordance with applicable law. Agent shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Agent may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral may be applied, after allowing two (2) Business Days for collection, first to the costs, expenses and attorneys' fees incurred by Agent and Lenders in collecting the Obligations, in enforcing the rights of Lenders under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral; second to the interest due upon any of the Obligations; and third, to the principal of the Obligations. If any deficiency shall arise, each Borrower and each Guarantor shall remain jointly and severally liable to Lenders therefore. 11.3.4 Agent is hereby granted a license or other right to use, without charge, Borrowers' labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, software and associated materials and information or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrowers' rights under all licenses and all franchise agreements shall inure to each Lender's benefit. 11.3.5 Agent may, at its option, require Borrowers to deposit with Agent funds equal to the LC Amount and, if Borrowers fail to promptly make such deposit, Lenders may advance such amount as a Base Rate Advance (whether or not an Overadvance is created thereby). Any such deposit or advance shall be held by Agent as a reserve to fund future payments on such LC Guaranties and future drawings against such Letters of Credit. At such time as all LC Guaranties have been paid or terminated and all Letters of Credit have been drawn upon or expired, any amounts remaining in such reserve shall be applied against any outstanding Obligations, or, if all Obligations have been indefeasibly paid in full, returned to Borrowers. 11.3.6 Each Borrower and each Guarantor hereby grants to Agent, each Lender, the Bank and each Participating Lender a lien, security interest and right of setoff as security for all Obligations, whether now existing or hereafter arising, upon and against all deposits, credits, Collateral or other Property, now or hereafter in the possession, custody, safekeeping or control of Agent, any Lender, any Participating Lender, Bank or any Affiliate of any of the foregoing, or in transit to any of them. At any time upon and during the continuance of an Event of Default, without demand or notice, Agent, any Lender, and any Participating Lender may set off the same or any part thereof or cause such set off to occur and apply the same to any liability or obligation of Borrowers and any Guarantor even though unmatured and regardless of the adequacy of any other Collateral securing the Obligations. Notwithstanding the foregoing, Agent and each Lender and Participating Lender agree with each other that it shall share any such set off on a Pro Rata basis with the Agent, other Lenders and Participating Lenders. ANY AND ALL RIGHTS TO REQUIRE AGENT, ANY LENDER OR ANY PARTICIPATING LENDER TO EXERCISE -52- ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF ANY BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. 11.3.7 Agent may (and upon the direction of the Required Lenders, shall) appoint, remove and reappoint or cause to be appointed, removed and reappointed any person or persons, including an employee or agent of Agent, to be a receiver (the "Receiver") which term shall include a receiver and manager of, or agent for, all or any part of the Collateral. Any such Receiver shall, as far as concerns responsibility for his acts, be deemed to be the agent of Borrowers and not of Agent, and Agent shall not in any way be responsible for any misconduct, negligence or malfeasance of such Receiver, his employees or agents. Except as otherwise directed by Agent, all money received by such Receiver shall be received in trust for and paid to Agent. Such Receiver shall have all of the powers and rights of Agent described in this Section 11. Agent may, either directly or through its agents or nominees, exercise any or all powers and rights of a Receiver. 11.4 Remedies Cumulative. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Borrowers contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any exhibit or schedule or in any Guaranty Agreement given to Agent or Lenders or contained in any other agreement between Agent, Lenders, and Borrowers, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Borrowers herein contained. The failure or delay of Agent or Lenders to require strict performance by Borrowers of any provision of this Agreement or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing from Borrowers to Agent and Lenders shall have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the other Loan Documents shall be deemed to have been suspended or waived by Agent unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver is by an instrument in writing and is signed by a duly authorized representative of Agent and, where required, Lenders, and is directed to Borrowers. SECTION 12. AGENT 12.1 Appointment, Powers and Immunities. Each Lender hereby appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the terms of this Agreement and of the other Loan Documents, together with such other powers as are reasonably incidental thereto. The Agent (which term, as used in this sentence, shall include reference -53- to its affiliates and to the officers, directors, employees and agents of the Agent and its affiliates): 12.1.1 Duties; Responsibilities. shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Lender; 12.1.2 Recitals, Statements, Presentations, Warranties. shall not be responsible to the Lenders for any recitals, statements, presentations or warranties contained in this Agreement or in any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Borrower or any other Person to perform any of its obligations hereunder or thereunder; 12.1.3 Litigation; Collection Proceedings. shall not, except to the extent expressly instructed by the Required Lenders, be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document; and 12.1.4 Actions or Omissions. shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence, bad faith or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Agent may deem and treat the payee of a Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Agent, together with the consent of the Borrowers to such assignment or transfer (to the extent provided in Section 12.10 hereof). 12.2 Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Required Lenders or, if provided herein, in accordance with the instructions given by all of the Lenders as is required in such circumstance, and such instructions of such Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. 12.3 Defaults. Except with respect to Events of Default consisting of the failure to make regularly scheduled interest payments hereunder or the failure to repay all -54- Revolving Credit Loans on the Revolving Credit Commitment Termination Date, the Agent shall not be deemed to have knowledge or notice of the occurrence of a Default unless the Agent has received notice from a Lender or the Borrowers specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Lenders. The Agent shall (subject to Sections 12.1 and 12.7 hereof) take such action with respect to such Default as shall be directed by the Required Lenders or all the Lenders (as provided in Section 13.3(vii)), provided that, unless and until the Agent shall have received such directions, the Agent may but shall not be obligated to take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Lenders except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Required Lenders or all of the Lenders. 12.4 Rights as a Lender. With respect to its Commitments and the Loans made by it, FCC (and any successor acting as Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. FCC (and any successor acting as Agent) and its affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Borrowers (and any of their Subsidiaries or Affiliates) as if it were not acting as Agent, and FCC (and any such successor) and its respective affiliates may accept fees and other consideration from the Borrowers for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. 12.5 Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed under Section 13.2 hereof, but without limiting the obligations of the Borrowers under said Section 13.2) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Agent (including by any Lender) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses that the Borrowers are obligated to pay under Section 13.2 hereof, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the person to be indemnified. 12.6 Non-Reliance on Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis -55- of the Borrowers and decision to enter into this Agreement and that it will, independently and without reliance upon the 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 analysis and decisions in taking or not taking action under this Agreement or under any other Loan Document. The Agent shall not be required to keep itself informed, as to the performance or observance by any Borrower of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the Properties or books of any Borrower. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of any Borrower (or any of their respective affiliates) that may come into the possession of the Agent or any of its affiliates. 12.7 Failure to Act. Except for action expressly required of Agent hereunder and under the other Loan Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from the Lenders of their indemnification obligations under Section 12.5 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 12.8 Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Borrowers. The Agent may be removed as Agent hereunder upon the written consent of all Lenders exclusive of the Agent upon the following: (i) willful misconduct in the performance of the Agent's duties or responsibilities under this Agreement as finally determined by a court of competent jurisdiction; (ii) if a receiver, trustee or conservator is appointed for the Agent or any state or federal regulatory authority assumes management or control of the Agent or if, under applicable law, the administrative or discretionary duties of the Agent hereunder become controlled by or subject to the approval of any state or federal regulatory authority; or (iii) in the event that Agent, in its capacity as a Lender, shall hold the lesser of $22,500,000 or fifteen percent (15%) of the Commitments for the Total Credit Facility. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent to such capacity (and in that connection, so long as no Event of Default shall have occurred and be continuing, subject to the consent of the Borrowers, not to be unreasonably withheld or delayed). If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after such removal or the retiring Agent's giving of notice of resignation then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent to such capacity, that shall be a bank with a combined capital and surplus of at least $250,000,000 (and in that connection, so long as no Event of Default shall have occurred and be continuing, subject to the consent of the Borrowers, not to be unreasonably withheld or delayed)). Upon the acceptance of any appointment as Agent hereunder by a successor Agent, (a) such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and (b) -56- the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. 12.9 Consents under Other Loan Documents. Except as provided in Section 13.3 hereof, the Agent may, with the prior consent of the Required Lenders (but not otherwise), consent to any modification, supplement or waiver under any of the other Loan Documents. 12.10 Assignments and Participations. 12.10.1 Borrowers. No Borrower may assign any of its rights or obligations hereunder or under the Notes or the other Loan Documents without the prior consent of all of the Lenders and the Agent. 12.10.2 Lenders. Each Lender may assign any of its Loans, its Note and its Commitment but only with the consent of the Borrowers and the Agent; provided that (i) no such consent by the Borrowers or the Agent shall be required in the case of any assignment to an Affiliate of any Lender, and no such consent by the Borrowers shall be required in the case of any assignment effected while a Default or an Event of Default has occurred and is continuing; (ii) except to the extent the Borrowers and the Agent shall otherwise consent, any such partial assignment (other than to another Lender) shall be in an amount at least equal to $5,000,000; (iii) upon each such assignment, the assignor and assignee shall deliver to the Borrowers and the Agent a Notice of Assignment; (iv) no consent required of the Borrowers or the Agent under this Section 12.10 shall be unreasonably withheld or delayed; and (v) upon such assignment the assignor shall pay to the Agent for its own account an assignment fee in the amount of $3,500.00. Upon execution and delivery by the assignor and the assignee to the Borrowers and the Agent of such Notice of Assignment and upon the consent thereto by the Borrowers and the Agent, the assignment shall be effective and the assignee shall have, to the extent of such assignment (unless otherwise consented to by the Borrowers and the Agent), the obligations, rights and benefits of a Lender hereunder holding the Commitment(s) and Loans (or portions thereof) assigned to it and specified in such Notice of Assignment (in addition to the Commitment(s) and Loans, if any, theretofore held by such assignee) and the assigning Lender shall, to the extent of such assignment, be released from the Commitment(s) (or portion(s) thereof) so assigned. -57- 12.10.3 Participants. Each Lender shall have the unrestricted right at any time and from time to time, and without the consent of or notice to the Borrowers, the Agent, or any other Lender, to grant to one or more banks or other financial institutions (each, a "Participant") participating interests in such Lender's obligations to lend hereunder and/or any or all of the Loans held by such Lender hereunder. In the event of any such grant by a Lender of a participating interest to a Participant, whether or not upon notice to the Borrowers, the Agent, or any other Lender, (i) such Lender shall be responsible for the performance of its obligations hereunder and the Borrowers, Agent, and other Lenders shall continue to deal solely and directly with such Lender in connection with the Agent's and Lenders' rights and obligations hereunder; (ii) each such Participant shall be entitled to the benefit of the cost protection and setoff provisions set forth herein. 12.10.4 Additional Permitted Assignments and Participations. In addition to the assignments and participations permitted under the foregoing provisions of this Section 12.10, any Lender may (without notice to the Borrowers, the Agent or any other Agent or Lender and without payment of any fee) (i) assign and pledge all or any portion of its Loans, and Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank; and (ii) assign all or any portion of its rights under this Agreement and its Loans, and Note to an Affiliate of such Lender provided that the Borrowers shall not be required to pay any increase in the cost of borrowing as a result of such assignment and LIBOR Advances must continue to be made available by such Assignee. 12.10.5 Information. A Lender may furnish any information concerning the Borrowers in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants). Each Borrower agrees that it will use its best efforts to assist and cooperate with any Lender in any manner reasonably requested by any such Lender to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including, without limitation, assisting in the preparation of appropriate disclosure documents 12.10.6 No Assignments to Borrowers or Affiliates. Anything in this Section 12.10 to the contrary notwithstanding, no Lender may assign or participate any interest in any Commitment or Loan held by it hereunder to any Borrower or any of its respective Affiliates or Subsidiaries, and Borrowers shall not, and shall not permit any of their Subsidiaries to, acquire any such interest in any Commitment or Loan, without the prior consent of each Lender. SECTION 13. MISCELLANEOUS 13.1 Power of Attorney. Each Borrower hereby irrevocably designates, makes, constitutes and appoints Agent (and all Persons designated by Agent) as such Borrower's true and lawful attorney (and agent-in-fact) and Agent may, without notice to such Borrower and in either of such Borrower's or Agent's name, but at the cost and expense of Borrowers: 13.1.1 At such time or times as Agent, in its sole discretion, may determine, endorse such Borrower's name on any checks, notes, acceptances, drafts, money orders or any -58- other evidence of payment or proceeds of the Collateral which come into the possession of Lender or Agent or under Agent's or any Lender's control. 13.1.2 At such time or times upon or after the occurrence of an Event of Default as Agent in its sole discretion may determine: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrowers' rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Agent deem advisable and, at Agent's option, with all warranties regarding the Collateral disclaimed; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign Borrowers' name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to Borrowers and to notify postal authorities to change the address for delivery thereof to such address as Agent may designate; (vii) endorse the name of Borrowers upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Agent for the benefit of Lenders on account of the Obligations; (viii) endorse the name of Borrowers upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use Borrowers' stationery and sign the name of Borrowers to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, Equipment and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Agent's determination, to fulfill Borrowers' obligations under this Agreement. 13.2 Indemnity. Borrowers hereby agree to indemnify the Agent, each Lender, their affiliates and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless from and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by any of them (including reasonable attorneys fees and legal expenses) as the result of Borrowers' failure to observe, perform or discharge Borrowers' duties hereunder or under any of the Loan Documents or the transactions contemplated thereby. In addition, Borrowers shall defend the Agent, each Lender, their affiliates and their respective directors, officers, employees, attorneys and agents from, against and save them harmless from all claims of any Person with respect to the Collateral or under the Loan Documents or the transactions contemplated thereby. Without limiting the generality of the foregoing, these indemnities shall extend to any claims asserted against Agent or any Lender by any Person under any Environmental Laws or similar laws by reason of Borrowers' or any other Person's failure to comply with laws applicable to solid or hazardous waste materials or other toxic substances. Notwithstanding any contrary provision in this Agreement, the obligation of Borrowers under this Section 13.2 shall survive the payment in full of the Obligations and the termination of this Agreement. -59- 13.3 Modification of Agreement. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by the Agent, the Borrowers and the Required Lenders, or by the Borrowers and the Agent acting with the consent of the Required Lenders, and any provision of this Agreement may be waived by the Required Lenders and the Agent or by the Agent acting with the consent of the Required Lenders; provided that: (a) no modification, supplement or waiver shall, unless by an instrument signed by all of the Lenders or by the Agent acting with the consent of all of the Lenders: (i) increase, or extend the term of any of the Commitments, (ii) reduce the rate at which interest is payable on the Loans, (iii) alter the dates specified for payment of principal and interest on the Loans or the rights or obligations of the Borrowers to prepay Loans or extend the Maturity Date, (iv) alter the terms of this Section 13.3, (v) modify the definition of the term "Required Lenders", or modify in any other manner the number or percentage of the Lenders required to make any determinations or waive any rights hereunder or to modify any provision hereof, (vi) release all or any substantial portion of the Collateral (except as required under the terms of the Loan Documents), (vii) modify or amend subsection 1.1.3 relating to use of proceeds; (viii) waive any Event of Default arising out of the failure to timely pay principal and interest on the Loans or any fee payable to the Lenders hereunder or waive any Event of Default relating to any unauthorized disposition of any material Collateral; or (ix) or release any Borrower or any Guarantor; and (b) any modification or supplement of Section 12 hereof shall require the consent of the Agent. In the event that Agent or the Required Lenders request the consent of any Lender to any approval, consent, amendment, waiver or other action under this Agreement or with respect to the Loans, and such Lender (a "Non-Consenting Lender") fails to timely give its consent then any Lender which does timely consent to such approval, consent, amendment, waiver or other action (a "Consenting Lender") shall have the right, but not the obligation, in its respective, sole and absolute discretion, to acquire (x) for no cash consideration (pro rata, based on the respective Commitments of those Consenting Lenders electing to exercise such right) the Non-Consenting Lender's Commitment to fund future Revolving Credit Loans; and (y) for consideration equal to the amount of the outstanding Revolving Credit Loans from such Non-Consenting Lender (pro rata, based on the respective Commitments of those Consenting Lenders electing to exercise such right) the Non-Consenting Lender's rights with respect to outstanding Revolving Credit Loans (the rights purchased under clauses (x) and (y), the "Acquired Rights"), but only if, in the aggregate, all of the Non-Consenting Lender's rights with respect to outstanding Revolving Credit Loans and Commitments are acquired hereunder by on or more Consenting Lenders. Upon any such purchase of the pro rata share of any Non-Consenting Lender's Acquired Rights, the Non-Consenting Lender's rights with respect to outstanding Revolving Credit Loans, Commitment, share in future Revolving Credit Loans, and rights under Loan Documents with respect thereto shall terminate on the day of purchase (other than indemnification rights that survive termination of the Commitments under Section 13.2 hereof and rights to receive accrued by unpaid interest and fees through the date of purchase), and the Non-Consenting Lender shall promptly execute all documents reasonably requested to surrender and transfer such interests (other than indemnification rights that survive termination of the Commitments under Section 13.2 hereof and rights to receive accrued by unpaid interest and fees -60- through the date of purchase), including, if so requested a Notice of Assignment (provided that the assignment fee in connection with such Notice of Assignment shall not be charged). 13.4 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 13.5 Successors and Assigns. Subject to the provisions of Section 12.10 hereof, this Agreement, the Other Agreements and the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of Borrowers, Agent and Lenders. 13.6 Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in Section 3.2 hereof and except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 13.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 13.8 Notice. Except as otherwise provided herein, all notices, requests and demands to or upon a party hereto, to be effective, shall be in writing and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight courier or by facsimile and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered immediately when delivered against receipt, one (1) Business Day after deposit in the mail, postage prepaid, or with an overnight courier or, in the case of facsimile notice, when sent, addressed as follows: If to Agent: c/o Fleet Capital Corporation 200 Glastonbury Boulevard Glastonbury, Connecticut 06033 Attention: Loan Administration Manager Facsimile No.: (860) 657-7759 -61- With a copy to: Brown Rudnick Freed & Gesmer, P.C. One Financial Center Boston, MA 02111 Attention: Jeffery L. Keffer, Esq. Facsimile No.: (617) 856-8201 If to Borrowers: United Natural Foods, Inc. 260 Lake Road Dayville, CT 06241 Attention: Todd Weintraub, Chief Financial Officer Facsimile No.: (860) 779-5678 With a copy to: Cameron & Mittleman LLP 56 Exchange Terrace Providence, RI 02903 Attention: Joseph F. Whinery, Esq. Facsimile No.: (401) 331-5787 If to any Lender: To the address set forth on the signature page hereto, or on the Notice of Assignment executed by such Lender, whichever is applicable. or to such other address as each party may designate for itself by notice given in accordance with this Section 13.8; provided, however, that any notice, request or demand to or upon Agent pursuant to subsection 3.1.1 or 5.2.2 hereof shall not be effective until received by Agent. 13.9 Credit Inquiries. Borrowers hereby authorize and permit Agent or any Lender to respond to usual and customary credit inquiries from third parties concerning Borrowers or any of their Subsidiaries or any Guarantor. 13.10 Time of Essence. Time is of the essence of this Agreement, the Other Agreements and the Security Documents. 13.11 Joint and Several Liability. All Loans, Letters of Credit and LC Guaranties made or issued hereunder are made to or for the benefit of each of the Borrowers. The Borrowers are jointly and severally, directly and primarily liable for the full and indefeasible payment when due and performance of all Obligations and for the prompt and full payment and performance of all of the promises, covenants, representations, and warranties made or undertaken by each Borrower under this Agreement and the Loan Documents and Borrowers agree that such liability is independent of the duties, obligations, and liabilities of each of the joint and several Borrowers. In furtherance of the foregoing, each Borrower jointly and severally, absolutely and unconditionally guaranties to Agent and Lenders and agrees to be liable for the full and indefeasible payment and performance when due of all the Obligations. This guarantee is a continuing guarantee, and shall apply to all Obligations whenever arising. -62- 13.12 Suretyship Waivers and Consents. (i) Each Borrower acknowledges that the obligations of such Borrower undertaken herein might be construed to consist, at least in part, of the guaranty of obligations of persons other than such Borrower (including the other Borrowers) and, in full recognition of that fact, each Borrower consents and agrees that Agent and Lenders may, at any time and from time to time, without notice or demand (except as provided in and in accordance with the terms of this Agreement), whether before or after any actual or purported termination, repudiation or revocation of this Agreement by any Borrower, and without affecting the enforceability or continuing effectiveness hereof as to each Borrower: (a) increase, extend, or otherwise change the time for payment or the terms of the Obligations or any part thereof; (b) supplement, restate, modify, amend, increase, decrease, or waive, or enter into or give any agreement, approval or consent with respect to, the Obligations or any part thereof, this Agreement, or any of the Loan Documents or any additional security or guarantees, or any condition, covenant, default, remedy, right, representation, or term thereof or thereunder; (c) accept new or additional instruments, documents, or agreements in exchange for or relative to any of the loan Documents or the Obligations or any part thereof; (d) accept partial payments on the Obligations; (e) receive and hold additional security or guarantees for the Obligations or any part thereof; (f) release, reconvey, terminate, waive, abandon, fail to perfect, subordinate, exchange, substitute, transfer, or enforce any Collateral, security or guarantees, and apply any Collateral or security and direct the order or manner of sale thereof as Agent in its sole and absolute discretion may determine; (g) release any person from any personal liability with respect to the Obligations or any part thereof; (h) settle, release on terms satisfactory to Agent or by operation of applicable laws or otherwise liquidate or enforce any Obligations and any Collateral or security therefor or guaranty thereof in any manner, consent to the transfer of any Collateral or security and bid and purchase at any sale; or (i) consent to the merger, change, or any other restructuring or termination of the corporate or partnership existence of any Borrower, and correspondingly restructure the Obligations, and any such merger, change, restructuring, or termination shall not affect the liability of any Borrower or the continuing effectiveness hereof, or the enforceability hereof with respect to all or any part of the Obligations. (ii) Agent may enforce this Agreement independently as to each Borrower and independently of any other remedy or security Agent at any time may have or hold in connection with the Obligations, and it shall not be necessary for Agent to marshal assets in favor of any Borrower or to proceed upon or against or exhaust any Collateral or security or remedy before proceeding to enforce this Agreement. Each Borrower expressly waives any right to require Agent to marshal assets in favor of any Borrower or any guarantor of the Obligations or to proceed against any other Borrower, and agrees that Agent may proceed against Borrowers or any Collateral in such order as Lender shall determine in its sole and absolute discretion. (iii) Agent may file a separate action or actions against any Borrower, whether such action is brought or prosecuted with respect to any security or against any guarantor of the Obligations, or whether any other person is joined in any such action or actions. -63- Each Borrower agrees that Agent and each Borrower and any affiliate of any Borrower may deal with each other in connection with the Obligations or otherwise, or alter any contracts or agreements now or hereafter existing between any of them, in any manner whatsoever, all without in any way altering or affecting the continuing enforceability of this Agreement. Each Borrower, as a joint and several Borrower hereunder, expressly waives the benefit of any statute of limitations affecting its joint and several liability hereunder or the enforcement of the Obligations or any rights of Agent created or granted herein. (iv) Agent's and Lenders' rights hereunder shall be reinstated and revived, and the enforceability of this Agreement shall continue, with respect to any amount at any time paid on account of the Obligations which thereafter shall be required to be restored or returned by Agent or any Lender, all as though such amount had not been paid. The rights of Agent created or granted herein and the enforceability of this Agreement at all times shall remain effective to cover the full amount of all the Obligations even though the Obligations, including any part thereof or any Collateral, other security or guaranty therefor, may be or hereafter may become invalid or otherwise unenforceable as against any Borrower and whether or not any Borrower shall have any personal liability with respect thereto. (v) Each Borrower expressly waives any and all defenses now or hereafter arising or asserted by reason of (a) any disability or other defense of any other Borrower with respect to the Obligations; (b) the unenforceability or invalidity of any security or guaranty for the Obligations or the lack of perfection or continuing perfection or failure of priority of any security for the Obligations; (c) the cessation for any cause whatsoever of the liability of any Borrower (other than by reason of the full payment and performance of all Obligations as required herein); (d) any failure of Agent to marshall assets in favor of any Borrower; (e) any failure of Agent to give notice to any Borrower of sale or other disposition of Collateral of another Borrower or any defect in any notice that may be given in connection with any such sale or disposition of Collateral of any Borrower securing the Obligations; (f) any failure of Agent to comply with applicable law in connection with the sale or other disposition of any Collateral or other security of any Borrower, for any Obligation, including any failure of Lender to conduct a commercially reasonable sale or other disposition of any Collateral or other security of any Borrower for any Obligation; (g) any act or omission of Agent or others that directly or indirectly results in or aids the discharge or release of any Borrower or the Obligations of any Borrower or any security or guaranty therefor by operation of law or otherwise; (h) any law which provides that the obligation of a surety or guarantor must neither be larger in amount nor in other respects more burdensome than that of the principal or which reduces a surety's or guarantor's obligation in proportion to the principal obligation; (i) any failure of Agent to file or enforce a claim in any bankruptcy or other proceeding with respect to any Borrower; (j) the avoidance of any lien or security interest in assets of any Borrower in favor of Agent for any reason; or (k) any action taken by Agent that is authorized by this section or any other provision of any Loan Document. Until such time, if any, as all of the Obligations have been indefeasibly paid and performed in full and no portion of any commitment of Lenders to Borrowers under any Loan Document remains in effect, -64- each Borrowers' indebtedness, claims and rights of subrogation, contribution, reimbursement, or indemnity against the other Borrowers shall be fully and completely subordinated to the indefeasible repayment in full of the Obligations, and each Borrower expressly waives until such indefeasible payment any right to enforce any remedy that it now has or hereafter may have against any other Person and waives the benefit of, or any right to participate in, any Collateral now or hereafter held by Agent. (vi) To the fullest extent permitted by applicable law, each Borrower expressly waives and agrees not to assert, any and all defenses in its favor based upon an election of remedies by Agent or Lenders which destroys, diminishes, or affects such Borrower's subrogation rights against the other Borrowers, or against any Guarantor, and/or (except as explicitly provided for herein) any rights to proceed against each other Borrower, or any other party liable to Lender, for reimbursement, contribution, indemnity, or otherwise. (vii) Borrowers and each of them warrant and agree that each of the waivers and consents set forth herein are made after consultation with legal counsel and with full knowledge of their significance and consequences, with the understanding that events giving rise to any defense or right waived may diminish, destroy, or otherwise adversely affect rights which Borrowers otherwise may have against each other, Agent, any Lender, or others, or against Collateral, and that, under the circumstances, the waivers and consents herein given are reasonable and not contrary to public policy or law. If any of the waivers or consents herein are determined to be contrary to any applicable law or public policy, such waivers and consents shall be effective to the maximum extent permitted by law. 13.13 Contribution Agreement. As an inducement to Agent and Lenders to enter into this Agreement and to make the Loans and extend credit to the Borrowers, each Borrower agrees to indemnify and hold the other harmless from and each shall have a continuing right of contribution against the other Borrowers, if and to the extent that a Borrower makes or is caused to make disproportionate payments in excess of that Borrower's Proportionate Share (as defined below) of the Loans or contributions (from dispositions of its assets or otherwise) to the repayment and satisfaction of the Obligations. These indemnification and contribution obligations shall be unconditional and continuing obligations of the Borrowers and shall not be waived, rescinded, modified, limited or terminated in any way whatsoever without the prior written consent of Lender, in its sole discretion. For purposes hereof, the Proportionate Share of a Borrower shall mean a fraction in which the numerator is the Net Worth of a Borrower on the date of this Agreement and the denominator is the Consolidated Net Worths of all the Borrowers on such date. 13.14 Entire Agreement. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. -65- 13.15 Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 13.16 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN HARTFORD, CONNECTICUT. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CONNECTICUT; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN CONNECTICUT, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF AGENT'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF AGENT'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF CONNECTICUT. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWERS, AGENT OR LENDERS, BORROWERS HEREBY CONSENT AND AGREE THAT THE SUPERIOR COURT OF HARTFORD, CONNECTICUT, OR, AT AGENT'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWERS AND LENDERS OR AGENT PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWERS EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWERS HEREBY WAIVE ANY OBJECTION WHICH BORROWERS MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWERS HEREBY WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWERS AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWERS' ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF AGENT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY AGENT -66- OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 13.17 WAIVERS BY BORROWERS. BORROWERS WAIVE (i) THE RIGHT TO TRIAL BY JURY (WHICH AGENT AND EACH LENDER HEREBY ALSO WAIVE) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL; (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY AGENT OR LENDERS ON WHICH BORROWERS MAY IN ANY WAY BE LIABLE AND HEREBY RATIFY AND CONFIRM WHATEVER AGENT OR LENDERS MAY DO IN THIS REGARD; (iii) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING AGENT OR LENDERS TO EXERCISE ANY OF THEIR REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; (v) NOTICE OF ACCEPTANCE HEREOF; AND (vi) EXCEPT AS PROHIBITED BY LAW, ANY RIGHT TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. BORROWER ACKNOWLEDGE THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO AGENT AND LENDERS' ENTERING INTO THIS AGREEMENT AND THAT EACH LENDER AND AGENT IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWERS. BORROWERS WARRANT AND REPRESENT THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 13.18 Waiver. No failure on the part of the Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. Borrowers irrevocably waive, to the fullest extent permitted by applicable law, any claim that any action or proceeding commenced by the Agent or any Lender relating in any way to this Agreement should be dismissed or stayed by reason, or pending the resolution, of any -67- action or proceeding commenced by Borrowers relating in any way to this Agreement whether or not commenced earlier. To the fullest extent permitted by applicable law, the Borrowers shall take all measures necessary for any such action or proceeding commenced by the Agent or any Lender to proceed to judgment prior to the entry of judgment in any such action or proceeding commenced by any Borrowers. 13.19 PREJUDGMENT REMEDIES. EACH BORROWER HEREBY WAIVES SUCH RIGHTS AS IT MAY HAVE TO NOTICE AND/OR HEARING UNDER ANY APPLICABLE FEDERAL OR STATE LAWS INCLUDING, WITHOUT LIMITATION, CONNECTICUT GENERAL STATUTES SECTIONS 52-278A, ET-SEQ., AS AMENDED, PERTAINING TO THE EXERCISE BY AGENT OR ANY LENDER OF SUCH RIGHTS AS THE AGENT OR ANY LENDER MAY HAVE INCLUDING, BUT NOT LIMITED TO, THE RIGHT TO SEEK PREJUDGMENT REMEDIES AND/OR DEPRIVE BORROWERS OF OR AFFECT THE USE OF OR POSSESSION OR ENJOYMENT OF BORROWERS' PROPERTY PRIOR TO THE RENDITION OF A FINAL JUDGMENT AGAINST A BORROWER. EACH BORROWER FURTHER WAIVES ANY RIGHT IT MAY HAVE TO REQUIRE LENDER TO PROVIDE A BOND OR OTHER SECURITY AS A PRECONDITION TO OR IN CONNECTION WITH ANY PREJUDGMENT REMEDY SOUGHT BY AGENT OR ANY LENDER. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -68- Signature Pages to Loan and Security Agreement IN WITNESS WHEREOF, this Agreement has been duly executed in Hartford, Connecticut, on the day and year specified at the beginning of this Agreement. WITNESS/ATTEST: UNITED NATURAL FOODS, INC. By: /s/ MICHAEL S. FUNK - -------------------------------- ------------------------------------ Name: Michael S. Funk Title: Chief Executive Office and Vice Chairman of the Board WITNESS/ATTEST: MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED By: /s/ MICHAEL S. FUNK - -------------------------------- ------------------------------------ Name: Michael S. Funk Title: Chief Executive Office and Vice Chairman of the Board WITNESS/ATTEST: NUTRASOURCE, INC. By: /s/ MICHAEL S. FUNK - -------------------------------- ------------------------------------ Name: Michael S. Funk Title: Chief Executive Office and Vice Chairman of the Board WITNESS/ATTEST: RAINBOW NATURAL FOODS, INC. By: /s/ MICHAEL S. FUNK - -------------------------------- ------------------------------------ Name: Michael S. Funk Title: Chief Executive Office and Vice Chairman of the Board -69- Signature Pages to Loan and Security Agreement WITNESS/ATTEST: STOW MILLS, INC. By: /s/ MICHAEL S. FUNK - -------------------------------- ------------------------------------ Name: Michael S. Funk Title: Chief Executive Office and Vice Chairman of the Board WITNESS/ATTEST: UNITED NATURAL FOODS OF PENNSYLVANIA, INC. By: /s/ MICHAEL S. FUNK - -------------------------------- ------------------------------------ Name: Michael S. Funk Title: Chief Executive Office and Vice Chairman of the Board -70- Signature Pages to Loan and Security Agreement Accepted in Glastonbury, Connecticut on August 28, 2001 FLEET CAPITAL CORPORATION, as Administrative Agent By: /s/ HOWARD HANDMAN ------------------- Name: Howard Handman Title: Senior Vice President FLEET CAPITAL CORPORATION, as a Lender Commitment Amount: $27,500,000 By: /s/ HOWARD HANDMAN ------------------- Name: Howard Handman Title: Senior Vice President Notice Address and Applicable Lending Office: 200 Glastonbury Boulevard Glastonbury, CT 06033 -71- Signature Pages to Loan and Security Agreement CITIZENS BANK OF MASSACHUSETTS, as Syndication Agent By /s/ DAVID N. PAIKIN ------------------- Name: David N. Paikin Title: Vice President CITIZENS BANK OF MASSACHUSETTS, as a Lender By: /s/ DAVID N. PAIKIN ------------------- Name: David N. Paikin Title: Vice President Notice Address Commitment Amount: $25,000,000 and Applicable Lending Office: 53 State Street Boston, MA 02109 -72- Signature Pages to Loan and Security Agreement U.S. BANK NATIONAL ASSOCIATION, as Documentation Agent By: /s/ JOHN BALL ------------- Name: John Ball Title: Vice President U.S. BANK NATIONAL ASSOCIATION, as a Lender By: /s/ JOHN BALL ------------- Name: John Ball Title: Vice President Notice Address Commitment Amount: $22,500,000 and Applicable Lending Office: 950 17th Street Suite 350 Denver, CO 80202 -73- Signature Pages to Loan and Security Agreement PNC BANK, NATIONAL ASSOCIATION, a Lender By: /s/ STEPHEN P. KANARIAN ----------------------- Name: Stephen P. Kanarian Title: Vice President Notice Address Commitment Amount: $22,500,000 and Applicable Lending Office: 125 High Street Oliver Tower, 16th Floor Boston, MA 02110 -74- Signature Pages to Loan and Security Agreement NATIONAL CITY BANK, a Lender By: /s/ LYLE P. CUNNINGHAM --------------------- Name: Lyle P. Cunningham Title: Vice President Notice Address Commitment Amount: $15,000,000 and Applicable Lending Office: One South Broad Street Philadelphia, PA 19107 -75- Signature Pages to Loan and Security Agreement SOVEREIGN BANK, a Lender By: /s/ CHRISTOPHER T. PHELAN ------------------------- Name: Christopher T. Phelan Title: Senior Vice President Notice Address Commitment Amount: $12,500,000 and Applicable Lending Office: 100 Pearl Street Hartford, CT 06103 -76- Signature Pages to Loan and Security Agreement FIRST PIONEER FARM CREDIT, ACA, a Lender By: /s/ JAMES M. PAPAI ------------------ Name: James M. Papai Title: Vice President Notice Address Commitment Amount: $10,000,000 and Applicable Lending Office: 174 South Road Enfield, CT 06082 -77- Signature Pages to Loan and Security Agreement ISRAEL DISCOUNT BANK OF NEW YORK, a Lender By: /s/ AMIR BARASH --------------- Name: Amir Barash Title: Vice President By: /s/ ALFRED J. FRANCO -------------------- Name: Alfred J. Franco Title: Vice President Notice Address Commitment Amount: $5,000,000 and Applicable Lending Office: 511 Fifth Avenue New York, NY 10017 -78- Signature Pages to Loan and Security Agreement WEBSTER BANK, a Lender By: /s/ MATTHEW RILEY ----------------- Name: Matthew Riley Title: Senior Vice President Notice Address Commitment Amount: $10,000,000 and Applicable Lending Office: 80 Elm Street New Haven, CT 06510 -79- Signature Pages to Loan and Security Agreement FLEET SECURITIES, INC., as Arranger By: /s/ GREGORY F. MATHIS --------------------- Name: Gregory F. Mathis Title: Managing Director Notice Address: 590 Madison Avenue 31st Floor New York, NY 10022 -80- Signature Pages to Loan and Security Agreement STATE OF ________________) ) ss: August ____, 2001 COUNTY OF ) Before me, personally appeared _______________, _______________ of United Natural Foods, Inc., who executed the foregoing Loan and Security Agreement and acknowledged the same to be his free act and deed, and the free act and deed of said corporation. ____________________________________________ Notary Public My commission expires: _____________________ Commissioner of the Superior Court STATE OF ________________) ) ss: August ____, 2001 COUNTY OF ) Before me, personally appeared _______________, _______________ of Mountain People's Warehouse Incorporated, who executed the foregoing Loan and Security Agreement and acknowledged the same to be his free act and deed, and the free act and deed of said corporation. ____________________________________________ Notary Public My commission expires: _____________________ Commissioner of the Superior Court -81- Signature Pages to Loan and Security Agreement STATE OF ________________) ) ss: August ____, 2001 COUNTY OF ) Before me, personally appeared _______________, _______________ of NutraSource, Inc., who executed the foregoing Loan and Security Agreement and acknowledged the same to be his free act and deed, and the free act and deed of said corporation. ____________________________________________ Notary Public My commission expires: _____________________ Commissioner of the Superior Court STATE OF _______________ ) ) ss: August ____, 2001 COUNTY OF ) Before me, personally appeared _______________, _______________ of Rainbow Natural Foods, Inc., who executed the foregoing Loan and Security Agreement and acknowledged the same to be his free act and deed, and the free act and deed of said corporation. ____________________________________________ Notary Public My commission expires: _____________________ Commissioner of the Superior Court STATE OF ________________) ) ss: August ____, 2001 COUNTY OF ) Before me, personally appeared _______________, _______________ of Stow Mills, Inc., who executed the foregoing Loan and Security Agreement and acknowledged the same to be his free act and deed, and the free act and deed of said corporation. ____________________________________________ Notary Public My commission expires: _____________________ Commissioner of the Superior Court -82- Signature Pages to Loan and Security Agreement STATE OF ________________) ) ss: August ____, 2001 COUNTY OF ) Before me, personally appeared _______________, _______________ of United Natural Foods of Pennsylvania, Inc., who executed the foregoing Loan and Security Agreement and acknowledged the same to be his free act and deed, and the free act and deed of said corporation. ____________________________________________ Notary Public My commission expires: _____________________ Commissioner of the Superior Court -83- APPENDIX A GENERAL DEFINITIONS When used in the Loan and Security Agreement dated as of August ___, 2001, by and among United Natural Foods, Inc., Mountain People's Warehouse Incorporated, NutraSource, Inc., Rainbow Natural Foods, Inc., Stow Mills, Inc., and United Natural Foods Pennsylvania, Inc. (collectively, the "Borrowers"), the Lenders identified on the signature pages under the caption "Lenders" therein, Fleet Capital Corporation as agent for the Lenders ("Agent"), Fleet Securities, Inc. as arranger for the Lenders ("Arranger"), U.S. Bank National Association as documentation agent for the Lenders ("Documentation Agent") and Citizens Bank of Massachusetts as syndication agent for the Lenders ("Syndication Agent") (the "Agent") (the "Agreement") (a) the terms Account, Certificated Security, Chattel Paper, Deposit Account, Document, Equipment, Financial Asset, Fixture, General Intangibles, Goods, Instrument, Inventory, Investment Property, Security, Proceeds, Security Entitlement and Uncertificated Security have the respective meanings assigned thereto under the UCC (as defined below); (b) the terms Commercial Tort Claims, Electronic Chattel Paper, Health-Care-Insurance Receivables, Letter-of-Credit Rights, Payment Intangibles, Software, Supporting Obligations and Tangible Chattel Paper have the respective meanings assigned thereto in the UCC Revisions (as defined below); (c) all terms indicating Collateral having the meanings assigned thereto under the UCC or the UCC Revisions shall be deemed to mean such Property, whether now owned or hereafter created or acquired by Borrowers or in which Borrowers now have or hereafter acquire any interest; (d) capitalized terms which are not otherwise defined have the respective meanings assigned thereto in said Loan and Security Agreement; and (e) the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Account Debtor - any Person who is or may become obligated on or under or on account of any Account, Contract Right, Chattel Paper or General Intangible. Advance Date - as defined in Section 4.4.1 of the Agreement. Affiliate - a Person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, a Person; (ii) which beneficially owns or holds five percent (5%) or more of any class of the Voting Stock of a Person; or (iii) five percent (5%) or more of the Voting Stock (or in the case of a Person which is not a corporation, five percent (5%) or more of the equity interest) of which is beneficially owned or held by a Person or a Subsidiary of a Person. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean possession , directly or indirectly, of power to direct or cause the direction of management or policies whether through ownership of securities or other ownership interests of the Borrowers by contract or otherwise. -84- Agent - Fleet Capital Corporation and its successors and assigns. Agreement - the Loan and Security Agreement referred to in the first sentence of this Appendix A, all Exhibits and Schedules thereto and this Appendix A. Applicable Lending Office - for each Lender and for each type of Loan, the Lending office of such Lender (or of an affiliate of such Lender) designated for such type of Loan on the signature pages hereof or on the Notice of Assignment (as applicable) or such other office of such Lender (or of an affiliate of such Lender) as such Lender may from time to time specify to the Agent and the Borrowers as the office by which its Loans of such type are to be made and maintained. Applicable Base Rate Margin; Applicable LIBOR Margin - determined by the ratio of total Consolidated Indebtedness for Money Borrowed of Borrowers ("Total Debt") to EBITDA for the most recently completed period of four (4) consecutive fiscal quarters for which financial reports have been (or are required to have been) furnished to Lenders as follows: Ratio of Total Applicable LIBOR Applicable Base Level Debt to EBITDA Margin Rate Margin ----- -------------- ------ ----------- Greater than or I equal to 2.50x 1.75% 0.25% Greater than or equal to 1.50x and II* less than 2.50x 1.50% 0.00% III Less than 1.50x 1.25% 0.00% * The Applicable Base Rate Margin and Applicable LIBOR Margin will be at Level II for the first six (6) months from the date of hereof. Thereafter the Applicable Base Rate Margin and the Applicable LIBOR Margin shall be adjusted quarterly according to the above performance based grid; provided, that if financial reports are not timely delivered to Lenders on and after the date which is six (6) months from the date hereof or thereafter, when required under the Agreement, the Applicable Base Rate Margin and the Applicable LIBOR Margin will be at Level I. Availability - the amount of money which Borrowers are entitled to borrow from time to time as Revolving Credit Loans, such amount being the difference derived when the sum of the principal amount of Revolving Credit Loans then outstanding (including any amounts which any Lender may have paid for the account of Borrowers pursuant to any of the Loan Documents and which have not been reimbursed by Borrowers) and the LC Amount is subtracted from the Borrowing Base. If the amount outstanding is equal to or greater than the Borrowing Base, Availability is zero (0). -85- Bank - Fleet National Bank. ---- Base Rate - the rate of interest announced or quoted by Bank from time to time as its prime rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if such prime rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. Base Rate Advances - any Loan bearing interest computed by reference to the Base Rate. Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (i) $150,000,000; or (ii) an amount equal to: (a) 85% of the net amount of Eligible Accounts outstanding at such date; PLUS (b) the lesser of (1) $90,000,000 or (2) 60%, of the value of Eligible Inventory at such date calculated on the basis of the lower of cost or market with the cost of raw materials and finished goods calculated on a first-in, first-out basis. For purposes hereof, the net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Agent's option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. Borrowing Base Certificate - a certificate by a responsible officer of each Borrower, substantially in the form of Exhibit R (or another form acceptable to Lenders) setting forth the calculation of the Borrowing Base, including a calculation of each component thereof, all in such detail as shall be satisfactory to Agent. All calculations of the Borrowing Base in connection with the preparation of any Borrowing Base Certificate shall originally be made by Borrowers and certified to Agent; provided, that Agent shall have the right to review and adjust, in the exercise of its reasonable credit judgment, any such calculation after giving notice thereof to the Borrowers, (1) to reflect its reasonable estimate of declines in value of any of the Collateral described therein, and (2) to the extent that such calculation is not in accordance with this Agreement. -86- Business Day - any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of Connecticut or is a day on which banking institutions located in such state are closed. Capital Expenditures - expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations. Capitalized Lease Obligation - any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. Closing Date - the date on which all of the conditions precedent in Section 10 of the Agreement are satisfied and the initial Loan is made or the initial Letter of Credit or LC Guaranty is issued under the Agreement. Collateral - all of the Property and interests in Property described in Section 6 of the Agreement, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations. Commercial Letter of Credit - a Letter of Credit issued for the purpose of packaging goods. Computer Hardware and Software - all of Borrowers' rights (including rights as licensee and lessee) with respect to (i) computer and other electronic data processing hardware, including all integrated computer systems, central processing units, memory units, display terminals, printers, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories, peripheral devices and other related computer hardware; (ii) all Software and all software programs designed for use on the computers and electronic data processing hardware described in clause (i) above, including all operating system software, utilities and application programs in any form (source code and object code in magnetic tape, disk or hard copy format or any other listings whatsoever); (iii) any firmware associated with any of the foregoing; and (iv) any documentation for hardware, Software and firmware described in clauses (i), (ii) and (iii) above, including flow charts, logic diagrams, manuals, specifications, training materials, charts and pseudo codes. Commitments - means the Revolving Credit Commitments. Consolidated - the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. -87- Contract Right - any right of Borrowers to payment under a contract for the sale or lease of goods or the rendering of services, which right is at the time not yet earned by performance. Current Assets - at any date means the amount at which all of the current assets of a Person would be properly classified as current assets shown on a balance sheet at such date in accordance with GAAP. Default - an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in subsection 2.1.2 of the Agreement. Delinquent Lender - as defined in subsection 4.4.2 of the Agreement. Distribution - in respect of any corporation means and includes: (i) the payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock) and (ii) the redemption or acquisition of Securities unless made contemporaneously from the net proceeds of the sale of Securities. Dominion Account - a special account established by Borrower pursuant to the Agreement at a bank selected by Borrower, but acceptable to Agent in its reasonable discretion, and over which Agent on behalf of each of the Lenders shall have sole and exclusive access and control for withdrawal purposes. EBITDA - with respect to any fiscal period, the sum of Borrowers' Consolidated net earnings (or loss) before interest expense, taxes depreciation and amortization for said period as determined in accordance with GAAP. Eligible Account - an Account arising in the ordinary course of any Borrower's business from the sale of goods or rendition of services which Agent, in its sole credit judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if: (i) it arises out of a sale made by any Borrower to a Subsidiary or an Affiliate of any Borrower or to a Person controlled by an Affiliate of any Borrower; or (ii) it is unpaid for more than sixty (60) days after the original due date shown on the invoice; or (iii) it is due or unpaid more than ninety (90) days after the original invoice date; or -88- (iv) 50% or more of the Accounts from the Account Debtor are not deemed Eligible Accounts hereunder; or (v) the total unpaid Accounts of the Account Debtor exceed 20% of the net amount of all Eligible Accounts, to the extent of such excess; or (vi) any covenant, representation or warranty contained in the Agreement with respect to such Account has been breached; or (vii) the Account Debtor is also a Borrower's creditor or supplier, or the Account Debtor has disputed liability with respect to such Account, or the Account Debtor has made any claim with respect to any other Account due from such Account Debtor to any Borrower, or the Account otherwise is or may become subject to any right of setoff by the Account Debtor; or (viii) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the premises in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; or (ix) it arises from a sale to an Account Debtor outside the United States, unless the sale is on letter of credit, guaranty or acceptance terms, in each case acceptable to Agent in its sole discretion; or (x) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or (xi) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrowers assign their right to payment of such Account to Agent for the account of Lenders, in a manner satisfactory to Agent, so as to comply with the Assignment of Claims Act of 1940 (31 U.S.C.ss.203 et seq., as amended); or (xii) the Account is subject to a Lien other than a Permitted Lien; or (xiii) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account -89- have not been performed by Borrowers and accepted by the Account Debtor or the Account otherwise does not represent a final sale; or (xiv) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; or (xv) Borrowers have made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (xvi) Borrowers have made an agreement with the Account Debtor to extend the time of payment thereof. Eligible Inventory - such Inventory of Borrowers (other than packaging materials and supplies) which Agent, in its sole credit judgment, deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory if: (i) it is not raw materials or finished goods, or work-in-process that is, in Agent's opinion, readily marketable in its current form; or (ii) it is not in good, new and saleable condition; or (iii) it is slow-moving, obsolete or unmerchantable; or (iv) it does not meet all standards imposed by any governmental agency or authority; or (v) it does not conform in all respects to the warranties and representations set forth in the Agreement; or (vi) it is not at all times subject to Lenders' duly perfected, first-priority security interest and no other Lien except a Permitted Lien; or (vii) it is not situated at a location in compliance with the Agreement or is in transit; or (viii) it is held for retail sale at a retail store owned or operated by a Borrower or a Subsidiary thereof; or (ix) it is perishable agricultural or farming products such as fruits, vegetables, nuts or meat. -90- Environmental Laws - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety and environmental matters. ERISA - the Employee Retirement Income Security Act of 1974, as amended, and all rules and regulations from time to time promulgated thereunder. Event of Default - as defined in Section 11.1 of the Agreement. Existing Loan Agreement - as defined in Section 1.1.3 of the Agreement. FCC - Fleet Capital Corporation, a Rhode Island corporation, and its successors and assigns. Fixed Charge Coverage Ratio - for any period of the Borrowers, on a Consolidated basis, that quotient equal to (A) the sum of (i) EBITDA, less (ii) the sum of taxes paid and nonfinanced Capital Expenditures made during such period, divided by (B) the sum of (i) interest payments and (ii) scheduled payments and prepayments on Indebtedness for Money Borrowed for such period, determined in accordance with GAAP. GAAP - generally accepted accounting principles in the United States of America in effect from time to time. Guarantor[s] - Natural Retail Group, Inc., a Delaware corporation, Albert's Organics, Inc., a California corporation, United Natural Trading Co., a Delaware corporation and The Health Hut, Inc., a New York corporation and any other Person who may hereafter guarantee payment or performance of the whole or any part of the Obligations. Guaranty Agreement[s] - the Continuing Guaranty Agreement[s] which are to be executed by each Guarantor in form and substance satisfactory to Lenders. Indebtedness - as applied to a Person means, without duplication (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, (ii) all obligations of other Persons which such Person has guaranteed, (iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person, and -91- (iv) in the case of Borrowers (without duplication), the Obligations. Intellectual Property - all past, present and future: trade secrets, know-how and other proprietary information; trademarks, internet domain names, service marks, trade dress, trade names, business names, designs, logos, slogans (and all translations, adaptations, derivations and combinations of the foregoing) indicia and other source and/or business identifiers, and the goodwill of the business relating thereto and all registrations or applications for registrations which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including copyrights for computer programs) and copyright registrations or applications for registrations which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights, unpatented inventions (whether or not patentable); patent applications and patents; industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, computer software, source codes, object codes, executable code, data, databases and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; all other intellectual property; and all common law and other rights throughout the world in and to all of the foregoing. Interest Expense - with respect to any fiscal period, the interest expense incurred for such period as determined in accordance with GAAP plus the Letter of Credit and LC Guaranty fees owing for such period. Interest Period - as applicable to any LIBOR Advance, a period commencing on the date a LIBOR Advance is made, and ending on the date which is one (1) month, two (2) months, three (3) months, or six (6) months later, as may then be requested by Borrower; provided that (i) any Interest Period which would otherwise end on a day which is not a Business Day shall end in the next preceding or succeeding Business Day as is such Lender's custom in the market to which such LIBOR Advance relates; (ii) there remains a minimum of one (1) month, two (2) months, three (3) months or six (6) months (depending upon which Interest Period Borrower selects) in the Original Term (or any Renewal Term then in effect); and (iii) all Interest Periods of the same duration which commence on the same date shall end on the same date. LC Amount - at any time, the aggregate undrawn face amount of all Letters of Credit and LC Guaranties then outstanding. LC Guaranty - any guaranty pursuant to which FCC or any Affiliate of FCC shall guaranty the payment or performance by a Borrower of its reimbursement obligation under any letter of credit. Letter of Credit - any letter of credit procured by FCC hereunder for the account of Borrowers. -92- LIBOR - as applicable to any LIBOR Advance, the rate per annum (rounded upward, if necessary, to the nearest 1/32 of one percent) as determined on the basis of the offered rates for deposits in U.S. dollars, for a period of time comparable to such LIBOR Advance which appears on the Telerate page 3750 as of 11:00 a.m. (London time) on the day that is two (2) London Banking Days preceding the first day of such LIBOR Advance; provided, however, if the rate described above does not appear on the Telerate System on any applicable interest determination date, the LIBOR rate shall be the rate (rounded upwards as described above, if necessary) for deposits in U.S. dollars for a period substantially equal to the interest period on the Reuters Page "LIBO" (or such other page as may replace the LIBO Page on that service for the purpose of displaying such rates), as of 11:00 a.m. (London Time), on the day that is two (2) London Banking Days prior to the beginning of such interest period. If both the Telerate and Reuters systems are unavailable, then the rate for that date will be determined on the basis of the offered rates for deposits in U.S. dollars for a period of time comparable to such LIBOR Advance which are offered by four (4) major banks in the London interbank market at approximately 11:00 a.m. (London time), on the day that is two (2) London Banking Days preceding the first day of such LIBOR Advance as selected by Agent. The principal London office of each of the major London Banks so selected will be requested to provide a quotation of its U.S. dollar deposit offered rate. If at least two (2) such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for a period of time comparable to such LIBOR Advance offered by major banks in New York City at approximately 11:00 a.m. (New York City time), on the day that is two (2) London Banking Days preceding the first day of such LIBOR Advance. In the event that Agent is unable to obtain any such quotation as provided above, it will be determined that LIBOR pursuant to a LIBOR Advance cannot be determined. In the event that the Board of Governors of the Federal Reserve System shall impose a Reserve Percentage with respect to LIBOR deposits of Bank then for any period during which such Reserve Percentage shall apply, LIBOR shall be equal to the amount determined above divided by an amount equal to 1 minus the Reserve Percentage. LIBOR Advance - any Loan bearing interest computed by reference to the LIBOR. Lien - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the Agreement, Borrowers shall be deemed to be the owner of any Property which they have acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. -93- Loan Account - the loan account established on the books of Agent pursuant to Section 3.6 of the Agreement. Loan Documents - the Agreement, the Other Agreements and the Security Documents. Loans - all loans and advances of any kind made by Lenders, and/or by any affiliates of Lenders, pursuant to the Agreement. London Banking Day - any date on which commercial banks are open for business in London, England. Maturity Date - June 30, 2005. Money Borrowed - means (i) Indebtedness arising from the lending of money by any Person to Borrowers; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to Borrowers, (A) which is represented by notes payable or drafts accepted that evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit and (v) Indebtedness of Borrowers under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by Borrowers. Mortgages - the Mortgage and Security Agreements and Deed of Trust and Security Agreements which are to be executed and delivered by Borrowers and Guarantors pursuant to Section 6.4 hereof to secure the Obligations, in form and substance satisfactory to the Agent and otherwise consistent with the form of Exhibit U attached. Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ERISA. Net Worth - the shareholder's equity of a Person as determined in accordance with GAAP. Notice of Assignment - a Notice of Assignment delivered to Agent pursuant to Section 12.10.2 hereof in the form of Exhibit T hereto. Obligations - all Loans and all other advances, debts, liabilities, obligations, covenants and duties, together with all interest, fees and other charges thereon, owing, arising, due or payable from Borrowers to Lenders, Agent, and/or to any affiliate of Lenders or Agent, of any kind or nature, present or future, whether or not evidenced by -94- any note, guaranty or other instrument, whether arising under the Agreement or any of the other Loan Documents or otherwise whether direct or indirect (including those acquired by assignment and arising out of the provision by Agent or its Affiliates of hedging or swap interest rate arrangements for Borrowers and any liabilities incurred with respect to ACH and other cash management arrangements), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. Organizational I.D. Number - with respect to Borrowers, the organizational identification number assigned to Borrowers by the applicable governmental unit or agency of the jurisdiction of organization of Borrowers. Other Agreements - any and all agreements, instruments and documents (other than the Agreement and the Security Documents), heretofore, now or hereafter executed by Borrower, any Subsidiary of Borrower or any other third party and delivered to Lenders in respect of the transactions contemplated by the Agreement. Overadvance - the amount, if any, by which the outstanding principal amount of Revolving Credit Loans plus the LC Amount exceeds the Borrowing Base. Participant - each Person who shall be granted the right by a Lender to participate in any of the Loans described in the Agreement and who shall have entered into a participation agreement in form and substance satisfactory to such Lender. Payment Account - as defined in subsection 4.1.1. Payor - as defined in Section 4.4 of the Agreement. Permitted Liens - any Lien of a kind specified in subsection 9.2.5 of the Agreement. Permitted Purchase Money Indebtedness - Purchase Money Indebtedness and Capitalized Lease Obligations of Borrowers incurred after the date hereof which is secured solely by a Purchase Money Lien. Person - an individual, partnership, corporation, limited liability company, joint stock company, land trust, business trust, or unincorporated organization, or a government (or agency, instrumentally or political subdivision thereof) and shall include any syndicate or group which would be deemed to be a "person" under Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended. Plan - an employee benefit plan now or hereafter maintained for employees of Borrowers that is covered by Title IV of ERISA. Projections - Each Borrower's forecasted Consolidated and consolidating (a) balance sheets, (b) profit and loss statements, (c) cash flow statements, and (d) -95- capitalization statements, all prepared on a consistent basis with each Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. Property or Properties - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Pro Rata - a share of or in all Revolving Credit Loans, participations in the LC Amount (or, in the case of FCC, the portion of the LC Amount in which FCC does not sell a participation interest pursuant to Section 1.3.2 of the Agreement), obligations to indemnify or reimburse FCC as the procurer of Letters of Credit, payments, proceeds, collections, Collateral and expenses, which share for any Lender on any date shall be a percentage arrived at by dividing the amount of the Commitment of such Lender on such date by the aggregate amount of the Commitments of all Lenders on such date. Purchase Money Indebtedness - means and includes (i) Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred at the time of or within ten (10) days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time. Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien. Purchased Rights - as defined in subsection 4.4.2 of the Agreement. Real Property - the interests of the Borrowers and any of their Subsidiaries or Guarantors, either in fee simple or under a long term ground lease, in land and improvements thereto, including, without implied limitation, those locations listed on Exhibit V attached, and any similar interests acquired subsequently. Rentals - as defined in subsection 9.2.13 of the Agreement. Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Required Lenders - Lenders having at least 51% of the aggregate amount of the Commitments or, if the Commitments shall have terminated, Lenders holding at least 51% of the aggregate unpaid principal amount of the Loans. Required Payment - as defined in Section 4.4.1 of the Agreement. -96- Reserve Percentage - the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed on member banks of the Federal Reserve System against "Euro-currency Liabilities" as defined in Regulation D of the Board of Governors of the Federal Reserve System (or any successor) as the same may be modified or supplemented and in effect from time to time. Restricted Investment - any investment made in cash or by delivery of Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (i) investments in one or more Subsidiaries of Borrowers to the extent existing on the Closing Date; (ii) Property to be used in the ordinary course of business; (iii) Current Assets arising from the sale of goods and services in the ordinary course of business of Borrowers and their Subsidiaries; (iv) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one (1) year from the date of acquisition thereof; (v) investments in certificates of deposit maturing within one (1) year from the date of acquisition issued by a bank or trust company organized under the laws of the United States or any state thereof having capital surplus and undivided profits aggregating at least $100,000,000; and (vi) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof. Revolving Credit Commitment - for each Lender, the obligation of such Lender to make Revolving Credit Loans in an aggregate principal amount at any one time outstanding up to but not exceeding (a) in the case of any such Lender originally party hereto, the sum of (i) the amount set opposite the name of such Lender on the signature pages hereto plus (ii) the aggregate amount of Revolving Credit Commitments acquired by such Lender from other Lenders pursuant to Sections 4.4.2, 12.10 and 13.3 hereof minus (iii) the aggregate amount of Revolving Credit Commitments transferred by such Lender to one or more other Lenders pursuant to Sections 4.4.2, 12.10 and 13.3 hereof and (b) in the case of any such Lender that was not originally party hereto, (i) the aggregate amount of Revolving Credit Commitments acquired by such Lender from one or more other Lenders pursuant to Sections 4.4.2, 12.10 and 13.3 hereof, minus (ii) the aggregate amount of Revolving Credit Commitments transferred by such Lender to one or more -97- other Lenders pursuant to Sections 4.4.2, 12.10 and 13.3 hereof, in each case, as such obligation may be reduced from time to time. Revolving Credit Commitment Percentage - as to any Lender, the ratio of (a) the amount of the Revolving Credit Commitment of such Lender to (b) the aggregate amount of the Revolving Credit Commitments of all of the Lenders. Revolving Credit Commitment Termination Date - June 30, 2005. Revolving Credit Loan - a Loan made by Lender as provided in Section 2.1 of the Agreement. Revolving Credit Note(s) - the Promissory Notes to be executed by Borrowers on or about the Closing Date in favor of each of the Lenders to evidence the Revolving Credit Loans, which shall be in substantially the form of Exhibit A to the Agreement. Schedule of Accounts - as defined in subsection 7.2.1 of the Agreement. Security - shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Agreements - the Security Agreements executed and delivered by each Guarantor in form and substance satisfactory to Agent. Security Documents - the Security Agreements, the Mortgages, the Guaranty Agreements, and all other instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations. Solvent - as to any Person, that such Person (i) owns Property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Standby Letter of Credit - a Letter of Credit issued for any purpose other than the purchase of goods. Subordinated Debt - Indebtedness of Borrowers that is subordinated to the Obligations in a manner satisfactory to Agent. Subsidiary - any Person of which the Borrower owns, directly or indirectly through one or more intermediaries, (i) shares of stock having ordinary voting power to elect a majority of the Board of Directors (or equivalent governing body) of such Person (irrespective of whether at the time stock of any other class or classes of such Person shall or might have voting power upon the occurrence of any contingency); or (ii) more than -98- 50% of the Voting Stock or any other ownership or equity interest in such Person; or (iii) controls the management of such Person. SwingLine Loans - as defined in Section 3.1.3(ii) of the Agreement. SwingLine Notes - the Promissory Note to be executed by Borrowers on or about the Closing Date in favor of FCC to evidence the SwingLine Loans, which shall be in substantially the form of Exhibit A to the Agreement. Total Credit Facility - $150,000,000. Total Liabilities - at any date means all amounts properly classified as liabilities on a balance sheet at such date in accordance with GAAP, plus all reserves for contingencies and all other potential liabilities for which no reserves have previously been established on such balance sheet, to the extent such amounts are not already classified as liabilities in accordance with GAAP. Type of Organization - with respect to Borrowers, the kind or type of entity by which each Borrower is organized, such as a corporation or limited liability company. UCC - the Uniform Commercial Code as in effect in the State of Connecticut on the date of this Agreement, as the UCC may be amended or otherwise modified, including by the UCC Revisions. UCC Revisions - the revisions to Article 9 and other Articles of the Uniform Commercial Code, as adopted by the State of Connecticut, effective October 1, 2001. Voting Stock - Securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Other Terms. All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the UCC to the extent the same are used or defined therein. Certain Matters of Construction. The terms "herein," "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. -99- LIST OF EXHIBITS Exhibit A Form of Revolving Credit Note Exhibit B Form of SwingLine Note Exhibit C Each Borrower's and each Subsidiary's Business Locations Exhibit D Jurisdictions in which each Borrower and each Subsidiary is Authorized to do Business Exhibit E Capital Structure of Borrowers Exhibit F Corporate Names Exhibit G Guarantees Exhibit H Tax Identification Numbers of Subsidiaries Exhibit I Patents, Trademarks, Copyrights and Licenses Exhibit J Contracts Restricting any Borrower's Right to Incur Debts Exhibit K Litigation Exhibit L Capitalized Leases Exhibit M Operating Leases Exhibit N Pension Plans Exhibit O Labor Contracts Exhibit P Compliance Certificate Exhibit Q Permitted Liens Exhibit R Borrowing Base Certificate Exhibit S Affiliate Transactions Exhibit T Notice of Assignment and Form of Assignment and Acceptance Agreement Exhibit U Form of Mortgage Exhibit V Real Property Exhibit W Bank Accounts -100- EXHIBIT A FORM OF REVOLVING CREDIT NOTE $______________ __________________, 20__ ____________, __________ FOR VALUE RECEIVED, the undersigned, UNITED NATURAL FOODS, INC., a Delaware corporation with its chief executive office and principal place of business located at 260 Lake Road, Dayville, Connecticut 06241 ("UNF"), MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED, a California corporation with its chief executive office and principal place of business located at 12745 Earhart Avenue, Auburn, California 95602 ("MPW"), NUTRASOURCE, INC., a Washington corporation with its chief executive office and principal place of business located at 12745 Earhart Avenue, Auburn, CA 95602 ("NutraSource"), RAINBOW NATURAL FOODS, INC., a Colorado corporation with its chief executive office and principal place of business located at 260 lake Road, Dayville, CT 06241 ("Rainbow"), STOW MILLS, INC., a Vermont corporation with its chief executive office and principal place of business located at 70 Stow Drive, Chesterfield, New Hampshire 03443 ("SMI"), and UNITED NATURAL FOODS PENNSYLVANIA, INC. with its chief executive office and principal place of business located at 70 Stow Drive, Chesterfield, NH 03443 ("UNFPA") (jointly and severally, the "Borrowers") jointly and severally promise to pay to the order of _______________ ("Lender"), at the office of the Agent, defined below, located at 200 Glastonbury Boulevard, Glastonbury, Connecticut 06033, in lawful money of the United States of America and in immediate available funds, the principal amount of ____________________ _______________________ Dollars ($_______________________) or such lesser sum as may constitute Lender's Pro Rata share of the outstanding amount of all Revolving Credit Loans made pursuant to the Loan Agreement referred to below, in accordance with the terms thereof. This Revolving Credit Note (the "Note") is a Revolving Credit Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement among Borrowers, Fleet Capital Corporation as administrative and collateral agent ("Agent") for itself and the lenders from time to time a party thereto (the "Lenders"), Fleet Securities, Inc. as syndication arranger for the Lenders ("Arranger"), Citizens Bank of Massachusetts as the syndication agent for the Lenders (the "Syndication Agent") and U.S. Bank National Association as the documentation agent for the Lenders (the "Documentation Agent") dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. The rate of interest in effect hereunder shall be calculated with reference to the Base Rate or LIBOR, as applicable, as more specifically provided in the Loan Agreement. The interest due shall be computed and shall be payable in the manner provided in the Loan Agreement. Except as otherwise expressly provided in the Loan Agreement, if any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof 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. Notwithstanding the foregoing, if any portion of the Revolving Credit Loans evidenced by this promissory note constitutes a LIBOR Advance, and an extension of the maturity of any payment hereon would cause the maturity thereof to occur during the next calendar month, then such payment shall mature on the next preceding Business Day. This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrowers may also terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 5 of the Loan Agreement. Upon the occurrence and continuation of any one or more of the Events of Default specified in the Loan Agreement which have not been cured by Borrowers or waived by Agent, Agent may declare all Obligations evidenced hereby to be immediately due and payable (except with respect to any Event of Default set forth in subsection 11.1.10 of the Loan Agreement, in which case all Obligations evidenced hereby shall automatically become immediately due and payable without the necessity of any notice or other demand) without presentment, demand, protest or any other action or obligation of the Agent or the Lender. Time is of the essence of this Note. Borrowers hereby waive presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Agent or Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Agent or Lender of any right or remedy preclude any other right or remedy. Subject to the terms of the Loan Agreement, Agent, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrowers, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrowers. Borrowers agree that, without releasing or impairing Borrowers' liability hereunder, Agent may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. 2 The validity, interpretation and enforcement of this promissory note shall be governed by the internal laws of the State of Connecticut without giving effect to the conflict of laws principles thereof. UNITED NATURAL FOODS, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ NUTRASOURCE, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ RAINBOW NATURAL FOODS, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ UNITED NATURAL FOODS OF PENNSYLVANIA, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ 3 STOW MILLS, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ 4 EXHIBIT B FORM OF SWINGLINE NOTE $10,000,000.00 __________________, 2001 Hartford, Connecticut FOR VALUE RECEIVED, the undersigned, UNITED NATURAL FOODS, INC., a Delaware corporation with its chief executive office and principal place of business located at 260 Lake Road, Dayville, Connecticut 06241 ("UNF"), MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED, a California corporation with its chief executive office and principal place of business located at 12745 Earhart Avenue, Auburn, California 95602 ("MPW"), NUTRASOURCE, INC., a Washington corporation with its chief executive office and principal place of business located at 12745 Earhart Avenue, Auburn, CA 95602 ("NutraSource"), RAINBOW NATURAL FOODS, INC., a Colorado corporation with its chief executive office and principal place of business located at 260 Lake Road, Dayville, CT 06241 ("Rainbow"), STOW MILLS, INC., a Vermont corporation with its chief executive office and principal place of business located at 70 Stow Drive, Chesterfield, New Hampshire 03443 ("SMI"), and UNITED NATURAL FOODS PENNSYLVANIA, INC. with its chief executive office and principal place of business located at 70 Stow Drive, Chesterfield, NH 03443 ("UNFPA") (jointly and severally, the "Borrowers") jointly and severally promise to pay to the order of Fleet Capital Corporation ("Lender"), at the office of the Agent, defined below, located at 200 Glastonbury Boulevard, Glastonbury, Connecticut 06033, in lawful money of the United States of America and in immediate available funds, the principal amount of Ten Million Dollars ($10,000,000.00) or such lesser sum as may constitute the outstanding amount of all SwingLine Loans made pursuant to the Loan Agreement referred to below, in accordance with the terms thereof. This SwingLine Note (the "Note") is the SwingLine Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement among Borrowers, Fleet Capital Corporation ("Agent") as administrative and collateral agent for itself and the Lenders from time to time a party thereto ("Lenders") and Lenders dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. The rate of interest in effect hereunder shall be calculated with reference to the Base Rate, as more specifically provided in the Loan Agreement. The interest due shall be computed and shall be payable in the manner provided in the Loan Agreement. Except as otherwise expressly provided in the Loan Agreement, if any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof 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. This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrowers may also terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement. Upon the occurrence and continuation of any one or more of the Events of Default specified in the Loan Agreement which have not been cured by Borrowers or waived by Agent, Agent may declare all Obligations evidenced hereby to be immediately due and payable (except with respect to any Event of Default set forth in subsection 10.1.10 of the Loan Agreement, in which case all Obligations evidenced hereby shall automatically become immediately due and payable without the necessity of any notice or other demand) without presentment, demand, protest or any other action or obligation of the Agent or the Lender. Time is of the essence of this Note. Borrowers hereby waive presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Agent or Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Agent or Lender of any right or remedy preclude any other right or remedy. Subject to the terms of the Loan Agreement, Agent, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrowers, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrowers. Borrowers agree that, without releasing or impairing Borrowers' liability hereunder, Agent may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. The validity, interpretation and enforcement of this promissory note shall be governed by the internal laws of the State of Connecticut without giving effect to the conflict of laws principles thereof. UNITED NATURAL FOODS, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ NUTRASOURCE, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ RAINBOW NATURAL FOODS, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ UNITED NATURAL FOODS OF PENNSYLVANIA, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ STOW MILLS, INC. _________________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ EXHIBIT C BUSINESS LOCATIONS - [complete for each Borrower] 1. Borrower currently has the following business locations, and no others: Chief Executive Office: Other Locations: 2. Borrower maintains its books and records relating to Accounts and General Intangibles at: 3. Borrower has had no office, place of business or agent for process located in any county other than as set forth above, except: 4. Each Subsidiary currently has the following business locations, and no others: Chief Executive Office: Other Locations: 5. Each Subsidiary maintains its books and records relating to Accounts and General Intangibles at: 6. Each Subsidiary has had no office, place of business or agent for process located in any county other than as set forth above, except: 7. The following bailees, warehouseman, similar parties and consignees hold Inventory of Borrower or one of its Subsidiaries: ================================================================================ Nature of Amount of Owner of Name and Address of Party Relationship Inventory Inventory ------------------------- ------------ --------- --------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT D JURISDICTIONS IN WHICH BORROWER AND ITS SUBSIDIARIES ARE AUTHORIZED TO DO BUSINESS [COMPLETE FOR EACH BORROWER] Name of Entity Jurisdictions -------------- ------------- EXHIBIT E CAPITAL STRUCTURE [complete for each Borrower] 1. The classes and number of authorized shares of Borrower and each Subsidiary and the record owner of such shares are as follows: Borrower: ================================================================================ Number of Shares Number of Shares Authorized Issued and but Class of Stock Outstanding Record Owners Unissued - -------------- ----------- ------------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ Subsidiaries: ================================================================================ Number of Shares Number of Shares Authorized Issued and but Class of Stock Outstanding Record Owners Unissued - -------------- ----------- ------------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 2. The number, nature and holder of all other outstanding Securities of Borrower and each Subsidiary are as follows: 3. The correct name and jurisdiction of incorporation of each Subsidiary of Borrower and the percentage of its issued and outstanding shares owned by Borrower are as follows: ================================================================================ Percentage of Shares Jurisdiction of Owned by Name Incorporation Borrower ---- ------------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 4. The name of each of Borrowers' corporate or joint venture Affiliates and the nature of the affiliation are as follows: EXHIBIT F CORPORATE NAMES [Complete for each Borrower] 1. Borrowers' correct corporate name, as registered with the Secretary of State of the State of ______________, is: 2. In the conduct of its business, Borrower has used the following names: 3. Each Subsidiaries' correct corporate name, as registered with the Secretary of State of the State of its incorporation, is: 4. In the conduct of its business, each Subsidiary has used the following names: 5. Borrowers' Organizational I.D. Number is: 6. Each Subsidiaries' Organizational Number(s) is/are: 7. Borrowers' Type of Organization is: 8. Each Subsidiaries Type(s) of Organization is/are: EXHIBIT G GUARANTEES EXHIBIT H TAX IDENTIFICATION NUMBERS OF SUBSIDIARIES [Complete for each Borrower] Subsidiary Number ---------- ------ EXHIBIT I PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES [Complete for each Borrower] 1. Borrowers' and its Subsidiaries' patents: ================================================================================ Status in Federal Patent Registration Registration Patent Owner Office Number Date ------ ----- ------ ------ ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 2. Borrowers' and its Subsidiaries' trademarks: ================================================================================ Status in Federal Trademark Registration Registration Trademark Owner Office Number Date --------- ----- ------ ------ ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 3. Borrowers' and its Subsidiaries' copyrights: ================================================================================ Status in Federal Copyright Registration Registration Copyrights Owner Office Number Date ---------- ----- ------ ------ ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 4. Borrowers' and its Subsidiaries' licenses (other than routine business licenses, authorizing them to transact business in local jurisdictions): ================================================================================ Term of Name of License Nature of License Licensor License --------------- ----------------- -------- ------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT J CONTRACTS RESTRICTING BORROWER'S RIGHT TO INCUR DEBTS [Complete for each Borrower] Contracts that restrict the right of Borrower to incur Indebtedness: ================================================================================ Nature of Term of Title of Contract Identity of Parties Restriction Contract ----------------- ------------------- ----------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT K LITIGATION [Complete for each Borrower] 1. Actions, suits, proceedings and investigations pending against Borrower or any Subsidiary: ================================================================================ Jurisdiction or Title of Action Nature of Action Complaining Parties Tribunal --------------- ---------------- ------------------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 2. The only threatened actions, suits, proceedings or investigations of which Borrower or any Subsidiary is aware are as follows: EXHIBIT L CAPITALIZED LEASES [Complete for each Borrower] Borrower and its Subsidiaries have the following capitalized leases: ================================================================================ Lessee Lessor Term of Lease Property Covered ------ ------ ------------- ---------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT M OPERATING LEASES [Complete for each Borrower] Borrower and its Subsidiaries have the following operating leases: ================================================================================ Lessee Lessor Term of Lease Property Covered ------ ------ ------------- ---------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT N PENSION PLANS [Complete for each Borrower] Borrower and its Subsidiaries have the following Plans: ================================================================================ Party Type of Plan ----- ------------ - -------------------------------------------------------------------------------- Borrower - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [Subsidiaries] - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT O COLLECTIVE BARGAINING AGREEMENTS; LABOR CONTROVERSIES [Complete for each Borrower] 1. Borrower and its Subsidiaries are parties to the following collective bargaining agreements: ================================================================================ Type of Agreement Parties Term of Agreement ----------------- ------- ----------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 2. Material grievances, disputes of controversies with employees are as follows: ================================================================================ Parties Involved Nature of Grievance, Dispute or Controversy ---------------- ------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 3. Threatened strikes, work stoppages and asserted pending demands for collective bargaining are as follows: ================================================================================ Parties Involved Nature of Matter ---------------- ---------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT P COMPLIANCE CERTIFICATE UNITED NATURAL FOODS, INC. 260 Lake Road Dayville, Connecticut 06241 __________________, 20__ Fleet Capital Corporation 200 Glastonbury Boulevard Glastonbury, CT 06033 Attention: Loan Administration Manager The undersigned, the chief financial officer of _________ _______________________, a _______________ corporation ("Borrower"), gives this certificate to Fleet Capital Corporation ("Agent") in accordance with the requirements of subsection 9.1.3 of that certain Loan and Security Agreement dated August __, 2001, among United Natural Foods, Inc. and certain of its subsidiaries and affiliates "Borrower"), the financial institutions party thereto as lenders ("Lenders"), Agent, Fleet Securities, Inc. as arranger for the Lenders, Citizens Bank of Massachusetts as syndication agent for the Lenders and U.S. Bank National Association as documentation agent for the Lenders ("Loan Agreement"). Capitalized terms used in this Certificate, unless otherwise defined herein, shall have the meanings ascribed to them in the Loan Agreement. 1. Based upon my review of the balance sheets and statements of income of Borrower for the [fiscal year] [quarterly period] ending __________________, 20__, copies of which are attached hereto, I hereby certify that: (a) the Fixed Charge Coverage Ratio is ___ to 1; (b) the Net Worth is $______________; and (c) Capital Expenditures during the period and for the fiscal year-to-date total $__________ and $__________, respectively. 2. No Default exists on the date hereof, other than ________________________________________ [if none, so state]. 3. No Event of Default exists on the date hereof, other than ________________________________________ [if none, so state]. Very truly yours, _______________________________ Its Chief Financial Officer EXHIBIT Q PERMITTED LIENS ================================================================================ Secured Party Nature of Lien ------------- -------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT R BORROWING BASE CERTIFICATE [To Be Furnished by Lender] EXHIBIT S AFFILIATE TRANSACTIONS EXHIBIT T NOTICE OF ASSIGNMENT EX-10.13 5 ex10-13.txt September 26, 2002 United Natural Foods, Inc. 260 Lake Road Dayville, CT 06241 Attention: Todd Weintraub, Chief Financial Officer RE: Second Amendment to Loan and Security Agreement Dear Todd: Reference is made to the Loan and Security Agreement dated as of August 31, 2001 (as amended, the "Loan Agreement") among United Natural Foods, Inc. ("UNF"), Mountain People's Warehouse Incorporated ("MPW"), Nutrasource, Inc. ("Nutrasource"), Rainbow Natural Foods, Inc. ("Rainbow"), Stow Mills, Inc. ("SMI"), United Natural Foods Pennsylvania, Inc. ("UNFPA" and together with UNF, MPW, Nutrasource, Rainbow and SMI, the "Borrowers") each of the Lenders identified under the caption "Lenders" on the signature pages thereto and Fleet Capital Corporation as administrative and collateral agent for the Lenders (the "Agent"), Citizens Bank of Massachusetts (the "Syndication Agent"), U.S. Bank National Association (the "Documentation Agent") and Fleet Securities, Inc. (the "Arranger"), as amended by First Amendment dated April 16, 2002. Capitalized terms not defined herein shall have the meanings ascribed thereto in the Loan Agreement. UNF is entering into a certain Asset Purchase Agreement with Blooming Prairie Cooperative Warehouse ("BPC") pursuant to which UNF will purchase certain assets and assume certain liabilities of BPC, all as described therein (the "BPC Transaction"). UNF has requested the consent of the Lenders to the BPC Transaction and the Lenders have agreed to consent thereto, on the terms and conditions set forth herein. Accordingly, the parties hereto hereby agree as follows: 1. Waivers and Amendments a. Exhibits. Effective on the date that the BPC Transaction is consummated (the "BPC Closing Date"), Exhibits C, F, L, M, N and Q to the Loan Agreement shall be deemed to be supplemented with (and thereafter shall be deemed to include) the information listed on Supplemental Exhibits C, F, L, M, N and Q hereto. b. Acquisition of over $5,000,000. Section 9.2.1(a) is hereby waived insofar as it applies to the BPC Transaction. c. Subordination of Note. Section 9.2.1(f) is hereby waived insofar as it requires the execution of a subordination agreement with respect to the promissory note in the maximum amount of $3,000,000 from UNF to BPC dated as of the BPC Closing Date (the "BPC Note"), which shall be unsecured. d. Permitted Indebtedness. Section 9.2.3 is hereby waived insofar as it would prohibit UNF from (i) executing and delivering the BPC Note and incurring the indebtedness evidenced thereby, (ii) assuming indebtedness of BPC to Iowa City Bank and Trust in connection with the BPC Transaction so long as such indebtedness is repaid at or about the BPC Closing Date, and (iii) assuming trade indebtedness of BPC not in excess of $13,000,000 in connection with the BPC Transaction. e. Disposition of Assets. Section 9.2.9 is hereby waived insofar as it would prohibit UNF from selling the real property to be acquired from BPC located at 2340 Heinz Road, Iowa City, Iowa (the "BPC Real Estate"), so long as proceeds of sale of such real property in excess of amounts used to pay expenses incurred in connection with such sale are sufficient to repay the BPC Note and are in fact so used, with any excess proceeds to be remitted to Agent to be applied against outstanding Revolving Credit Loans. 2. Covenants and Agreements. In consideration of the Lenders' agreements set forth herein, the Borrowers hereby agree as follows. The agreements set forth below shall be deemed to constitute covenants under the Loan Agreement. a. Within 30 days after the BPC Closing Date, the Borrowers agree to provide to Agent a landlord waiver and consent in form reasonably acceptable to Agent with respect to any location listed on Supplemental Exhibit C hereto. b. Within 3 days after the BPC Closing Date, the Borrowers shall provide to the Agent insurance certificates otherwise complying with the terms of the Loan Agreement and including all additional locations listed on Supplemental Exhibit C hereto. c. Within 30 days after the BPC Closing Date, UNF shall provide to the Agent a duly executed Mortgage and Security Agreement with respect to the BPC Real Estate, together with a title insurance policy and survey or site plan, all reasonably acceptable to Agent. d. Within 15 days after the BPC Closing Date, UNF shall take such actions as may be necessary to ensure that the Agent holds a duly perfected security interest in all notes, instruments and other investment property constituting a part of the assets purchased pursuant to the BPC Transaction, including endorsing and delivering possession of any such property to Agent. e. Within 30 days after the BPC Closing Date, UNF shall take such actions as may be necessary to ensure that the Agent holds a duly perfected security interest in all registered trademarks purchased pursuant to the BPC Transaction, including such filings with the United States Patent and Trademark Office as may be required by Agent. -2- f. Within 30 days after the BPC Closing Date, UNF shall provide evidence that it is qualified to do business as a foreign corporation in the state of each location listed on Supplemental Exhibit C. g. UNF shall complete the BPC Transaction substantially in accordance with the terms of the Asset Purchase Agreement delivered pursuant to Section 4(b) hereof, without material amendment or waiver, not later than October 30, 2002. h. UNF agrees that Agent shall complete a field exam with respect to the assets and liabilities of BPC, including without limitation, inventory and accounts, on or before the BPC Closing Date; and further agrees that if such a field exam is not completed by such date, Agent may, in its discretion, impose reserves or reduce advance rates with respect to inventory and accounts purchased from BPC and used for purposes of calculating the Borrowing Base, until such a field exam is completed. 3. Representations and Warranties. The Borrowers hereby represent and warrant as follows: a. Power, Authority, Etc. The Borrowers have the power and authority for the making and performing of this Second Amendment. This Second Amendment has been duly executed and delivered by or on behalf of the Borrowers pursuant to authority legally adequate therefor, and this Second Amendment is in full force and effect and is a legal, valid and binding obligation of the Borrowers enforceable in accordance with its terms subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws and equitable principles affecting the enforcement of creditors' rights generally. b. Incorporation of Representations and Warranties. The representations and warranties of the Borrowers contained in the Loan Agreement, after giving effect to the amendments thereto contemplated hereby, and except for any changes resulting only from the passage of time, are true and correct on and as of the date hereof as though made on and as of the date hereof and such representations and warranties are hereto incorporated in this Second Amendment as though fully set forth herein. c. Corporate Purposes. The Borrowers hereby represent that the BPC Transaction is within the UNF's general corporate purposes. 4. Conditions Precedent. This Amendment and the Lender's obligations hereunder shall not be effective until each of the following conditions are satisfied (the "Amendment Effective Date"): a. Borrowers shall have duly executed and delivered this Amendment; b. Borrowers shall have delivered to Agent or its counsel a complete copy of the Asset Purchase Agreement evidencing the BPC Transaction, including all exhibits and schedules thereto, certified as true and complete. -3- c. All requisite corporate action and proceedings of the Borrower in connection with this Amendment shall be satisfactory in form and substance to Agent; and d. There shall have occurred no Default or Event of Default under the Loan Agreement. 5. Miscellaneous a. Counterparts. This Second Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Second Amendment by signing any such counterpart. b. Force and Effect. Except as amended or modified by this Second Amendment, the Loan Agreement and each of its terms and provisions, shall continue in full force or effect. c. Loan Document. This Second Amendment and all other documents executed in connection herewith are "Loan Documents" as such term is defined in the Loan Agreement. This Second Amendment and the other documents executed and delivered in connection herewith set forth the entire agreement of the parties with respect to the subject matter thereof and supersede any prior agreement and contemporaneous oral agreements of the parties concerning their subject matter. [remainder of page intentionally left blank] -4- IN WITNESS WHEREOF, the parties have executed this agreement as of the date first above written. UNITED NATURAL FOODS, INC. By: /s/ TODD WEINTRAUB ------------------ Name: Todd Weintraub Title: Chief Financial Officer MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED By: /s/ MICHAEL S. FUNK ------------------- Name: Michael S. Funk Title: Chief Executive Officer and Vice Chairman of the Board NUTRASOURCE, INC. By: /s/ MICHAEL S. FUNK ------------------- Name: Michael S. Funk Title: Chief Executive Officer and Vice Chairman of the Board RAINBOW NATURAL FOODS, INC. By: /s/ MICHAEL S. FUNK ------------------- Name: Michael S. Funk Title: Chief Executive Officer and Vice Chairman of the Board STOW MILLS, INC. By: /s/ STEVEN TOWNSEND ------------------- Name: Steven Townsend Title: President and Director -5- UNITED NATURAL FOODS OF PENNSYLVANIA, INC. By: /s/ STEVEN TOWNSEND ------------------- Name: Steven Townsend Title: President and Director FLEET CAPITAL CORPORATION, as Administrative Agent By: /s/ KIM B. BUSHEY ----------------- Name: Kim B. Bushey Title: Senior Vice President FLEET CAPITAL CORPORATION, as a Lender By: ____________________________ Name: ______________________ Title: _____________________ CITIZENS BANK OF MASSACHUSETTS, as a Lender By: /s/ PAUL R. CRIMLISK -------------------- Name: Paul R. Crimlisk Title: Vice President U.S. BANK NATIONAL ASSOCIATION, as a Lender By: /s/ JOHN W. BALL ---------------- Name: John W. Ball Title: Vice President -6- PNC BANK, NATIONAL ASSOCIATION, a Lender By: /s/ JOHN C. WILLIAMS ---------------- Name: John C. Williams Title: Vice President NATIONAL CITY BANK, a Lender By: ____________________________ Name: ______________________ Title: _____________________ FIRST PIONEER FARM CREDIT, ACA, a Lender By: /s/ CAROL L. SOBSON --------------- Name: Carol L. Sobson Title: Assistant Vice President ISRAEL DISCOUNT BANK OF NEW YORK, a Lender By: ____________________________ Name: ______________________ Title: _____________________ WEBSTER BANK, a Lender By: ____________________________ Name: ______________________ Title: _____________________ -7- SOVEREIGN BANK, a Lender By: /s/ CHRISTOPHER T. PHELAN --------------------- Name: Christopher T. Phelan Title: Senior Vice President -8- EX-10.19 6 ex10-19.txt I.H.F.&S. Multiple Occupancy Net Lease 6/00 This Lease, dated the ____________ day of _____________ 2001 __________, between TWO SEVENTY - M - EDISON, a New Jersey general partnership having an office at 205 Mill Road, Edison, New Jersey 08837 (hereinafter designated as "Landlord"), and UNITED NATURAL TRADING CO., a Delaware corporation, d/b/a HERSHEY IMPORT CO., INC., having an office at 700 East Lincoln Avenue, Rahway, New Jersey 07065 (hereinafter designated as "Tenant"). W I T N E S S E T H: FOR AND IN CONSIDERATION of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby covenant and agree as follows: ARTICLE I - DEMISE and PREMISES Section 1.01. Demise and Premises. Landlord does hereby demise and lease to Tenant and Tenant does hereby take and hire from Landlord a portion of all that certain tract or parcel of land, together with the building and improvements (the building and improvements being leased to Tenant hereunder collectively hereinafter designated as the "Building") erected thereon by Landlord, as provided herein, situate, lying and being in the Township of Edison, County of Middlesex, State of New Jersey and shown on the plan(s) designated Exhibit A, annexed hereto and made a part hereof, the lands aforesaid being more particularly described on Exhibit B annexed hereto and made a part hereof, together with the fixtures and equipment therein and the appurtenances now or hereafter belonging or pertaining thereto (all referred to hereinafter as the "Demised Premises" or the "Premises"), subject to the use, by various tenants of the building of which the Demised Premises forms a part, of Common Drive Easement Area 'A', Common Drive Easement Area 'B' and Common Drive Easement Area 'C', as shown on Exhibit A, and further subject to the use, by various tenants of a building on the adjacent parcel, of Common Drive Easement Area 'A' and Common Drive Easement Area 'B'. TO HAVE AND TO HOLD for the Term and at the rents as herein provided, subject to the terms, covenants and conditions herein contained which each of the parties hereto expressly covenants and agrees to keep, perform and observe. ARTICLE II - TERM and COMMENCEMENT Section 2.01. Term and Commencement. (a) Term. The term of this Lease is five (5) years ("Term"). (b) Commencement of Term. The Term shall commence on April 1, 2002 (hereinafter designated as "Commencement Date") and shall terminate at 5:00 P.M. (prevailing time) on March 31, 2007. (c) Commencement Date Agreement. Within ten (10) days after the request of either party, Landlord and Tenant shall execute, acknowledge and deliver to each other duplicate originals of an agreement, in recordable form, setting forth the Commencement Date. Section 2.02. Right of Renewal. Provided this Lease is not in default, the Tenant is granted a right of renewal of this Lease as follows: At the option of the Tenant, the Term of this Lease may be extended for two (2) renewal period(s) of three (3) years and two (2) years respectively, each by written notice to the Landlord at least six (6) months prior to the expiration of the Term, or any renewal Term thereof, as the Lease may be. Upon valid exercise of any such rights of renewal, the terms of this Lease shall remain in full force and effect except that Basic Rent shall be as stipulated in Section 5.03 and the Term shall include the exercised renewal term. -1- I.H.F.&S. M.O.N.L. 2/99 ARTICLE III - PLANS Section 3.01. Plans. The parties hereto have approved plans of the Building (hereinafter called "Plans") prepared by Abraham Hertzberg, Consulting Engineer, P.C (hereinafter called "Architect") and attached hereto as Exhibit A. It is to be noted that the Demised Premises consist of a portion of the one-story building which encloses a total area of 270,000 square feet. The portion of said building demised by said Lease as shown on the Plans comprises 110,125 square feet. The Demised Premises also include the land under the portion of the building aforesaid, as well as land outside of the building area within the "Lease Line" as shown on Exhibit A. The Demised Premises are more particularly described in Exhibit B. Section 3.02. Work To Be Performed By Landlord. Landlord represents that it will perform certain "Work To Be Performed By Landlord" as specifically set forth on Exhibit A. Landlord shall perform such work in an expeditious manner and there shall be no reduction in Basic Rent or additional rent pending the completion of said work. Landlord represents that Items numbered 1 (office portions only), 5 through 9, 12, 13 and 19 of the Work To Be Performed, and the Special Tenant Improvements, as set forth in Section 28.02 below (all said work herein after known as "Office Work"), and Items numbered 1 (balance of work), 10, 11 and 18 shall be completed on or before April 15, 2002. All other items shall be completed on or before May 31, 2002. ARTICLE IV - LANDLORD'S COVENANTS Section 4.01. No Waiver by Tenant. No act of Tenant, including the taking possession of the Demised Premises, shall constitute a waiver by Tenant of any of Landlord's obligations respecting the Building or to correct any defects in materials or workmanship as provided in this Lease. Section 4.02. Landlord's Covenants Regarding Construction. Landlord represents, warrants and covenants that on the Commencement Date: (i) The Building will be structurally safe and sound and that all parts thereof and all mechanical equipment therein (except such as may be installed by Tenant) will be in good working order; (ii) Liability of the Landlord as to the foregoing (i) shall be limited to one (1) year and to the extent set forth in Section 10.01; and (iii) All utilities serving the Demised Premises will have been installed and paid for. ARTICLE V - RENT and PAYMENT Section 5.01. Rent During Term. Landlord reserves and Tenant covenants to pay to Landlord during the Term of this Lease without demand or notice, and without any setoff or deduction, a net basic rental (herein called "Basic Rent") in advance on the first day of each and every month, as follows: 4/1/2002 - 3/31/2005 $385,437.50 payable $32,119.79/month 4/1/2005 - 3/31/2007 $423,981.25 payable $35,331.77/month Notwithstanding the above, Tenant shall not be required to pay Basic Rent until the business day following Landlord's delivery of written notice that the Office Work has been substantially completed. Substantially Completed, as used in this Section, is intended to constitute that stage of completion which will permit the Tenant to use the office areas for their intended purpose without any substantial interference by reason of any failure of Landlord to finish punch list items. Section 5.02. Payment of Rent. The Basic Rent and all additional rents and moneys payable to Landlord under this Lease shall be paid at the above address of Landlord or at such other address or to any entity Landlord transfers the management of the real property leased hereunder to as may be specified by Landlord from time to time by notice given to Tenant. Section 5.03. Rent During Renewal Term(s). In the event the Tenant shall exercise the option(s) to renew this Lease for any of the renewal periods provided for in Section 2.02, the annual Basic Rent during each renewal period shall be adjusted for the applicable term thereof by multiplying $400,855.00 by the "Index Change" hereinafter defined, provided, however, that the Basic Rent during the renewal period(s) shall not be less than the Basic Rent paid upon expiration of the immediately preceding period. Section 5.04. The first monthly installment of Basic Rent shall be due and payable by Tenant on the Commencement Date. Subsequent monthly installments of Basic Rent shall be due and payable by Tenant on or before the first day of each month following the Commencement Date and continuing thereafter until the expiration of the Term. Basic Rent for the Fractional Month, if any, shall be prorated and shall be due and payable by Tenant on the first day of the month following the month in which the Commencement Date occurs. Upon the execution of this Lease, Tenant shall pay to Landlord a deposit in the amount of the first monthly installment of Basic Rent which deposit shall be held by Landlord as additional security for Tenant's performance of this Lease and applied by Landlord against the first monthly installment of Basic Rent due on the Commencement Date. -2- I.H.F.&S. M.O.N.L. 2/99 ARTICLE VI - TAXES and IMPOSITIONS Section 6.01. Real Estate Taxes. Tenant shall pay to Landlord, as additional rent, its pro rata share of real estate taxes and assessments levied or assessed against the property of which the Demised Premises forms a part (hereinafter "Landlord's Property") and all those real estate taxes and assessments levied or assessed against the Demised Premises or any part thereof applicable to the period of time Tenant leases the Demised Premises, whether payable during the Term of the Lease, or subsequent to the expiration of this Lease. This obligation shall include those real estate taxes and assessments presently in effect, as well as those enacted in the future. Tenant acknowledges that Real Estate Taxes are currently payable to the local assessing authority on a quarterly basis and that such tax bills represent payment of Real Estate Taxes applicable to the quarter in which the bill is issued. Such payment as to all real estate taxes or assessments levied or assessed against Landlord's Property or the Demised Premises or any part thereof, shall be made by Tenant to Landlord within ten (10) days after Tenant's receipt of an invoice or statement from Landlord setting forth the amount of such taxes or assessments and Tenant's pro rata share thereof. Such invoice or statement shall include a copy of the Real Estate Tax bill or assessment for which Tenant is responsible. The real estate taxes and assessments aforesaid shall be apportioned by Landlord among tenants or users of Landlord's Property, including Landlord, to arrive at Tenant's pro rata share of real estate taxes and assessments. The computation of Tenant's pro rata share of taxes on land and buildings shall be made by multiplying the real estate taxes or assessments levied against the Landlord on Landlord's Property of which the Demised Premises forms a part by a fraction the numerator of which is the number of square feet of building premises demised to Tenant and the denominator of which is the total number of square feet in the building assessed by the taxing authorities. In the calculation of the total number of square feet of building premises demised to Tenant, finished space, i.e. offices, including toilet areas, shall be weighted in determination of the numerator in the fraction described in this subsection by doubling the square footage devoted to such finished space. To the extent that Tenant shall be liable for the payment of other taxes under this Article VI which may be assessed against Landlord or for which Landlord may become liable by reason of its estate or interest in the Demised Premises, Tenant shall pay its pro rata share thereof in accordance with the payment procedure set forth in the third paragraph of this Section 6.01. Section 6.02. Other Taxes and Payment Thereof. In addition to the pro rata taxes and assessments described in Section 6.01, Tenant shall pay pro rata in accordance with Section 6.01 for each and every item of expense in the nature of a tax or charge or assessment for which Landlord is or shall become liable by reason of its estate or interest in the Demised Premises, or any part thereof, including, without limiting the generality thereof, all personal property taxes, gross receipts taxes, use and occupancy taxes, and excise taxes levied or assessed against Landlord or Tenant by reason of the use, occupancy or any other activity by the Tenant in connection with the Demised Premises or any part thereof, or which may be levied or assessed or imposed upon any rents or rental income, as such, payable to Landlord or payable to Tenant from any subtenant in connection with the Demised Premises or any part thereof. There is expressly included among Tenant's obligations with respect to taxes and assessments as set forth in this Article any tax which may be levied against Landlord enacted as part of tax reform legislation in lieu of taxes presently levied against real estate or any portion thereof. Section 6.03. Certain Taxes Not Payable by Tenant. Tenant shall not be required to pay any of the following taxes or governmental impositions which shall be levied or imposed against Landlord by any governmental authority: (i) Any estate, inheritance, devolution. succession, transfer, legacy or gift tax which may be imposed upon or with respect to any transfer of Landlord's interest in the Demised Premises; (ii) Any capital stock tax or other tax imposed against Landlord for the privilege of doing business; (iii) Any income tax levied upon or against the profits of the Landlord from all sources. Section 6.04. Apportionment During First and Last Year of Term. Any bill for real estate taxes and assessments (including installments pursuant to Section 6.05 below) which includes a period of time within the Term and a period of time prior to the commencement of the Term or a period of time after the expiration of the Term shall be apportioned between Landlord and Tenant so that Tenant shall only be responsible for that portion of the bill that covers real estate taxes or assessments assessed for the period of time within the Term. Accordingly, Tenant shall remain responsible for any and all such bills issued after the Term of this Lease that are applicable to the period of time within the Lease Term. Section 6.05. Assessments Payable in Installments. Landlord agrees to exercise its option, if applicable, to pay any assessments levied by any governmental or municipal agency or authority (other than periodic real estate tax payments covered by Section 6.01 above) in annual installments. Tenant shall pay the installments within ten (10) days of its receipt of an invoice for same. Section 6.06. Contest. In the event Landlord contests any assessment for taxes or assessments by the taxing authorities of the Township of Edison Tenant agrees that Tenant will reimburse Landlord for its pro rata share of all costs of such appeal ("Tenant's Costs") within ten (10) days of Tenant's receipt of an invoice for same, except as set forth below. Such invoice shall include a copy of all the relevant supporting documentation. Notwithstanding the foregoing, Tenant's responsibility to pay Tenant's Costs shall be limited to an amount equal to Tenant's Savings in Real Estate Taxes. For the purpose of this Section 6.06, "Tenant's Savings" shall be equal to: Tenant's pro rata share of refunds obtained by Landlord as a result of such appeal; and/or the product of the assessed value of Landlord's Property prior to the appeal less the assessed value of Landlord's Property after the appeal multiplied by Tenant's pro rata share of real estate taxes and further multiplied by the tax rate (in each and every applicable year) used by Edison Township. In the event Tenant's Costs exceed Tenant's Savings, Tenant's Costs payable, in any one year, shall be limited Tenant's Savings for that year. In such event however, Landlord shall be permitted to invoice Tenant for such excess each and every year (limited in amount to that year's Tenant's Savings) until the earlier of: the end of Term (including any renewal periods); or Tenant has paid, in full, Tenant's Costs. -3- I.H.F.&S. M.O.N.L. 2/99 ARTICLE III - PLANS Section 3.01. Plans. The parties hereto have approved plans of the Building (hereinafter called "Plans") prepared by Abraham Hertzberg, Consulting Engineer, P.C (hereinafter called "Architect") and attached hereto as Exhibit A. It is to be noted that the Demised Premises consist of a portion of the one-story building which encloses a total area of 270,000 square feet. The portion of said building demised by said Lease as shown on the Plans comprises 110,125 square feet. The Demised Premises also include the land under the portion of the building aforesaid, as well as land outside of the building area within the "Lease Line" as shown on Exhibit A. The Demised Premises are more particularly described in Exhibit B. Section 3.02. Work To Be Performed By Landlord. Landlord represents that it will perform certain "Work To Be Performed By Landlord" as specifically set forth on Exhibit A. Landlord shall perform such work in an expeditious manner and there shall be no reduction in Basic Rent or additional rent pending the completion of said work. Landlord represents that Items numbered 1 (office portions only), 5 through 9, 12, 13 and 19 of the Work To Be Performed, and the Special Tenant Improvements, as set forth in Section 28.02 below (all said work herein after known as "Office Work"), and Items numbered 1 (balance of work), 10, 11 and 18 shall be completed on or before April 15, 2002. All other items shall be completed on or before May 31, 2002. ARTICLE IV - LANDLORD'S COVENANTS Section 4.01. No Waiver by Tenant. No act of Tenant, including the taking possession of the Demised Premises, shall constitute a waiver by Tenant of any of Landlord's obligations respecting the Building or to correct any defects in materials or workmanship as provided in this Lease. Section 4.02. Landlord's Covenants Regarding Construction. Landlord represents, warrants and covenants that on the Commencement Date: (i) The Building will be structurally safe and sound and that all parts thereof and all mechanical equipment therein (except such as may be installed by Tenant) will be in good working order; (ii) Liability of the Landlord as to the foregoing (i) shall be limited to one (1) year and to the extent set forth in Section 10.01; and (iii) All utilities serving the Demised Premises will have been installed and paid for. ARTICLE V - RENT and PAYMENT Section 5.01. Rent During Term. Landlord reserves and Tenant covenants to pay to Landlord during the Term of this Lease without demand or notice, and without any setoff or deduction, a net basic rental (herein called "Basic Rent") in advance on the first day of each and every month, as follows: 4/1/2002 - 3/31/2005 $385,437.50 payable $32,119.79/month 4/1/2005 - 3/31/2007 $423,981.25 payable $35,331.77/month Notwithstanding the above, Tenant shall not be required to pay Basic Rent until the business day following Landlord's delivery of written notice that the Office Work has been substantially completed. Substantially Completed, as used in this Section, is intended to constitute that stage of completion which will permit the Tenant to use the office areas for their intended purpose without any substantial interference by reason of any failure of Landlord to finish punch list items. Section 5.02. Payment of Rent. The Basic Rent and all additional rents and moneys payable to Landlord under this Lease shall be paid at the above address of Landlord or at such other address or to any entity Landlord transfers the management of the real property leased hereunder to as may be specified by Landlord from time to time by notice given to Tenant. Section 5.03. Rent During Renewal Term(s). In the event the Tenant shall exercise the option(s) to renew this Lease for any of the renewal periods provided for in Section 2.02, the annual Basic Rent during each renewal period shall be adjusted for the applicable term thereof by multiplying $400,855.00 by the "Index Change" hereinafter defined, provided, however, that the Basic Rent during the renewal period(s) shall not be less than the Basic Rent paid upon expiration of the immediately preceding period. Section 5.04. The first monthly installment of Basic Rent shall be due and payable by Tenant on the Commencement Date. Subsequent monthly installments of Basic Rent shall be due and payable by Tenant on or before the first day of each month following the Commencement Date and continuing thereafter until the expiration of the Term. Basic Rent for the Fractional Month, if any, shall be prorated and shall be due and payable by Tenant on the first day of the month following the month in which the Commencement Date occurs. Upon the execution of this Lease, Tenant shall pay to Landlord a deposit in the amount of the first monthly installment of Basic Rent which deposit shall be held by Landlord as additional security for Tenant's performance of this Lease and applied by Landlord against the first monthly installment of Basic Rent due on the Commencement Date. -2- I.H.F.&S. M.O.N.L. 2/99 ARTICLE VI - TAXES and IMPOSITIONS Section 6.01. Real Estate Taxes. Tenant shall pay to Landlord, as additional rent, its pro rata share of real estate taxes and assessments levied or assessed against the property of which the Demised Premises forms a part (hereinafter "Landlord's Property") and all those real estate taxes and assessments levied or assessed against the Demised Premises or any part thereof applicable to the period of time Tenant leases the Demised Premises, whether payable during the Term of the Lease, or subsequent to the expiration of this Lease. This obligation shall include those real estate taxes and assessments presently in effect, as well as those enacted in the future. Tenant acknowledges that Real Estate Taxes are currently payable to the local assessing authority on a quarterly basis and that such tax bills represent payment of Real Estate Taxes applicable to the quarter in which the bill is issued. Such payment as to all real estate taxes or assessments levied or assessed against Landlord's Property or the Demised Premises or any part thereof, shall be made by Tenant to Landlord within ten (10) days after Tenant's receipt of an invoice or statement from Landlord setting forth the amount of such taxes or assessments and Tenant's pro rata share thereof. Such invoice or statement shall include a copy of the Real Estate Tax bill or assessment for which Tenant is responsible. The real estate taxes and assessments aforesaid shall be apportioned by Landlord among tenants or users of Landlord's Property, including Landlord, to arrive at Tenant's pro rata share of real estate taxes and assessments. The computation of Tenant's pro rata share of taxes on land and buildings shall be made by multiplying the real estate taxes or assessments levied against the Landlord on Landlord's Property of which the Demised Premises forms a part by a fraction the numerator of which is the number of square feet of building premises demised to Tenant and the denominator of which is the total number of square feet in the building assessed by the taxing authorities. In the calculation of the total number of square feet of building premises demised to Tenant, finished space, i.e. offices, including toilet areas, shall be weighted in determination of the numerator in the fraction described in this subsection by doubling the square footage devoted to such finished space. To the extent that Tenant shall be liable for the payment of other taxes under this Article VI which may be assessed against Landlord or for which Landlord may become liable by reason of its estate or interest in the Demised Premises, Tenant shall pay its pro rata share thereof in accordance with the payment procedure set forth in the third paragraph of this Section 6.01. Section 6.02. Other Taxes and Payment Thereof. In addition to the pro rata taxes and assessments described in Section 6.01, Tenant shall pay pro rata in accordance with Section 6.01 for each and every item of expense in the nature of a tax or charge or assessment for which Landlord is or shall become liable by reason of its estate or interest in the Demised Premises, or any part thereof, including, without limiting the generality thereof, all personal property taxes, gross receipts taxes, use and occupancy taxes, and excise taxes levied or assessed against Landlord or Tenant by reason of the use, occupancy or any other activity by the Tenant in connection with the Demised Premises or any part thereof, or which may be levied or assessed or imposed upon any rents or rental income, as such, payable to Landlord or payable to Tenant from any subtenant in connection with the Demised Premises or any part thereof. There is expressly included among Tenant's obligations with respect to taxes and assessments as set forth in this Article any tax which may be levied against Landlord enacted as part of tax reform legislation in lieu of taxes presently levied against real estate or any portion thereof. Section 6.03. Certain Taxes Not Payable by Tenant. Tenant shall not be required to pay any of the following taxes or governmental impositions which shall be levied or imposed against Landlord by any governmental authority: (i) Any estate, inheritance, devolution. succession, transfer, legacy or gift tax which may be imposed upon or with respect to any transfer of Landlord's interest in the Demised Premises; (ii) Any capital stock tax or other tax imposed against Landlord for the privilege of doing business; (iii) Any income tax levied upon or against the profits of the Landlord from all sources. Section 6.04. Apportionment During First and Last Year of Term. Any bill for real estate taxes and assessments (including installments pursuant to Section 6.05 below) which includes a period of time within the Term and a period of time prior to the commencement of the Term or a period of time after the expiration of the Term shall be apportioned between Landlord and Tenant so that Tenant shall only be responsible for that portion of the bill that covers real estate taxes or assessments assessed for the period of time within the Term. Accordingly, Tenant shall remain responsible for any and all such bills issued after the Term of this Lease that are applicable to the period of time within the Lease Term. Section 6.05. Assessments Payable in Installments. Landlord agrees to exercise its option, if applicable, to pay any assessments levied by any governmental or municipal agency or authority (other than periodic real estate tax payments covered by Section 6.01 above) in annual installments. Tenant shall pay the installments within ten (10) days of its receipt of an invoice for same. Section 6.06. Contest. In the event Landlord contests any assessment for taxes or assessments by the taxing authorities of the Township of Edison Tenant agrees that Tenant will reimburse Landlord for its pro rata share of all costs of such appeal ("Tenant's Costs") within ten (10) days of Tenant's receipt of an invoice for same, except as set forth below. Such invoice shall include a copy of all the relevant supporting documentation. Notwithstanding the foregoing, Tenant's responsibility to pay Tenant's Costs shall be limited to an amount equal to Tenant's Savings in Real Estate Taxes. For the purpose of this Section 6.06, "Tenant's Savings" shall be equal to: Tenant's pro rata share of refunds obtained by Landlord as a result of such appeal; and/or the product of the assessed value of Landlord's Property prior to the appeal less the assessed value of Landlord's Property after the appeal multiplied by Tenant's pro rata share of real estate taxes and further multiplied by the tax rate (in each and every applicable year) used by Edison Township. In the event Tenant's Costs exceed Tenant's Savings, Tenant's Costs payable, in any one year, shall be limited Tenant's Savings for that year. In such event however, Landlord shall be permitted to invoice Tenant for such excess each and every year (limited in amount to that year's Tenant's Savings) until the earlier of: the end of Term (including any renewal periods); or Tenant has paid, in full, Tenant's Costs. -3- I.H.F.&S. M.O.N.L. 6/00 Section 6.07. Alternate Method of Payment of Taxes. At the request of Tenant or Landlord, Landlord shall prepare an estimate of Real Estate Taxes and/or Fire Service Billing applicable to the current calendar year (whether payable in that year or later) and shall give notice to Tenant of the monthly payment to be made to Landlord. The first monthly payment shall be due within ten (10) days of Tenant's receipt of Landlord's notice. Subsequent payments shall thereafter be due and payable simultaneously with the payment of Basic Rent. The parties further agree that each year Landlord shall submit to Tenant a statement, with copies of actual bills, setting forth the amount of Real Estate Taxes and/or Fire Service Billing applicable to the current year or the previous year, as applicable. Such statement shall include either an Invoice for additional monies due or a reimbursment to Tenant as appropriate. Payment of the aforesaid Invoice shall be made by Tenant to Landlord within ten (10) days of Tenant's receipt of same. Such statement shall be accompanied by a revised estimate of the monthly payment due for the then current calendar year (or a portion thereof if this Lease shall be terminated during such calendar year). ARTICLE VII - INSURANCE Section 7.01. Coverage and Amount. Tenant covenants and agrees to pay to Landlord, as additional rent, during the Term of this Lease its pro rata share, to be calculated as hereinafter provided, of premiums for insurance to be procured by Landlord, insuring Landlord, the coverage to be as follows: (i) Insurance on the Building and building equipment, fixtures and appurtenances, against loss and damage including coverage by an insurance policy with Agreed Amount Endorsement and Replacement Cost Endorsement, in an amount no less than One Hundred Percent (100%) of the full replacement value thereof (exclusive of cost of excavation and land) from time to time; (ii) Rent insurance covering the risks described in (i) above in the amount equal to twelve (12) months of the Basic Rent and additional rent payable; (iii) If and when obtainable and generally carried on buildings of the type to be leased hereunder, war risks and nuclear damage, as well as flood and earthquake insurance for the full replacement value of the Demised Premises if such insurance is required by any institutional first mortgagee of the Premises; (iv) Any additional insurance coverages as may be reasonably required from time to time, by Landlord, in the exercise of its reasonable judgement, or by any institutional first mortgagee of the Premises; and (v) Commercial General Liability Insurance for claims arising out of the ownership, operation and control of the Demised Premises as to liability of Landlord in limits of not less than Five Million Dollars ($5,000,000.00) combined single limit arising out of one occurrence. The Landlord may insure his liability under his Blanket Comprehensive General Liability Policy, Umbrella Liability Policy, and Environmental Impairment Liability Policy, and the Tenant will reimburse the Landlord for the Tenant's pro rata share of the premium. Landlord's procurement and maintenance of insurance covering any of the risks or damage which are the responsibility of Tenant under this Lease to remedy, repair and/or insure against shall not diminish, impair or derogate in any way whatsoever any of Tenant's obligations under this Lease or the waiver and release set forth in Section 7.06 below. Section 7.02. Tenant's Pro Rata Share of Insurance Premiums. Tenant's pro rata share of insurance premiums shall be calculated in accordance with Section 6.01 of Article VI. In addition to the premiums to be paid as aforesaid by Tenant, in the event of loss to the Demised Premises as a result of an insured casualty, any deductible amount on the policy coverage in question shall be paid by Tenant. In the event of a loss to the Demised Premises and any other portion of the Building of which the Demised Premises is a part, any deductible amount on the policy coverage in question shall be paid by Tenant to the extent of the proportion which the damage to the Demised Premises bears to the total damage to the Building. Section 7.03. Method of Payment of Pro Rata Insurance Premiums. Landlord shall furnish to Tenant statements with calculations of the actual Premiums paid by the Landlord for the coverage aforesaid, and the pro rata share thereof which is Tenant's responsibility under the Lease. Tenant will pay to Landlord, as additional rent, its pro rata share of such Premiums, plus a 10% handling charge, within ten (10) days of Tenant's receipt of said statement. Section 7.04. Insurance Procured by Tenant. (a) Tenant covenants and agrees to provide on or before the earlier of (i) the Commencement Date, or (ii) Tenant's, or any third party acting in behalf of Tenant, entering upon the Demised Premises for any purpose; and to keep in force during the Term and Renewal Term, if any, Commercial General Liability Insurance relating to the Demised Premises and its appurtenances on an occurrence basis, including a Contractual Liability Insurance Endorsement and a Tenant's Legal Liability Insurance Endorsement (as same is defined and regulated by the Department of Insurance for the State of New Jersey) insuring the risk of Tenant's failure to perform Tenant's obligations under this Lease, including, but not limited to, Tenant's indemnity of Landlord herein, with minimum limits of liability in the amount of $5,000,000.00 in respect of bodily injury or death and/or property damage combined. Said insurance shall be primary with respect to any loss. The minimum limit of the Tenant's Legal Liability Insurance Endorsement shall be $2,000,000.00, (b) Tenant covenants and agrees to provide insurance coverage for any and all trade fixtures and personal property (including, but not limited to, any furniture, machinery, goods, products or supplies) of Tenant, which Tenant may have upon or within the Demised Premises. Landlord shall not be responsible to insure any of Tenant's trade fixtures or personal property. (c) The aforesaid liability insurance coverage shall be issued in the name of Tenant naming Landlord, and any entity Landlord transfers the management of the real property leased hereunder to, as additional insureds. Said liability insurance coverage shall provide that it shall not be cancelable, nor shall the coverage thereunder be reduced, without at least thirty (30) days prior written notice to said additional insureds and shall be written by one or more responsible insurance companies reasonably satisfactory to Landlord, in form satisfactory to Landlord; all such insurance may be carried under a blanket policy covering the Premises or any other of Tenant's facilities. The minimum limits of such Insurance shall in no way limit or diminish Tenant's liability pursuant to Article XX hereto. Tenant shall deliver to Landlord a certificate of insurance to show compliance with its obligations hereunder on or before the earlier of (i) the Commencement Date; or (ii) Tenant's entering upon the Demised Premises for any purpose and thereafter at least thirty (30) days prior to the expiration of each policy, together with satisfactory evidence of the payment of premiums thereof. -4- I.H.F.&S. M.O.N.L. 6/00 Section 7.05. Limits of All Insurance. The limits of all insurance contemplated in this Lease shall be subject to change at any time and from time to time after the Commencement Date as the Landlord, in the exercise of its reasonable judgement, or mortgagee may deem same necessary for adequate protection. Section 7.06. Fire Insurance Premiums and Requirements. Tenant agrees, at its own cost and expense, to comply with all requirements of the insurance carriers providing the insurance coverage in force pursuant to the provisions hereof and to the applicable sections of the "National Fire Codes" as published by the National Fire Protection Association. If, at any time, and from time to time, as a result of or in connection with any failure by Tenant to comply with the foregoing sentence or any act or omission or commission by Tenant, its employees, agents, contractors or licensees, or as a result of or in connection with the use to which the Premises are put (notwithstanding that such use may be for the purposes herein permitted or that such use may have been consented to by Landlord) the fire insurance premium(s) applicable to the Premises, or the Building in which same are located, or to any other premises in said Building (including rent insurance relating thereto) shall be increased as a result of such act, use, or occupancy; Tenant agrees it will pay to Landlord on demand as additional rent such portion of the premiums for all fire insurance policies in force with respect to the premises of the Landlord of which the Demised Premises are a part (including rent insurance relating thereto) as shall be attributable to such act, use or occupancy. Section 7.07. Waiver of Subrogation. Tenant hereby waives any right of recovery it might otherwise have against Landlord or its insurance company(ies) for losses or damages caused actively or passively, in whole or in part, by any of the risks Tenant is required to insure against in accordance with Section 7.04 above (whether or not such coverage is in effect). Tenant shall obtain a waiver of subrogation endorsement, if necessary, to permit the waiver of subrogation and release as set forth herein in connection with any insurance coverage obtained by Tenant, it being understood that Tenant shall look solely to its insurer for reimbursement. Landlord hereby waives any right of recovery it might otherwise have against Tenant or its insurance company(ies) for losses or damages caused by fire, acts of nature, the public enemy, civil commotion or other events beyond the reasonable control of Tenant. Landlord shall obtain a waiver of subrogation endorsement, if necessary, to permit the waiver of subrogation and release as set forth herein in connection with any insurance coverage obtained by Landlord, it being understood that Landlord shall look solely to its insurer for reimbursement. ARTICLE VIII - CONSTRUCTION OR OTHER WORK Section 8.01. Conditions as to Repairs, Alterations or Other Work. Whenever any repairs, alterations, changes or other work in, on, to or about the Premises shall be made by either Landlord or Tenant as provided in this Lease: (i) The work shall be done in a good and workmanlike manner and in compliance with all applicable laws, ordinances and codes, and all applicable governmental rules, regulations and requirements, and in accordance with the standards, if any, of the Board of Fire Underwriters, or other organizations exercising the functions of a board of fire underwriters whose jurisdiction includes the Demised Premises; (ii) All materials and workmanship shall be of good quality, and in case of repairs, restoration, changes, additions, alterations or improvements, shall be at least equal to the original and consistent with the original construction as to design, appearance, function and wearability; (iii) All said work shall be paid for as promptly as is practicable and consistent with good business practices under the then existing circumstances; (iv) Such work shall be done as promptly as is possible and practicable under the existing circumstances; (v) The Commercial General Liability Insurance provided for in Section 7.04 shall be extended by Tenant, if necessary, to apply to the work being done, and evidence thereof shall be delivered to the Landlord prior to the commencement of such work. Tenant's failure to have such insurance extended or its failure to provide such certificate shall in no way limit or diminish Tenant's liability pursuant to Article XX below; In the case of Tenant(s) contractor(s) performing such work, Tenant's contractor(s) shall carry Commercial General Liability Insurance relating to the work being done on an occurrence basis, with minimum limits of liability in the amount of $1,000,000.00 in respect of bodily injury or death and/or property damage combined; evidence thereof shall be obtained by Tenant prior to the commencement of such work. The aforesaid liability insurance shall be issued in the name of Tenant's contractor(s) naming Tenant and Landlord as additional insureds and shall be written by one or more responsible insurance companies. The minimum insurance limits of Tenant's contractor(s), or such contractor(s) failure to obtain or retain such insurance, shall in no way limit or diminish Tenant's liability pursuant to Article XX below; (vi) The party doing or having work done shall carry or cause its contractors, if any, to carry worker's compensation insurance as required by law in connection with such work, and evidence thereof shall be delivered to the other party prior to the commencement of such work; (vii) Title to all buildings, building fixtures and improvements erected and installed by Tenant (but not Tenant's trade fixtures, however the same may be attached to the realty) shall become the property of Landlord upon the expiration or earlier termination of this Lease; (viii) The contractor or the party performing the work shall obtain an official certificate of occupancy or an amended certificate of occupancy upon completion of the work in each instance if under local practice such certificates of occupancy are issued or required in connection with such work. The party performing the work shall also obtain the certificate from the Board of Fire Underwriters, or other organization exercising the same functions, whose jurisdiction includes the Demised Premises in each instance, certifying that the electrical work has been property completed whenever the work done involves any electrical work for which such a certificate is issued under local practice. If, under local practice, official certificates of occupancy are not issued or required by a governmental officer or department, or if the Board of Fire Underwriters, or other such organization does not issue certificates on proper completion of electrical work, this covenant shall be satisfied upon issuance of such certifications by an architect or engineer licensed in the state in which the Demised Premises is located; and (ix) Landlord agrees to join in the applications for all permits and authorizations whenever necessary. -5- I.H.F.&S. M.O.N.L. 6/00 ARTICLE IX - MECHANIC'S LIENS Section 9.01. Mechanic's Liens Prohibited. Tenant shall not suffer any mechanic's lien to be filed against the Demised Premises by reason of work, labor, services or materials performed or furnished to Tenant or to anyone holding the Demised Premises, or any part thereof, through or under Tenant. If any mechanic's lien or any notice of intention to file a mechanic's lien shall at any time be filed against the Demised Premises, (unless the labor or materials were actually performed for or furnished to Landlord in connection with its obligations under this Lease) Tenant shall at Tenant's cost, within fourteen (14) days after knowledge or notice of the filing of any mechanic's lien cause the same to be removed or discharged of record by payment, bond, order of a court of competent jurisdiction, or otherwise. Section 9.02. Landlord's Remedy for Tenant's Breach. If Tenant shall fail to remove or discharge any mechanic's lien or any notice of intention to file a mechanic's lien within the prescribed time, then in addition to any other right or remedy of Landlord, Landlord may, at its option, procure the removal or discharge of same by payment or bond or otherwise. Any amount paid by Landlord for such purpose, together with all legal and other expenses of Landlord in procuring the removal or discharge of such lien or notice of intention and together with interest thereon at the Lease Interest Rate (as hereinafter defined) shall be and become due and payable by Tenant to Landlord as additional rent, and in the event of Tenant's failure to pay therefor within fifteen (15) days after demand, the same shall be added to and be due and payable with the next month's rent. Section 9.03. Non-Consent of Landlord to Filing of Liens. Nothing contained in this Lease shall be construed as a consent on the part of Landlord to subject Landlord's estate in the Demised Premises to any lien or liability arising out of Tenant's use or occupancy of the Premises. ARTICLE X - REPAIRS and MAINTENANCE Section 10.01. (a) Landlord's Covenants. Landlord at its sole cost and expense shall remedy all defects in workmanship and materials in the Demised Premises, evidence of which shall appear or be discovered within twelve (12) months after the Commencement Date. Landlord shall not be liable under this Section however unless Tenant shall give Landlord notice specifying such defects or the need for remedying them on or before the last day of the twelfth month of the Term. In addition, Landlord shall repair any roof leaks which shall appear or be discovered within sixty (60) months after the Commencement Date. Landlord shall not be liable under this Section however unless Tenant shall give Landlord notice of the need for such repairs on or before last day of said sixty (60) month period. (b) Structural Components. In addition Landlord at its sole cost and expense shall remedy all defects in workmanship and materials in the Demised Premises with respect to the Structural Components of the Building, evidence of which shall appear or be discovered within sixty (60) months after the Commencement Date, and shall repair all damage to the Demised Premises caused thereby. For the purpose of this paragraph, this term Structural Components shall be limited to the structural steel framing including roof framing, the foundations, and the masonry perimeter walls (excluding all windows, plate glass, and doors). Landlord shall not be liable under this Section however unless Tenant shall give Landlord notice specifying such defects or the need for remedying them on or before the last day of the sixtieth (60th) month of the Term. (c) Alterations by Tenant. Notwithstanding any of the above, if Tenant shall make any changes or alterations, structural or otherwise, to any portion of the Building, Landlord's obligations under this Section 10.01 shall not thereafter extend to any portion of the Building affected by such change or alteration. (d) Limited Liability of Landlord. Landlord's liability under the provisions of this Article X is limited to repair or correction of the defect or condition to be rectified, and Landlord shall not be liable for any loss or damage, direct or consequential. Landlord shall not be required to make any repairs caused by Tenant's abuse or misuse, or lack of routine maintenance, of the Demised Premises. -6- I.H.F.&S. M.O.N.L. 6/00 Section 10.02. Tenant's Obligations. Except for items which are the obligation of Landlord under Section 10.01 hereof, Tenant, for and during the Term of this Lease, at Tenant's sole cost and expense, assumes all responsibility and obligation for the physical condition of the Demised Premises and shall: (a) Keep and maintain in good repair, as well as paint and decorate, the exterior and interior of the Demised Premises including, but not limited to, all structural repairs, roof, floor, doors, windows, dock levelors, heating, ventilating and air conditioning systems, electrical system, sprinkler system and plumbing facilities. Damage to party walls shall be repaired by Tenant if the cause of the damage is initiated on the Demised Premises; (b) Keep and maintain the Demised Premises in a clean and sanitary condition free from rubbish, flammable or other objectionable materials; (c) Perform all normal routine adjustments and maintenance on all equipment, including but not limited to filter changes, cleaning and lubrication of heating, ventilating and air conditioning systems; (d) Repair or replace as required, all mechanical and working parts used in connection with doors, windows, dock levelors, the heating, air conditioning, electrical, plumbing and sprinkler and other systems; (e) Keep, maintain and repair all drainage facilities including drainage pipes, ditches and detention areas, as well as the lawns, shrubbery, driveways and parking areas, including the keeping of the driveways, sidewalks and steps and parking areas free and clear of ice and snow; and (f) Comply with all present and future applicable Federal, State and local laws, ordinances and codes and all applicable rules, regulations and requirements, including without limitations, those relating to environmental protection and the requirement set forth in the applicable sections of the "National Fire Codes" as published by the National Fire Protection Association; and pay any and all costs of compliance and all fines and penalties imposed upon Landlord, or consequential damages incurred, by reason of any violations thereof. Without limiting the generality of the foregoing, Tenant acknowledges and agrees that it shall promptly repair any and all damage to the Demised Premises, whether caused by Tenant or Tenant's employees, agents, guests, invitees, licensees, subtenants, related persons, contract warehousemen (or similar), however caused, including, without limitation, any damage caused by the operation of forklifts or other equipment in or about the Demised Premises. Section 10.03. Landlord's Remedy for Tenant's Breach. In the event Tenant shall fail or neglect to comply with the aforesaid statutes, ordinances, rules, orders, regulations and requirements referred to in this Article X, or any of them, or in the event Tenant shall fail or neglect to make any repairs or replacements required of it, then Landlord or Landlord's agents may, after compliance with the notice requirements set forth in Article XIII hereof, enter in and upon the Demised Premises to make an inspection and make said repairs or replacements and comply with any and all said statutes, ordinances, rules, orders, regulations or requirements Tenant agrees to reimburse Landlord for its cost to perform any of the foregoing (including 15% overhead), as additional rent, within ten (10) days of Tenant's receipt of an invoice for same. This provision is in addition to the right of the Landlord to terminate this Lease by reason of any default on the part of Tenant, and Landlord's remedies provided in Article XXI. Landlord's cost to perform the foregoing shall not include its cost for any office personnel involved in the foregoing. ARTICLE XI - FIRE, DAMAGE and DESTRUCTION Section 11.01. Notice of Casualty, Continuation of Lease, Restoration. In the event of the total destruction of the Building or the Demised Premises by fire or otherwise during the Term created hereby or prior thereto, or in the event of such partial destruction thereof: (a) Tenant shall immediately notify Landlord in writing thereof; (b) upon receipt of said notice Landlord shall have its Architect make a full and comprehensive report on the damage of the Premises and/or Building, and ascertain the number of days to complete the repair of the Building or Premises. Unless such damages can, in the opinion of Landlord's Architect, be repaired within one hundred eighty (180) days after its occurrence, this Lease and the Term hereby created shall cease and become null and void from the date of such damage or destruction, and Tenant shall upon written notice from Landlord, then immediately surrender the Demised Premises and all interest therein to Landlord, and Tenant shall pay Basic Rent and any additional rent within said Term only to the time of such damage or destruction. If, however, in such Architect's opinion, the damage aforesaid can be repaired within one hundred eighty (180) days from the occurrence thereof, Landlord (or Tenant, if such repair is Tenant's responsibility under Article X) shall repair or rebuild the Demised Premises with all reasonable speed, and this Lease shall continue in full force and effect, but there shall be an abatement of Basic Rent and any additional rent to the extent of insurance payments received from rent insurance. Notwithstanding anything contained in this Section 11.01 to the contrary, in no event shall Landlord be required to expend more to reconstruct, repair or restore the Building than the amount actually received by Landlord from the proceeds of the insurance carried by Landlord. In the event the repair work is Tenant's responsibility as aforesaid, and the estimated cost to perform the required repair exceeds $10,000.00, Tenant acknowledges that Landlord shall have the right to require detailed drawings and written specifications of the work to be performed, prior to Tenant's commencement of the required repair. Landlord shall have the right to review the submitted plans and specifications to ensure the repair work's compliance with all relevant provisions of this Lease, including, without limitation, Article VIII. Tenant shall not commence any repair work until Landlord has issued written approval of the plans and specifications. Section 11.02. Statutory Conditions. Tenant hereby expressly waives the benefit of N.J.S.A. 46:8-6 and 46:8-7. Tenant agrees that it will not be relieved of the obligation to pay basic net rent or any additional rent in case of damage to or destruction of the Demised Premises except as specifically provided in this Lease. -7- I.H.F.&S. M.O.N.L. 10/95 ARTICLE XII - EMINENT DOMAIN Section 12.01. Total Taking. In the event that any public authority or agency holding the power of eminent domain under applicable law shall at any time during the term of this Lease condemn or acquire title in lieu of condemnation of substantially all of the Demised Premises, this Lease and the Term hereby created shall terminate and expire as of the date upon which title shall vest in such authority, and Tenant shall pay Basic Rent and any additional rent only to the time of such vesting of title. Section 12.02. Partial Taking. If there shall be only a partial taking or condemnation as aforesaid which shall not substantially prevent Tenant's use of the Demised Premises for purposes of its business, this Lease shall thereafter continue as to the untaken part and Tenant shall be entitled to a reduction in the Basic Rent in such proportion and in such manner as shall be fair and equitable, and if the parties hereto cannot agree thereto the dispute shall be settled by arbitration as set forth in this Lease. Section 12.03. Restoration by Landlord. If there shall be a partial taking and this Lease shall continue as to the remaining balance of the Demised Premises, Landlord, at its own expense and as promptly as practicable, shall restore the remaining building and land as nearly as may be practicable to their former condition. Section 12.04. Award to Landlord. Landlord reserves the exclusive right to negotiate with the condemning authority with respect to any proposed award, and all damages and compensation paid for the taking under the power of eminent domain, whether for the whole or a part of the Demised Premises shall belong to and be the property of Landlord, except that Landlord consents to efforts by Tenant separately to seek additional compensation from the condemning authority for the loss of depreciated value of leasehold improvements installed by Tenant resulting from the taking, provided always, that Tenant hereby releases and disclaims any interest or right whatsoever in the award or compensation offered or paid by the condemning authority to the Landlord for the loss of the fee. There is expressly excluded from any right of compensation to the Tenant and the Tenant expressly waives, any claim against the condemning authority for dimunition in the value of the leasehold. Section 12.05. Notwithstanding any of the paragraphs above pertaining to eminent domain, there is expressly reserved to the Tenant the right to recover against the condemning authority for its actual reasonable expenses in moving its business from the Demised Premises and its actual direct losses in tangible personal property by virtue of the taking, all as contemplated in the Relocation Assistance Act (R.S. 20:4-1 et seq), and rules and regulations adopted by the Department of Community Affairs of the State of New Jersey pursuant to the legislation aforesaid, and applicable regulations of the State Department of Transportation contemplated in the said Relocation Assistance Act. ARTICLE XIII - NOTICES Section 13.01. Notices. Every notice required or permitted under this Lease shall, unless otherwise specifically provided herein, be given in writing and shall be sent by United States Certified Mail, return receipt requested, addressed by the party giving, making or sending the same to the Landlord at the address first above given, and to the Tenant at the Demised Premises or to such other address as either party may designate from time to time by a notice given to the other party. Notice shall be deemed to be given upon receipt, provided, however, that in the event a party shall refuse to accept delivery of said Certified Mail, the notice shall nevertheless be deemed to be given upon the date of refusal to accept delivery and further provided that if the postal service is unable to deliver said Certified Mail the notice shall nevertheless be deemed to be given as of the date of the Postal Service's second notice of attempted delivery. Notwithstanding the above, a notice of change of address shall not be effective until received. Landlord may, at its option, substitute for service by United States First Class Certified Mail, service by Federal Express or similar overnight courier, provided that such courier obtains and makes available to its customers evidence of delivery. Notice given via such courier shall be deemed to be given upon receipt. ARTICLE XIV - MEMORANDUM of LEASE Section 14.01, Memorandum of Lease. Tenant shall not record this Lease, but if either party should desire to record a short form Memorandum of Lease setting forth only the parties, the Demised Premises and the Term, such Memorandum of Lease shall be executed, acknowledged and delivered by both parties upon notice from either party. ARTICLE XV - USE Section 15.01. Use. The Demised Premises shall be used and occupied by Tenant as an office, warehouse and distribution facility for non-hazardous and non-caustic products and for those uses set forth on Exhibit E. This shall not be construed to restrict the Tenant's use of the Demised Premises for any lawful purposes in connection with its business, provided that such uses shall be in accordance with all applicable laws and do not damage the Building. Tenant shall not have the right to use the Demised Premises for the manufacturing, processing, transferring or piping of any liquid or storage of any Hazardous Materials, except for diminimus amounts of 'hazardous' office supplies. -8- I.H.F.&S. M.O.N.L. 6/00 ARTICLE XVI - ASSIGNMENT, SUBLETTING, ETC. Section 16.01. Assignment, Subletting, Etc. Tenant shall not sell, assign, mortgage, pledge, or, in any manner, transfer or encumber this Lease or any estate or interest hereunder (hereinafter designated as Assignment), or sublet the Demised Premises or any part thereof without the previous written consent of the Landlord; provided, however, with respect to a corporation into which Tenant shall have been merged or consolidated or which shall have purchased all or substantially all of the assets of Tenant, such previous written consent by Landlord shall not be necessary. In the event of any Assignment of this Lease or subletting of the Demised Premises, Tenant, nevertheless, shall remain primarily liable for the payment of the Basic Rent and all additional rents, and the performance of Tenant's other covenants and obligations under this Lease including any amendments thereto. In the event of an Assignment of this Lease, the assignee shall assume, by written recordable instrument reasonably satisfactory to Landlord, the due performance of all of Tenant's obligations under this Lease. A true copy of such Assignment and the original assumption agreement or the sublease, as the case may be, shall be delivered to Landlord within ten (10) days of the effective date thereof. No Assignment shall be valid or effective in the absence of such assumption. No consent to any Assignment of this Lease or subletting of any or all of the Demised Premises shall be deemed or be construed as a consent by Landlord to any further or additional Assignment or subletting. Notwithstanding anything hereinabove contained to the contrary, Landlord's consent shall not be unreasonably withheld provided that (i) Tenant is not in default hereunder (without regard to whether a notice of default has been served pursuant to Section 21.01); (ii) Tenant shall provide Landlord with access to the Demised Premises for inspection and testing thereof; (iii) the use by the proposed assignee or subtenant does not, in Landlord's sole discretion, adversely affect the Demised Premises by virtue of environmentally related factors or lessen the present or future value of the Premises; and (iv) does not increase risk or endanger the Building or the occupants thereof. Notwithstanding anything contained herein to the contrary, Landlord may refuse to permit Tenant to assign this Lease or sublet to a third party any portion of the Demised Premises if Landlord agrees to sublet back the Demised Premises from Tenant under the same terms and conditions as set forth in this Lease and for the remaining Term of this Lease. ARTICLE XVII - WARRANTY of TITLE Section 17.01. Warranty of Title. Landlord covenants, represents and warrants that Landlord on the Commencement Date will be the sole and absolute owner of the fee title to the Demised Premises and has the right to execute this Lease, and that on the Commencement Date there will be no liens affecting the Demised Premises, or any covenants, easements or restrictions adversely affecting Tenant's use of the Demised Premises except as set forth in Exhibit B. Such exceptions are herein referred to as Permitted Encumbrances. ARTICLE XVIII - SUBORDINATION Section 18.01. Subordination to Mortgages. At the option of the Landlord, this Lease shall either be: (a) Subject and subordinate to all mortgages which may now or hereafter affect the Demised Premises, and to all renewals, modifications, consolidations, replacements or extensions thereof; or (b) Paramount in priority as an encumbrance against the Demised Premises with respect to the lien of any mortgage which may now or hereafter affect the Demised Premises and to all renewals, modifications, consolidations, replacements and extensions thereof. Section 18.02. Subordination, Non-Disturbance and Attornment Agreement. Tenant agrees, upon at least ten (10) days prior written request from Landlord, to execute with Landlord and the holder of any mortgage on the Building, a Subordination, Non-Disturbance and Attornment Agreement substantially in the form annexed hereto as Exhibit D. Landlord agrees, upon written request from Tenant, to use all reasonable efforts to have the holder of any mortgage on the Building execute a Subordination, Non-Disturbance and Attornment Agreement substantially in the form annexed hereto as Exhibit D. In the event any such mortgagee imposes a fee for its review, execution and recording of said Subordination, Non-Disturbance and Attornment Agreement, and said Agreement is being executed at Tenant's request, Tenant agrees that it shall pay to Landlord, as additional rent, the amount of said fee within ten (10) days of Landlord delivering a fully executed copy of said Agreement to Tenant. Section 18.03. Tenant's Certificate. Tenant further agrees, upon at least ten (10) days prior written notice from Landlord to certify by written instruments duty executed and acknowledged to any mortgagee or purchaser, or any proposed mortgage lender, or purchaser, that this Lease is in full force and effect or, if not, in what respect it is not; that this Lease has not been modified, or to the extent to which it has been modified; that there are no existing defaults hereunder to the best of the knowledge of the party so certifying, or specifying the defaults, if any; and any additional statements of fact that may be requested or required from time to time by any mortgagee or purchaser, or any proposed mortgage lender or purchaser. Any such certification shall be without prejudice as between the Landlord and Tenant, it being agreed that any document required hereunder shall not be used in any litigation between Landlord and Tenant. -9- I.H.F.&S. M.O.N.L. 11/00 ARTICLE XIX - QUIET ENJOYMENT Section 19.01. Quiet Enjoyment. Tenant, upon payment of the Basic Rent and all additional rents and all sums herein reserved and due, and upon the due performance of all of the terms, covenants and conditions herein contained on the Tenant's part to be kept and performed, shall and may at all times during the Term hereby granted peaceably and quietly enjoy the Demised Premises, subject, however, to the terms of this Lease. ARTICLE XX - INDEMNIFICATION Section 20.01. Indemnification of Landlord. Tenant agrees to indemnify and save Landlord harmless from and against all liability, and all loss, cost and expense, including reasonable attorneys' fees, arising out of Tenant's operation, maintenance, management and control of the Premises or in connection with (a) any loss, injury or damage whatsoever caused by Tenant, its employees or agents, (b) any breach of this Lease by Tenant, (c) any act or omission of Tenant occurring in, on, or about the Premises or on the sidewalks adjoining the same, or (d) any contest or proceeding brought by Tenant as provided for herein. However, notwithstanding anything herein contained to the contrary, Tenant shall not be obligated or required hereunder, to hold harmless or indemnify Landlord from or against any liability, loss, cost, expense, or claim to the extent arising from any act, omission or negligence of Landlord or its agents, servants, employees or contractors. The provisions of this Section 20.01 shall survive the expiration or earlier termination of this Lease. ARTICLE XXI - DEFAULTS and REMEDIES Section 21.01. Tenant's Defaults. The occurrence of any of the following events shall constitute an event of default under this Lease: (i) Tenant's failure to pay, in full, any installment of Basic Rent or additional rent when it is first due; (ii) Tenant's failure to perform any of its obligations under this Lease if such failure has caused loss or damage that cannot promptly be cured by Tenant; (iii) Tenant's failure to perform any of its obligations under this Lease (other than those contemplated by clauses (i) and (ii) of this Section 21.01) within thirty (30) days after the receipt of notice specifying the default, unless complete performance of such obligation within such thirty (30) day period is not possible using diligence and expedience, then within a reasonable time after Tenant's receipt of Landlord's notice, so long as Tenant shall have commenced performance of the work required to correct the default and Tenant shall continue to perform such remedy, diligently and expediently, through to completion of performance; (iv) The discovery that any representation made by Tenant in this Lease shall have been inaccurate or incomplete in any material respect on the date it was made; (v) The sale, transfer or other disposition of any interest of Tenant in the Demised Premises, whether voluntarily or by way of execution or other legal process; (vi) Tenant, if a corporation, shall cease to exist as a corporation in good standing in the state of its incorporation, or the state in which the Demised Premises is located, or Tenant, if a partnership or other entity, shall be dissolved or otherwise liquidated; or (vii) Tenant shall use any property adjoining the Demises Premises for any purpose whatsoever, without the written permission of the property owner and any third party who may have an interest in such property (including, without limitation, holding an interest as tenant, easement holder) or do any act (including, without limitation, the parking or staging of any vehicle) that interferes with the operations of Landlord, or any third party who may have an interest in property owned by Landlord or managed by Manager (including, without limitation, those holding an interest as tenant or easement holder), or any adjacent property owner. Upon the occurrence of an event of default, Landlord shall deliver written notice to Tenant specifying the default (hereinafter "First Notice"). At the expiration of the time period specified in (iii) above, or at the expiration of ten (10) days in any other event of default, Landlord may (x) cancel and terminate this Lease on not less than five (5) days written notice (hereinafter "Second Notice") to Tenant, and on the date specified in the Second Notice the Term of this Lease shall terminate and expire, and Tenant shall then quit and surrender the premises to Landlord, but Tenant shall remain liable as hereinafter provided and/or (y) at any time thereafter re-enter and resume possession of the Premises by summary proceedings, an action in ejectment or by force or otherwise and dispossess or remove Tenant and other occupants and their effects and hold the Premises as if this Lease had not been made; and Tenant waives the service of any additional notice of intention to re-enter or to institute legal proceedings to that end. Notwithstanding the foregoing, in the event: Tenant is contesting, in good faith, the payment of such additional rent; and Tenant has provided Landlord with written notice of such contest prior to the expiration of the aforestated ten (10) days; and Such written notice contains the basis for Tenant's contest, including any and all required supporting documentation; and Tenant diligently prosecutes such contest in an expeditious manner; and Tenant has deposited the amount of the additional rent billed by Landlord with an escrow agent; then, Landlord agrees to delay sending the aforesaid Second Notice until ten (10) days after Tenant's receipt of Landlord's Response. Landlord agrees to deliver to Tenant written notice of it's response to Tenant's written contest setting forth Landlord's basis for the validity of the additional rent billing ("Landlord's Response"), including any and all required supporting documentation. Section 21.02. Landlord's Remedies. If this Lease shall be terminated or if Landlord shall be entitled to re-enter the Demised Premises and dispossess or remove Tenant under the provisions of Section 21.01, the Landlord, or Landlord's agents or servants, may immediately or at any time thereafter re-enter the Demised Premises and remove therefrom the Tenant, its agents, employees, servants, licensees, and any subtenants and other persons, firms or corporations, and all or any of its or their property therefrom, either by summary dispossess proceedings or by any suitable action or proceeding at law or by force or otherwise, without being liable to indictment, prosecution or damages therefor, and repossess and enjoy said Premises together with all additions, alterations and improvements thereto. -10- I.H.F.&S. M.O.N.L. 6/00 Section 21.03. Landlord's Damages. In case of such termination, re-entry, or dispossess or removal by summary proceedings or otherwise, the annual rent and all other charges required to be paid by the Tenant hereunder shall thereupon become due and be paid up to the time of such termination, re-entry, or dispossess or removal, and the Tenant shall also pay to the Landlord all reasonable expenses which the Landlord may then or thereafter incur for necessary legal expenses, attorneys' fees, brokerage commissions, and all other necessary costs paid or incurred by the Landlord for restoring the Demised Premises to good order and condition and for altering and otherwise preparing the same for re-letting. The Landlord may, at any time and from time to time, re-let the Demised Premises, in whole or part, either in its own name or as agent of the Tenant, for a term or terms which, at the Landlord's option, may be for the remainder of the then current Term of this Lease, or for any longer or shorter period, and (unless the statute or rule of law which governs the proceedings in which such damages are to be proved, limits or shall limit the amount of such claim capable of being so proved and allowed, in which case the Landlord shall be entitled to prove as and for liquidated damages and have allowed an amount equal to the maximum allowed by or under any such statute or rule of law) the Tenant shall be obligated to, and shall pay to the Landlord as damages, upon demand, and the Landlord shall be entitled to recover of and from the Tenant, at the election of the Landlord, either: (a) liquidated damages, in an amount which, at the time of such termination, re-entry or dispossess or removal by the Landlord, as the case may be, is equal to the excess, if any, of the then present value of the installments of annual rent reserved hereunder, for the period which would otherwise have constituted the unexpired portion of the then current Term of this Lease, over the then present value of the market rental value of the Demised Premises for such unexpired portion of the then current Term of this Lease, discounted at the rate of six percent (6 %) per annum; or (b) damages (payable in monthly installments, in advance, on the first day of each calendar month following such termination, re-entry or dispossess, and continuing until the date originally fixed herein for the expiration of the then current Term of this Lease) in any amount or amounts equal to the excess, if any, of the sums of the aggregate expenses paid by the Landlord during the month immediately preceding such calendar month for all such items as, by the terms of this Lease, are required to be paid by the Tenant, plus an amount equal to the amount of the installment of annual rent which would have been payable by the Tenant hereunder in respect to such calendar month, had this Lease and the Demised Term not been so terminated, and had the Landlord not so re-entered, over the sum of rents, if any, collected by or accruing to the Landlord in respect to such calendar month pursuant to such re-letting or any holding over by any subtenants of the Tenant, plus the amount of the rental value of any portion of the Demised Premises occupied by the Landlord or any agent of the Landlord. Any suit for any month shall not prejudice in any way the rights of the Landlord to collect the deficiency for any subsequent month by a similar proceeding. The Landlord, at its option and at its expense, may make such alterations, repairs and/or decorations in the Demised Premises as in its reasonable judgment the Landlord considers advisable and necessary, and the making of such alterations, repairs and/or decorations shall not operate or be construed to release the Tenant from liability hereunder. The Landlord shall in no event be liable in any way whatsoever for failure to re-let the Demised Premises, or in the event that the Demised Premises are re-let, for failure to collect rent thereof under such re-letting; and in no event shall the Tenant be entitled to receive any excess of such annual rents over the sums payable by the Tenant to the Landlord hereunder but such excess shall be credited to the unpaid rentals due hereunder, and to the expenses of re-letting and preparing for re-letting as provided in this Section 21.03. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by the Landlord from time to time at its election, and nothing herein contained shall be deemed to require the Landlord to postpone suit until the date when the Term of this Lease would have expired if it has not been terminated under the provisions of this Lease, or under any provision of law, or had the Landlord not re-entered into or upon the Demised Premises. Section 21.04. Waiver of Redemption. Tenant hereby waives all rights of redemption to which Tenant or any person claiming under Tenant might be entitled, after an abandonment of the Premises, or after a surrender and acceptance of the Premises and the Tenant's leasehold estate, or after a dispossession of Tenant from the Demised Premises, or after a termination of this Lease, or after a judgment against Tenant in action in an ejectment, or after the issuance of a final order or warrant of dispossess in a summary proceeding, or any other proceeding or action authorized by any rule of law or statute now or hereafter in force or effect. ARTICLE XXII - BANKRUPTCY Section 22.01. Bankruptcy, Insolvency, Etc. If the Tenant shall have applied or consented to the appointment of a custodian, receiver, trustee or liquidator, or other court appointed fiduciary of all or a substantial part of its property; or a custodian shall have been appointed with or without the consent of the Tenant; or Tenant is generally not paying its debts as they become due by means of available assets and the fair use of credit; or has made a general assignment for the benefit of creditors; or has filed a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or seeking to take advantage of any insolvency law, or an answer admitting the material allegations of a petition in any bankruptcy, reorganization or insolvency proceeding; or has taken corporate action for the purpose of effecting any of the foregoing, or if within 60 days after the commencement of any proceeding against the Tenant seeking any reorganization, rehabilitation, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy code or any present or future applicable federal, state or other statute or law, such proceeding shall not have been dismissed; or if, within 60 days after the appointment of any trustee, receiver, custodian, liquidator, or other court appointed fiduciary of the Tenant (without the consent or acquiescence of such party), or of all or any substantial part of its property or any of the leased Premises, such order or appointment shall not have been vacated or stayed on appeal or otherwise or if, within 60 days after the expiration of any such stay, such order or appointment shall not have been vacated, the occurrence of any one of such contingencies shall be deemed to constitute and shall be construed as a repudiation by Tenant of Tenant's obligations hereunder and shall cause this Lease ipso facto to be cancelled and terminated, without thereby releasing Tenant; and upon such termination Landlord shall have the immediate right to re-enter the Demised Premises and to remove all persons and property therefrom and this Lease shall not be treated as an asset of the Tenant's estate and neither the Tenant nor anyone claiming by, through or under Tenant by virtue of any law or any order of any Court shall be entitled to the possession of the Demised Premises or to remain in the possession thereof. Upon the termination of this Lease, as aforesaid, Landlord shall have the right to retain as partial damages, and not as a penalty, any prepaid rents and any security deposited by Tenant hereunder and Landlord shall also be entitled to exercise such rights and remedies to recover from Tenant as damages such amounts as are specified in Article XXI thereof, unless any statute or rule of law governing the proceedings in which such damages are to be proved shall lawfully limit the amount of such claims capable of being so proved, in which case Landlord shall be entitled to recover, as and for liquidated damages, the maximum amount which may be allowed under any such statute or rule of law. Tenant, if the subject of a bankruptcy proceeding, hereby consents to the immediate termination, annulment and vacation of the automatic stay provisions of the Bankruptcy Code to permit Landlord to exercise all rights set forth herein. As used in this Article XXII, the term "Tenant" shall be deemed to include Tenant and its successors and assigns and the guarantor of the Tenant's obligations under this Lease, if any. -11- I.H.F.&S. M.O.N.L. 6/00 ARTICLE XXIII - CHANGES, ALTERATIONS Section 23.01. Changes or Alterations. If Landlord shall have first consented thereto in writing, Tenant may make structural and nonstructural changes, alterations, additions and improvements to the Demised Premises. Landlord's reasonable consent shall be granted if the proposed work does not: (a) Impair the structural soundness of the Building; (b) Lessen the present and future value of the Building or improvement; (c) Change the type of use from a general warehouse to a specialty type of building with a limited resale or re-letting market; or (d) Increase risk, endanger the Building or occupants in the Building, or create or increase risk of contamination. If Landlord requests, Tenant shall deliver to Landlord assurance, reasonably satisfactory to Landlord, of Tenant's financial ability to complete and pay for such changes, alterations, additions or improvements, and restorations thereof. In any event, however, Tenant may, without Landlord's consent, make nonstructural changes, alterations, additions and improvements costing in each case less than $10,000.00 (hereinafter called Minor Alterations). Tenant shall give written notice to Landlord of each change, alteration, addition and improvement costing more than $10,000.00 and obtain Landlord's consent as provided herein. In the event, however, that as the result of any changes, alterations, additions and improvements made by Tenant with or without Landlord's consent, the Building or any other part of the Demised Premises is damaged thereby, Tenant, at Tenant's sole cost, shall be obligated and responsible to repair said damage forthwith and restore the Building or Demised Premises to the condition they were in just prior to the damage. Landlord shall have no obligation to make any repairs with respect to any changes, alterations, additions, and improvements made by Tenant. Tenant need not obtain or furnish Landlord any certificate of completion or otherwise (unless required by law) with respect to Minor Alterations. Landlord reserves the right to require Tenant to restore the Premises to the original condition as nearly as may be practical, upon the expiration or sooner termination of this Lease. ARTICLE XXIV - END OF TERM Section 24.01. End of Term. (a) Condition of the Demised Premises. Tenant shall, on the last day of the Term, or upon its earlier termination, peaceably and quietly surrender and deliver up to Landlord the Demised Premises broom clean, including all buildings, alterations, rebuildings, replacements, changes or additions placed by Tenant thereon (except as expressly provided to the contrary in Section 23.01), with all equipment in or appurtenant thereto, in as good condition and repair as when delivered to Tenant; subject, however, to reasonable wear and tear. Damage to any portion of the Demised Premises, including, but not limited to, damage to doors, windows, walls, columns, lighting fixtures, heating, ventilating and air conditioning equipment, dock levelers, stairs, railings and handrails, notwithstanding that such damaged portions may continue to function, shall not be included in any definition of reasonable wear and tear. Broken items or equipment; or anything rendered dysfunctional as a result of Tenant's abuse or misuse of Tenant's lack of routine maintenance, repair or replacement as required under Article VIII, Article X or elsewhere in this Lease shall also not be included in any definition of reasonable wear and tear. (b) Removal of Trade Fixtures. Notwithstanding anything to the contrary contained in this Lease, and provided Tenant is not in default hereunder beyond any grace period to cure same, Tenant may remove all trade fixtures installed or paid for by it, however affixed to the realty. If any trade fixtures or personal property are not removed by the end or earlier termination of the Term, they shall be deemed abandoned if Landlord shall so elect, and if Landlord shall not so elect, it may cause the removal and storage of same at Tenant's risk and expense, but if the Term ends by reason of a condemnation or destruction of all or part of the Premises, Tenant shall have a reasonable time to effect such removal without being deemed to abandon said property. Tenant, at Tenant's cost, shall repair any damage caused to the Demised Premises by reason of such removal. All obligations of Tenant under this paragraph shall survive the termination of this Lease. (c) Completion of Repairs. Any repair or restoration required to be performed by Tenant in order for Tenant to comply with its obligations under this Section 24.01 shall be completed on or before thirty (30) days prior to the end of the Term, or any applicable Renewal Term, or earlier termination of this Lease ("End of Term"). On or about thirty (30) days prior to the End of Term, representatives of Landlord and Tenant shall inspect the Demised Premises to determine what repair or restoration remain to be completed, if any. If Tenant has not completed said repair or restoration within the time set forth above Landlord shall promptly advise Tenant of such fact and shall specify the work which has not been completed. Notwithstanding any other provisions of this Lease, Tenant's failure to complete such repair or restoration by no later than fifteen (15) days prior to the End of Term shall, without further notice, constitute an uncured event of default hereunder. Landlord shall have the right to inspect the Demised Premises to determine whether Tenant has completed such work within the time periods provided herein. During the last thirty (30) days prior to the End of Term, Landlord shall be permitted access to the Demised Premises for the purpose of performing such work as Landlord may desire, in which event Landlord shall use reasonable efforts not to interfere with Tenant's activities at the Demised Premises. Landlord agrees to provide Tenant with reasonable advance notice prior to its entering onto the Demised Premises to perform such work. Section 24.02, Landlord's Right to Inspect and Exhibit Signs. Tenant shall permit Landlord or its agents to enter the Demised Premises during business hours on not less than 48 hours prior notice for the purpose of inspecting or showing the Demised Premises to persons wishing to purchase the same and, at any time within one year prior to the expiration of the Term, to persons wishing to rent same; and Tenant shall, within one year prior to the expiration of the Term, permit the usual notice of "To Let", "For Rent" and "For Sale" to be placed at reasonable locations on the Demised Premises and to remain thereon without hindrance and molestation. -12- I.H.F.&S. M.O.N.L. 5/01 ARTICLE XXV - ARBITRATION Section 25.01. Method of Arbitrating Disputes; Disputes to be Arbitrated. All disagreements, controversies and disputes (other than with regard to the payment of the Basic Rent and additional rent) between the parties arising out of or related to interpretation, performance, validity or enforcement of any of the provisions of this Lease shall be resolved by arbitration pursuant to the Rules of Commercial Arbitration of the American Arbitration Association. Such arbitration proceedings to be held in the State in which the Demised Premises are located, at the offices of the American Arbitration Association located in the city nearest to the Demised Premises. The parties intend that the scope of matters to be arbitrable is all inclusive, and submission to arbitration is intended to constitute the exclusive remedy available to the parties. The award to the arbitrators shall be binding and conclusive upon the parties and may be entered as a final judgment in any court of competent jurisdiction. The submission to arbitration as contemplated herein and completion of proceedings in arbitration by award of the arbitrators shall be a condition precedent to the right of either party to commence an action with respect to any of such matters in any other court or forum. The parties agree that any arbitration proceeding shall be conducted before a panel of three (3) arbitrators. Nothing contained in this Article XXV shall preclude either party from bringing an action in a court of competent jurisdiction for the sole purpose of seeking equitable relief. Section 25.02. No Abatement in Rent Pending Arbitration; Limited Right of Offset After Award. The parties expressly agree that during the pendency of any arbitration proceeding and until such dispute shall have been resolved thereby, Tenant shall continue to pay the Basic Rent and any additional rent stipulated herein without any abatement or deduction. If the dispute as resolved by the Arbitrators results in an award to Tenant, and Landlord does not promptly satisfy the said award in accordance with the terms thereof, then Tenant shall have the right to offset said award against the Basic Rent to become due hereunder; provided, however, that the right of offset is expressly limited to exclude from any right of offset that portion of the Basic Rent necessary to satisfy (i) the mortgage obligations of the Landlord as Mortgagor, to the extent such obligations are set forth in the provisions of the Note and Mortgage; and (ii) in addition to the amount required under (i) above, such amounts as then may be required to satisfy the obligations of the Landlord in the operation of the Demised Premises under the provisions of this Lease. ARTICLE XXVI - GENERAL PROVISIONS Section 26.01. No Waste. The Tenant covenants not to do or suffer any waste or damage, or injury to any building or improvement now or hereafter on the Demised Premises, or the fixtures and equipment thereof, or permit or suffer any overloading of the floors thereof. Section 26.02. Landlord's Liability. If Landlord shall breach any of the provisions hereof, Landlord shall only be liable to Tenant for monetary damages and Landlord's liability shall in no event exceed the Landlord's interest in the Demised Premises as of the date of Landlord's breach; and Tenant expressly agrees that any judgment or award which it may obtain against Landlord shall be recoverable and satisfied solely out of the right, title and interest of Landlord in the Demised Premises and Tenant shall have no rights of lien or levy against any other property of Landlord, nor shall any other property or assets of the Landlord be subject to levy, execution or other enforcement proceedings for the collection of any such sums or satisfaction of any such judgment or award. Section 26.03. Partial Invalidity. If any term or provision of this Lease or the application thereof to any party or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease or the application of such term or provision to parties or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. Section 26.04. No Waiver. Except as may otherwise be specifically set forth in this Lease, the failure of either party at any time or times, to require performance of any provision(s) of this Lease shall in no manner affect the right at a later time to enforce the same. One or more waivers by either party of the obligation of the other to perform any covenant or condition shall not be construed as a waiver of a subsequent breach of the same or any other covenant or condition. The receipt of rent by the Landlord, with knowledge of any breach of this Lease by the Tenant or of any default on the part of the Tenant in the observance or performance of any of the conditions or covenants of this Lease shall not be deemed to be a waiver of any provision of this Lease. Neither the payment by Tenant of a lesser amount than the installments of Basic Rent, additional rent or of any sums due hereunder, nor any endorsement or statement on any check or in any letter accompanying a check for payment of Basic Rent, additional rent or other sums payable hereunder, shall be deemed to create an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or other sums or to pursue any other remedy available to Landlord. Neither the acceptance of the keys nor any other act or thing done by the Landlord or any agent or employee during the Term herein demised shall be deemed to be an acceptance of a surrender of said Premises, excepting only an agreement, in writing, signed by the Landlord accepting or agreeing to accept such a surrender. Section 26.05. Number and Gender. Wherever herein the singular number is used, the same shall include the plural and the masculine gender shall include the feminine and neuter genders. Section 26.06. Successors and Assigns. The terms, covenants and conditions herein contained shall be binding upon and inure to the benefit of the respective parties and their successors and assigns. Section 26.07. Article and Marginal Headings. The article and marginal headings herein are intended for convenience in finding the subject matters, are not to be used in determining the intent of the parties to this Lease. -13- I.H.F.&S. M.O.N.L. 6/00 Section 26.08. Entire Agreement. This instrument contains the entire and only agreement between the parties, and no oral statements or representations or prior written matter not contained in this instrument shall have any force or effect. This Lease shall not be modified in any way or terminated except by a writing executed by both parties. Section 26.09. Obligations also Covenants. Whenever in this Lease any words of obligation or duty are used, such words or expressions shall have the same force and effect as though made in the form of covenants. Section 26.10. Cost of Performing Obligations. The respective obligations of the parties to keep, perform and observe any terms, covenants or conditions of this Lease shall be at the sole cost and expense of the party so obligated. Section 26.11, Remedies Cumulative. The specified remedies to which the Landlord or Tenant may resort under the Terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which the Landlord or Tenant may be lawfully entitled in case of any breach or threatened breach of any provision of this Lease. Section 26.12. Holding Over. If Tenant holds over after the expiration or earlier termination of this Lease, and if Tenant is not otherwise in default hereunder, such holding over shall not be deemed to create an extension of the Term, but such occupancy shall be deemed to create a month-to-month tenancy at a rental rate of 150% of the then current Basic Rent, and on the same terms and conditions as are in effect on the date of said expiration or earlier termination. Section 26.13. Utilities. (a) Utility Lines. Landlord shall be responsible for bringing all utilities and utility services to the Building and connecting them to the interior lines installed in the Demised Premises. Such utilities shall be gas, water, sewer and electricity. Tenant shall be responsible to bring any other utility, utility service, or communication service to the Demised Premises. (b) Utility Charges. Tenant shall undertake and be responsible for having all utilities metered in its name in the Demised Premises and agrees to pay all charges for same directly to the respective utility companies throughout the demised Term. Such utilities include the utilities listed in (a) above as well as any other other utility, utility service, or communication service obtained or used by Tenant or rendered or supplied to Tenant. (c) Sprinkler and Security Monitoring Service. Notwithstanding anything herein to the contrary, Tenant shall be required, at its sole cost and expense, to install a Sprinkler Monitoring Service (including a low temperature sensor) with associated key box, Smoke Detectors, and a Security Monitoring Service at the Demised Premises. The parties acknowledge that such installation shall be in accordance with all provisions of this Lease pertaining to construction and alterations in Articles VIII and XXIII except that the aforementioned Sprinkler Monitoring Service and Smoke Detectors shall be installed in accordance with the most recent version of the BOCA National Building Code, unless the governmental authority whose jurisdiction includes the Demised Premises imposes more stringent monitoring requirements on Tenant. (d) Common Utilities. Tenant acknowledges that portions of the water line, sanitary sewer and storm sewer serving the Demised Premises are used in common with other tenants of the Building of which the Demised Premises forms a part ("Common Utilities"). The operation, maintenance and repair of the Common Utilities shall be performed by Landlord and the costs thereof shall be charged pro rata to the tenants using the Common Utilities. Tenant further acknowledges that portions of the sprinkler system servicing the Demised Premises are used in common with other tenants of the Building of which the Demised Premises forms a part ("Sprinkler System"). Landlord will inspect, service and maintain the Sprinkler System, including the risers, valves and piping. All costs relating to the inspection, service and maintenance of the Sprinkler System, including the costs of any required governmental inspections, permits or approval, will be charged pro rata to the tenants using the Sprinkler System. Tenant shall pay to Landlord, as additional rent, its pro rata share of the costs of inspection, servicing, operation, maintenance and repair of the Common Utilities and the Sprinkler System, plus a 15% handling charge, such share to be calculated in accordance with the formula set forth in Section 6.01, except that the denominator shall be the number of square feet affected by the particular inspection, servicing, operation, maintenance and repair being performed. Such additional rent shall be paid to Landlord within ten (10) days of Tenant's receipt of Landlord's invoice for such additional rent. Landlord's cost to perform the foregoing shall not include its cost for any office personnel involved in the foregoing. The parties further agree that Landlord at his sole cost and expense, shall have the right, at any time, to cause the Sprinkler System for the Demised Premises to be separated. Upon completion of the separation, Tenant shall assume the obligation for maintenance of the Sprinkler System in the Demised Premises as provided in Section 10.02. (e) Fire Service Billing. Tenant acknowledges that Tenant shall pay to Landlord, as additional rent, its pro rata share of the Fire Service Billing issued by the Township of Edison for the Building of which the Demised Premises forms a part plus a 10% handling charge, such share to be calculated in accordance with Section 6.01. Tenant shall make payment to Landlord within ten (10) days of receipt of an invoice for such additional rent. See Section 6.07 for Alternate Method of Payment. Section 26.14. Signs. (a) Erection of Signs. Tenant shall have the right and privilege of erecting signs for advertising purposes in connection with its business at the Demised Premises provided, however, that no sign shall be erected on the roof and that all signs comply with the applicable rules and regulations of the applicable governmental boards and bureaus having jurisdiction thereof, and Tenant shall remove same at the expiration or sooner termination of this Lease. Notwithstanding the above, Landlord shall have the right to order the removal of such signs if, in its reasonable judgement, the content or design of said signs are not in harmony with the character of the Building or the surrounding locale. In such case, Tenant shall promptly remove same. -14- I.H.F.&S. M.O.N.L. 3/00 (b) Repair of Damage. Tenant shall be responsible for any damage caused by said signs and any damage so caused shall be repaired forthwith at Tenant's sole cost and expense. In the event any sign erected by Tenant is removed during the Term of this Lease or at the expiration or earlier termination thereof, Tenant shall repair any damage whatsoever caused by the removal at Tenant's sole cost and expense. Section 26.15. Force Majeure. The period of time during which either party is prevented from performing any act required to be performed under this Lease by reason of fire, catastrophe, labor difficulties, strikes, lock-outs, civil commotion, acts of God or of the public enemy, governmental prohibitions or preemptions, embargoes, inability to obtain materials or labor by reason of governmental regulations or prohibitions, or other events beyond the reasonable control of that party, as the case may be, shall be added to the time for performance of such act, and that party shall not be liable to the other or in default under this Lease as the results thereof. Section 26.16. Vacancy or Abandonment. In the event that the Demised Premises shall become vacant as the result of being vacated or abandoned by Tenant during the Term and such vacancy or abandonment shall exist for a period of two (2) months, Landlord may re-enter the same, either by force or otherwise, without being liable to prosecution therefor and re-let said Demised Premises as agent of Tenant and receive the rent therefor and apply the same first to payment of such expenses as Landlord may be put to in re-entering and then to payment of rent due under this Lease. In addition, such vacancy or abandonment shall constitute a default under Section 21.01. In any event, Tenant shall remain liable for any deficiency. Section 26.17. Governing Law. The interpretation and validity of this Lease shall be governed by the laws of the state in which the Demised Premises are located. Section 26.18. Brokerage. The parties mutually represent that Binswanger/Klatskin ("Broker") is the sole Broker responsible for introducing the parties in this Lease transaction and Landlord agrees to pay commission on the Lease pursuant to an Agreement entered into with said Broker. Tenant covenants and agrees to hold Landlord harmless from any claim of any other brokers, including any broker Tenant may hire in the future, alleging to be entitled to a commission pursuant to this Lease, or any future modification, amendment, renewal or extension of this Lease. Section 26.19. Additional Rent. If Tenant shall be in default under any term, covenant, provision or condition hereof, Landlord, after thirty (30) days notice that Landlord intends to cure such default, or without notice if in Landlord's reasonable judgment an emergency shall exist, shall have the right, but not the obligation, to cure such default, and Tenant shall pay to Landlord upon demand as additional rent the reasonable cost thereof with interest at the Lease Interest Rate (as hereinafter defined). Section 26.20. Notice by Tenant to Mortgagee. If required by the holder of a mortgage lien on the Premises (provided Tenant is furnished with written notice of such requirement), Tenant agrees (a) to notify such mortgagee of any alleged default by Landlord in any of the provisions of this Lease; and (b) to allow said mortgagee a reasonable period of time to cure such alleged default. Section 26.21. NOT USED. Section 26.22. Definitions. (a) "Re-enter and Re-entry". The terms "re-enter" and "re-entry" as used in this Lease are nor restricted to their technical legal meaning. (b) "Landlord". The term "Landlord" as used in this Lease means only the holder, for the time being, of Landlord's interest under this Lease so that in the event of any transfer of title to the Demised Premises Landlord shall be and hereby is entirely freed and relieved of all obligations of Landlord hereunder accruing after such transfer, and it shall be deemed without further agreement between the parties that such grantee, transferee or assignee has assumed and agreed to observe and perform all obligations of Landlord hereunder arising during the period it is the holder of Landlord's interest hereunder. (c) "Lease Interest Rate". The term "Lease Interest Rate", as used in Section 9.02 and 26.19 of this Lease, shall mean interest at the rate which three percent (3%) in excess of the then current rate of interest charged by the First Union National Bank as its so called "base rate". (d) "Index Change". The term "Index Change" shall mean the "all items" portions of the United States Department of Labor Bureau of Labor Statistics Consumer Price Index for urban wage earners and clerical workers (1982-84 = 100) for the city or region closest to the Demised Premises for which an index is prepared for the shortest period for which an index is published which includes the date on which this Lease is signed, divided into the said index for the shortest period for which an index is published which includes the date on which the relevant Renewal Term commences. If the index is no longer published, the index of consumer prices in such city or region most closely comparable to said index, after making such adjustments as may be prescribed by the agency publishing same or as otherwise may be required to compensate for changes subsequent to the Commencement Date, in items included or method of compilation or computation thereof, shall be substituted therefor. -15- I.H.F.&S. M.O.N.L. 5/00 Section 26.23. Late Payment Service Charge. Tenant covenants and agrees to pay to the Landlord a "Late Payment Service Charge" equal to four percent (4%) of any rent payment, or any other payment prescribed herein, which has not been paid in accordance with the terms and conditions of this Lease Agreement. Said "Late Payment Service Charge" shall be paid by Tenant to Landlord promptly upon proper notice and demand therefor. Notwithstanding the foregoing, in the event Landlord has delivered to Tenant a First Notice pursuant to Section 21.01 for non-payment of any additional rent and Tenant is contesting the payment of any additional rent in accordance with the provisions of Section 21.01, Landlord agrees not to impose a Late Payment Service Charge until after the expiration of the ten (10) day period following Landlord's Response. In the event Landlord has NOT delivered to Tenant a First Notice pursuant to Section 21.01 for non-payment of any additional rent and: Tenant is contesting, in good faith, the payment of such additional rent; and Tenant has provided Landlord with written notice of such contest within ten (10) days of Tenant's receipt of Landlord's invoice; and Such written notice contains the basis for Tenant's contest, including any and all required supporting documentation; and Tenant diligently prosecutes such contest in an expeditious manner; then Landlord shall delay exercising its right to impose a Late Payment Service Charge on contested additional rent payments for a period of fifteen (15) days after Landlord's receipt of Tenant's contest notice. Section 26.24. NOT USED. Section 26.25. Design and Construction Requirements. All requirements promulgated by any Federal, State or local governmental authority, including without limitation, under the Occupational Safety and Health Act (OSHA), the Spill Compensation and Control Act, the Industrial Site Recovery Act (ISRA) and all applicable building and fire safety codes with respect to Tenant's use and occupancy of the Demised Premises, including storage arrangements and/or racking systems, shall be the sole responsibility of the Tenant, except that Landlord warrants that the Premises are in compliance with design and construction requirements which are of general application at the Commencement Date of the Lease Term for light industrial type buildings, unless otherwise stated in this Lease, without regard to any specific use thereof (notwithstanding that such use may be for the purposes herein permitted or may have been consented to by Landlord). Section 26.26. Information for Mortgagee. The Tenant shall furnish to the Landlord any data or information which the Landlord shall reasonably require in his preparation of applications for mortgage financing, or as may be required by the mortgagee from time to time throughout the Term of this Lease. Section 26.27. Inspection by Landlord. The Tenant agrees that Landlord, its agents and other representatives, shall have the right to enter into and upon said Premises, or any part thereof, at all reasonable hours, for the purpose of examining the same upon reasonable advance notice not less than 24 hours, except in the event of emergency, or making such repairs or alterations therein as may be necessary for the safety and preservation thereof, without unduly disturbing the operations of Tenant. Section 26.28. Submission. Submission of this Lease for examination or signature of Tenant does not constitute an offer, reservation of, or option to lease; and this Lease will not be effective or binding upon the parties as a lease or otherwise, until execution and delivery by both Landlord and Tenant. Section 26.29. Environmental Covenants. (a) Tenant covenants not to discharge any "Hazardous Substances" or "Hazardous Wastes" (as said terms are defined in ISRA and/or Spill Compensation and Control Act) upon the Premises or any adjacent lands. In the event of any such discharge, Tenant shall immediately notify Landlord, and shall, at Tenant's sole cost and expense, immediately take any and all actions required by law. (b) Tenant agrees to conduct any and all environmental testing and sampling required by ISRA, if applicable, not more than six months, or less than two months, before the earlier of (i) the anticipated termination date of this Lease, or (ii) the date on which Tenant intends to "close, terminate or transfer operations" at the Premises (as those terms are defined in ISRA and/or in the regulations promulgated pursuant thereto). Tenant shall notify Landlord at least seven days in advance of any such testing or sampling and permit Landlord or its representatives to observe all testing and sampling activities. Tenant shall provide to the Landlord, within seven days from Landlord's request the following: (1) the name, address and telephone number and primary contact name of Tenant's environmental testing or sampling consultants or contractors; and (2) written authorization to such consultant or contractor to communicate freely with Landlord or its environmental consultants and to provide to Landlord or its environmental consultants, copies of all written materials relating to the Premises. Landlord agrees to obtain, on Tenant's behalf, if applicable, a Letter of Non-Applicability ("LNA") from the New Jersey Department of Environmental Protection and Energy at or near the end of Term. Tenant agrees to cooperate with Landlord in obtaining said LNA. Tenant also agrees to pay to Landlord the filing fee for said LNA within ten (10) days of Tenant's receipt of an invoice for same. (c) Tenant agrees to remove and clean-up any Hazardous Substances or Hazardous Wastes prior to cessation of operation or termination of this Lease. In the event that the clean-up is not completed prior to the termination date of this Lease, Tenant shall be deemed to be a Hold Over in accordance with Section 26.12 and all the obligations of Tenant under the Lease, including, but not limited to, the Tenant's obligation to pay Basic Rent and any additional rent shall continue until completion of the clean-up and receipt of written approval of such completion from the governmental authority(ies) having jurisdiction thereof; provided, however, that Tenant's rights under the Lease shall be limited to a right of access for the sole and limited purpose of completing the required clean-up. -16- I.H.F.&S. M.O.N.L. 10/93 (d) Landlord shall have the right to inspect the Premises and surrounding lands and waters and to conduct environmental surveys and testing of any nature whatsoever (collectively "Inspection"), at any time. Landlord's right to conduct Inspection shall include, without limitation, a right of access to all portions of the Premises for testing and a right to inspect all of Tenant's raw materials, processes, work in process, finished products, machinery, waste disposal procedures, waste disposal equipment and waste materials, and the right to remove samples of any of the foregoing for analysis. In addition, Tenant shall, upon request by Landlord, supply to Landlord, in writing, a listing of all of Tenant's raw materials and intermediate and finished products, if applicable, and a listing of any Hazardous or Toxic Substances or Wastes generated, manufactured, refined, treated, stored, handled or disposed of on or from the Demised Premises at any time during the Term hereof. Landlord shall pay the cost of such Inspection unless any one or more of the following conditions are applicable, in which event the entire cost and expense of the Inspection shall be borne by the Tenant: (1) the Inspection occurs within six months prior to, or within a reasonable time after, (i) the termination date of the Lease or the closure, termination or transfer of operations at the Premises and Tenant has failed to provide such testing as required in subsection (b) above; (ii) the assignment or sublease of all or a portion of the Premises by Tenant; or (iii) the termination of any such assignment or sublease; or (2) the Inspection is required by any governmental authority having jurisdiction ("Environmental Regulator"); or (3) the Inspection reveals any unlawful environmental contamination of or discharge on the Premises; or (4) the Inspection is the result of or in response to any discharge, spill or contamination of the Premises, or any clean-up of any of the foregoing. As used herein, the costs and expenses of Inspection includes all costs directly or indirectly related to such Inspection, or as may be required by any Environmental Regulator in the formulation of a clean-up plan or otherwise. Except in the case of an emergency, Landlord agrees to provide Tenant with written notice prior to entering onto the Demised Premises to perform an Inspection. Landlord further agrees not to perform any Inspection unless: it has a good faith belief that the Demised Premises contains the existence of Hazard Substances; or the Inspection is required by the mortgagee; or the Inspection is required by any governmental agency having jurisdiction. (e) Landlord shall have the right of injunctive relief to enforce any and all of Tenant's obligations under this Section. (f) Landlord shall have the right to remedy, at Tenant's sole cost and expense, which shall be due from Tenant upon demand as additional rent, any environmental contamination revealed by any Inspection or clean-up required by any Environmental Regulator. (g) All rights and remedies of the Landlord under this Section are cumulative and in addition to any other rights or remedies provided to Landlord elsewhere in this Lease or pursuant to applicable law. In the event of any conflict between the provisions of this Section and the other provisions of this Lease, the provision which gives the greater protection to the Landlord shall control. (h) Notwithstanding any provision in this Section 26.29 to the contrary, Landlord agrees that Tenant shall not be responsible for: 1. any Hazardous Substances or Hazardous Wastes which is existing on the Demised Premises prior to Tenant's occupancy; or 2. any contamination of the Demised Premises caused by Landlord, his agents, invitees, licensees, employees or anyone acting under his control or authority; or 3. any Hazardous Substances or Hazardous Wastes on the Demised Premises caused by any third party tenants Landlord has given the right to use any of the Common Drive Easements existing on the Demised Premises; or 4. Subterranean contamination of ground, water or soil which is not the result of a contamination source which is located within the Demised Premises or is in any way related to Tenant's operations at the Demised Premises. Tenant shall only be relieved of its responsibilities as set forth in this Section 26.29(h) if Tenant provides Landlord with notice of its discovery of any such contamination within three (3) business days of Tenant's actual discovery of such contamination. Section 26.30. Tests Prior To Commencement. Prior to the Commencement Date, the Landlord, at its own cost and expense, shall cause the Demised Premises to be inspected by an environmental testing consultant who shall make such tests as he shall deem reasonable so that he may issue to Landlord and Tenant a report confirming that as of the Commencement Date of this Lease the Demised Premises are in compliance with applicable governmental regulations. Section 26.31. Fit and Finish. The parties herein acknowledge that they have inspected several buildings constructed and leased by the Landlord to others. The parties agree that the fit and finish of the Demised Premises shall be substantially equal to the quality of those which they have inspected. -17- I.H.F.&S. M.O.N.L. 2/99 ARTICLE XXVII - SECURITY Section 27.01. Security Deposit. (a) Tenant hereby agrees to deliver to Landlord upon execution of this Lease Agreement, as security, an irrevocable letter of credit to be issued by a United States financial institution reasonably satisfactory to Landlord, in favor of Landlord, in the amount of $48,500.00 (hereinafter "Letter of Credit"). The Letter of Credit shall be substantially in the form annexed hereto marked Exhibit C (with such changes as may be reasonably required by the issuing financial institution) and by its terms shall expire no earlier than one year after the date of its issuance, subject to automatic renewal as set forth below. (b) It is the intention of the parties hereto that during the original Term and any renewal term(s), the Landlord shall have in its possession a valid, unexpired, irrevocable Letter of Credit as prescribed herein. In order to implement this intention, the Letter of Credit shall be automatically renewed upon its "original expiration date", or any "renewal expiration date" as the case may be. Such automatic renewals shall be for additional one year periods and shall continue until thirty (30) days after the expiration of the original Term and any renewal term(s) of this Lease. (c) Failure of Tenant to deliver the Letter of Credit as required by subsection (a) above, or to renew the Letter of Credit as required by subsection (b) above, shall constitute a default under this Lease; and upon such event, and in the event said default is not cured within five (5) business days after written Notice thereof, Landlord shall be entitled to draw the full amount of the Letter of Credit and to hold the cash realized thereby as security under this Lease. (d) Notwithstanding anything to the contrary contained in this Section 27.01, if Landlord shall present the Letter of Credit for payment, Landlord shall, on the day it presents such Letter of Credit for payment, deliver to Tenant a copy of the certificate required to be delivered by Landlord under such Letter of Credit. If Tenant's default described in Section 27.01(c) is limited to the failure to renew the Letter of Credit, as stipulated in Section 27.01(b), then, if the Lease is in full force and effect, the Landlord shall forthwith return to Tenant all monies paid to Landlord under the said Letter of Credit, upon delivery of a renewal Letter of Credit. Section 27.02. Purpose. In the event that Tenant defaults in respect to any of the terms, provisions, covenants and conditions of this Lease, including, but not limited to payment of Basic Rent and any additional rent, Landlord shall be entitled to draw the full amount of the Letter of Credit and to hold the cash realized thereby as security under this Lease and use, apply or retain the cash realized for payment of any such Basic Rent and any additional rent in default or for any other sum which Landlord may expend or be required to expend by reason of Tenant's default, including any damages or deficiency in the reletting of the Premises, whether such damage or deficiency may accrue before or after summary proceedings or other re-entry by Landlord. The use by Landlord of all or any part of the security so deposited is not intended to be a form of liquidated damages and such use shall not release Tenant from liability for the full amount of any and all expenses incurred by Landlord by reason of Tenant's default hereunder and shall not be a waiver by Landlord of any other remedies granted to it under this Lease. Within ten (10) days after Landlord shall have drawn against the Letter of Credit by reason of a default by Tenant and shall have notified Tenant of such draw, Tenant shall either (a) procure an amendment from the issuing bank reinstating the Letter of Credit in the full amount required to be maintained hereunder, or (b) notify Landlord that Tenant denies that a default has occurred in which event Tenant shall forthwith commence an action (the "Proceeding") for a determination of the existence or nonexistence of such default. Tenant agrees to continue to pay Basic Rent, additional rent and all other amounts due under this Lease when due without abatement, setoff or deduction during such Proceeding. In the event the initial determination of the Proceeding is in favor of the Landlord, Tenant shall, within ten (10) days of such initial determination, (a) procure an amendment from the issuing bank reinstating the Letter of Credit in the full amount required to be maintained hereunder, and (b) pay to Landlord all the fees and expenses incurred by Landlord in connection with the Proceeding. In the event a final determination of such Proceeding is in favor of the Tenant, Landlord shall, within ten (10) days after such final determination (a) pay to the issuing bank the amount of monies previously drawn by Landlord against the default which was alleged to have occurred, at which time Landlord shall receive an amendment from the issuing bank reinstating the Letter of Credit in the full amount required to be maintained hereunder, and (b) pay to Tenant all fees and expenses incurred by Tenant in connection with the Proceedings. Landlord agrees to return to Tenant all monies paid to Landlord under the said Letter of Credit which exceed the amount of Tenant's default within ten (10) days of Landlord's receipt of an amendment from the issuing bank reinstating the Letter of Credit in the full amount required to be maintained hereunder, as aforesaid. Section 27.03. No Interest on Return. In the event that Tenant shall fully and faithfully comply with the terms, provisions, covenants and conditions of this Lease, the security or any balance thereof shall be returned to Tenant after the time fixed as the expiration of the Term. Tenant shall not be entitled to any interest on the aforesaid security. Section 27.04. Consequence of Assignment. In the absence of evidence satisfactory to Landlord of any assignment of the right to receive the security, or the remaining balance hereof, Landlord may return the security to the original Tenant, regardless of one or more assignments of the Lease itself. In the event Landlord shall not have received such satisfactory evidence of any such assignment, Landlord shall be relieved and released from any such obligation if such payment is made to the Tenant herein named in this Lease. Section 27.05. Consequence of Sale. In the event of a bona fide sale, subject to this Lease, Landlord shall transfer the security to the vendee for the benefit of Tenant, and Landlord shall have the right to transfer the security to the vendee for the benefit of Tenant, and Landlord shall be considered released by Tenant from all liability for the return of such security, and Tenant agrees to took solely to the new Landlord for the return of the said security, and it is agreed that this shall apply to every transfer or assignment made of the security to a new landlord. Section 27.06. Mortgagee Not Responsible. No holder of a mortgage on the Premises shall be responsible in connection with the security deposited hereunder, by way of credit or payment of any rent or otherwise, unless such mortgagee actually shall have received the security deposited hereunder. The security deposited under this Lease shall not be mortgaged, assigned or encumbered by Tenant. Section 27.07. Default. It is expressly understood and agreed that the issuance of a warrant for possession in summary proceedings or the entry of a judgment for possession upon Landlord's complaint in a plenary action or the re-entering of said Premises by Landlord for any default on the part of Tenant prior to the expiration of the Term shall not be deemed such a termination of this Lease as to entitle Tenant to the recovery of the said security; that any unapplied portion of said deposit shall be retained and remain in the possession of Landlord until the end of the Term hereinbefore stated. -18- ARTICLE XXVIII - SPECIAL TENANT IMPROVEMENTS Section 28.01. Special Tenant Improvements. Landlord and Tenant hereby acknowledge that Tenant's use and occupancy of the Demised Premises requires the installation of certain improvements as more particularly set forth in Section 28.02 ("Special Tenant Improvements"). The Special Tenant Improvements are in addition to the Work To Be Performed By Landlord, as set forth in Section 3.02 above. Section 28.02. Scope of Work. Landlord and Tenant hereby agree that the scope of work of the Special Tenant Improvements shall be as follows: 1. Modify the exisitng main office area by: a. removing approximately 118 lineal feet of partition walls, as shown on the Plans. b. closing three (3) existing door openings at locations shown on the Plans. c. installing five (5) new door openings at locations shown on the Plans. d. installing approximately 56 lineal feet of walls, as shown on the Plans. e. modifying the existing HVAC ducts, sprinkler, acoustic ceiling tile, plumbing and electrical systems to conform to new office layout. Section 28.03. Payment. The parties hereto agree that Tenant shall pay to Landlord, as additional rent, the sum of $48,500.00 which sum represents reimbursment to Landlord of Landlord's cost for the installation of the Special Tenant Improvements. The reimbursment shall be paid to Landlord over ten (10) years with interest at the rate of 10.0% per annum in one hundred twenty (120) consecutive equal monthly payments of $640.93 ("Special Additional Rent"). Upon the execution of this Lease, Tenant shall pay to Landlord a deposit in the amount of the first monthly installment of Special Additional Rent which deposit shall be held by Landlord as additional security for Tenant's performance of this Lease and applied by Landlord against the first monthly installment of Special Additional Rent due on the Commencement Date. Thereafter, payments shall be made simultaneously with monthly Basic Rent payments. Section 28.04. Pre-Payment. Tenant shall have the right to prepay the unpaid principal balance of the Special Additional Rent at any time with no penalty. Section 28.05. Removal of Special Tenant Improvements. Landlord and Tenant hereby acknowledge that the Special Tenant Improvements installed by Landlord shall become part of the real estate and may not be removed by Tenant at any tine during the Term of the Lease, any renewals thereof, or upon expiration of this Lease. Section 28.06. Non-Exercise of Right of Renewal. Notwithstanding anything to the contrary contained above, in the event Tenant does not exercise its first and/or second Right(s) of Renewal as provided in Section 2.02 above, the parties hereto agree that the then remaining principal balance of the Special Tenant Improvement Costs, plus all accrued interest, will become due and payable on the first day of the 57th month of the initial Term or the first day of the 33rd month of the first renewal period, as the case may be. Section 28.07. Default. Failure by Tenant to make the monthly Special Additional Rent payments when due, or failure by Tenant to pay the then remaining principal balance of the Special Tenant Improvement Costs, plus all accrued interest, due upon Tenant's non-exercise of its first and/or second Right(s) of Renewal as set forth in Section 28.05 above, shall be deemed a default pursuant to Article XXI hereof, and Landlord shall be entitled to all remedies contained in Article XXI, including, but not limited to, presenting the Letter of Credit for payment in accordance with the provisions of Article XXVII. Tenant's Representation. Tenant hereby represents and warrants to Landlord that the following persons constitute the holders of all of the outstanding equity interests and voting power of Tenant as of the date hereof: ---------------------------------- ---------------------------------- ---------------------------------- ---------------------------------- -19- IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written TWO SEVENTY - M - EDISON, LANDLORD by: Isaac Heller, Managing Partner by HELLER INDUSTRIAL PARKS, INC., MANAGER Attest: by: ---------------------------------- - ------------------------------- Secretary TENANT: UNITED NATURAL TRADING CO. ------------------------------------- Attest: /s/ Kathleen Matyi BY: /s/ [ILLEGIBLE] - -------------------------------- --------------------------------- President Guarantee. In consideration of the signing of this Lease, United Natural Foods, Inc., a Delawre corporation with a mailing address of 260 Lake Road, Dayville, Connecticut 06241 ("GUARANTOR") does hereby guarantee to the Landlord, its heirs, executors, administrators, successors and assigns, Tenant's compliance with the terms and conditions of this Lease, as it may be amended from time to time, including, but not limited to, the due, regular and punctual payment by Tenant of the Basic Rent, additional rent and all other amounts due. ATTEST: United Natural Foods, Inc. --------------------------------------- GUARANTOR /s/ Kathleen Matyi by: /s/ Daniel V. Atwood - -------------------------------- ----------------------------------- Secretary -20- I.H.F.&S. M.O.N.L. 5/01 EXHIBIT "B" Township of Edison, County of Middlesex, State of New Jersey Being a portion of Lot 30, in Block 375-BB, as shown on a map entitled Tax Map of The Township of Edison The said Demised Premises consist of a portion of the one-story building located upon the land above described. The said building encloses a total area of 270,000 square feet. The portion of the building and the office space demised herein, as more particularly shown on the Plans and Exhibit A consists of 110,125 square feet. The land demised includes all of the land under the portion of the building demised and additional lands as is more particularly shown outlined in red within the Lease Line on Exhibit A, subject to the use, by various tenants of the building of which the Demised Premises forms a part, of Common Drive Easement 'A', Common Drive Easement 'B' and Common Drive Easement 'C', as shown on Exhibit A, and further subject to the use, by various tenants of a building on the adjacent parcel, of Common Drive Easement 'A' and Common Drive Easement 'B'. This demise is subject to the following Permitted Exceptions: (a) 50 foot setback line; (b) A servitude of the public in and to that portion of the Premises that lies within Executive Avenue; (c) Restrictions to run with the land as follows: (i) No building shall at any time be erected on the Premises unless such building shall be set back not less than: 110 feet from the southerly property boundary, 175 feet from the westerly property boundary, 45 feet from the northerly property boundary and 130 feet from the easterly property boundary. (ii) All buildings erected on the property shall be of masonry construction or its equivalent. All walls facing public roadways and the first bay on each side of such walls shall be finished with face brick, natural stone, architecturally treated concrete panels, e.g. stucco, modern metal paneling or glass. Other walls shall be faced with common brick, concrete block, or concrete panel construction or its equivalent. (iii) All areas in the setbacks required by these restrictions shall be used either for open landscaped and green areas, driveways or for service access to the building or as a paved parking area subject to applicable law. The said landscaped and green areas shall be properly maintained in a sightly and attractive condition. (iv) Water tower, water tanks, stand pipes, penthouses, elevators or elevator equipment, stairways, ventilating fans or similar equipment required to operate and maintain the building, fire or parapet walls, skylight, tanks, cooling or other towers, wireless radio or television masts, flagpoles, chimneys, smoke stacks, gravity flow storage and mixing towers or similar structures may exceed a height of fifty (50) feet from the established building grade only with the written approval of the Landlord. (v) In addition to such easements as shall have been reserved by Landlord as provided herein, Landlord excepts and reserves for itself non-exclusive easements under and through the above designated set-back areas, as well as through the bar joists and trusses within the Demised Premises, for constructing, erecting, maintaining and operating facilities, including wires and conduits for lighting and power, telephone wires, signs, gas and water lines, railroad tracks, sanitary and storm sewer lines and drains, all of which facilities are hereinafter referred to as Utilities, and the Landlord may grant and convey easements to others for such purposes. All contracts for the installation and maintenance of such Utilities shall provide, inter alia, that the surface of the Premises shall be restored in harmony to its condition existing prior to work performed thereon, and so as not to interfere with Tenant's operations. (vi) Outdoor storage areas shall be effectively screened from streets upon which the Premises may have frontage by a wall, fence, shrubs, hedges or other foliage, all of which shall be properly maintained in a sightly and attractive condition. (vii) Neither the Premises nor any portion of thereof shall be used or maintained as a dumping ground for rubbish, trash garbage or other waste, which shall be kept in sanitary containers and regularly taken away from the Premises. All equipment for the storage or disposal of such material shall be kept in a clean and sanitary condition and shall be effectively screened from streets upon which the Premises may have frontage by a wall, fence, shrubs, hedges or other foliage all of which shall be properly maintained in a sightly and attractive condition. (viii) The Premises shall not be used in any manner which will permit dust, noxides, odors, fumes or harmful airborne particles or gases which might contaminate, damage or injure persons or property to emanate or to be emitted from any structure or facility on the Premises. (ix) The Premises shall not be used in any manner which will permit solid or liquid contaminates to be put upon the land either under the building(s) or outside of the building(s). No washing, repairing or servicing of tractors and/or trailers will be permitted at the Demised Premises. No underground storage tanks, wells, cisterns, pipes or other similar structures shall be constructed without prior written approval of the Landlord. No pumping of underground water shall be permitted. (x) Upon any breach by the Tenant of any of the foregoing covenants or conditions, Landlord shall have a remedy of injunctive relief in addition to all other remedies available to Landlord under applicable law. It is understood, however, that the breach of any of the foregoing covenants, conditions and restrictions shall not defeat or render invalid the lien of any mortgage on the Premises made in good faith and for value; provided, however, that any breach or continuance thereof may be enjoined, abated or remedied by the proper arbitration proceedings as aforesaid and provided further, that each and all of the foregoing covenants, conditions and restrictions shall at all times remain in full force and effect against said Premises or any part thereof, title to which is obtained by foreclosure of any such mortgage. (xi) Reference in these restrictions and conditions to Landlord or Tenant shall include their respective heirs, executors, administrators, successors and assigns. (d) Such facts as an accurate survey may disclose provided there is nothing revealed thereby which would prohibit the use and occupancy by Tenant in accordance with the provisions of this Lease. (e) Lien of Mortgage dated October 20, 2000 to Massachusetts Mutual Life Insurance Company recorded in the official records in the Middlesex County Clerks Office on October 20, 2000 in Mortgage Book 6410, Page 459. (g) Common Electric & Sprinkler Room and the Common Sprinkler Room, both shown on Exhibit "A" and access thereto is subject to use in common with others who lease a portion or portions of the Building of which the Demised Premises forms a part. I.H.F.&S. M.O.N.L. 2/99 EXHIBIT C APPROPRIATE BANK LETTERHEAD Jeffrey J. Milanaik President Heller Industrial Parks, Inc. 205 Mill Road Edison, New Jersey 08837 Dear Sir: At the request of UNITED NATURAL TRADING CO. we hereby establish our Irrevocable Letter of Credit No. ______ in favor of the Landlord under the lease agreement described below, in the amount of U.S.$ 48,500.00 (Forty Eight Thousand, Five Hundred and Zero/100 Dollars) effective upon the date hereof and expiring at our main office, ____________________________________ on ___________________________. Funds under our Irrevocable Letter of Credit are available to you against your sight draft on us accompanied by a certificate of an authorized representative of the beneficiary stating that: (i) an uncured default or defaults exist, under a certain Lease Agreement dated _______________________ between TWO SEVENTY - M - EDISON, as Landlord and UNITED NATURAL TRADING CO., d/b/a HERSHEY IMPORT CO., INC., as Tenant, and specifying and describing such default or defaults; (ii) a copy of the above certificate has been delivered to Tenant at the Demised Premises, or if Tenant no longer occupies the Demised Premises, then at such location as Tenant is then located. It is a condition of this Letter of Credit that it shall be automatically renewed, for a period of one (1) year from the present or any future expiration date, unless at least sixty (60) days prior to such expiration date, we notify you by Certified Mail, Return Receipt Requested, that we elect not to renew. If we receive such certificate and your draft on or before the close of business on the date of expiration of this Letter of Credit, we will forthwith honor the draft. This Letter of Credit sets forth in full the terms of our undertaking and such undertaking shall not in any way be modified, amended or amplified by reference to any document or instrument referred to herein or in which this Letter of Credit may be referred to; or to which this Letter of Credit relates; and any such reference shall not be deemed to incorporate herein by reference any document or instrument. Very truly yours, APPROPRIATE BANK APPROPRIATE SIGNATURE I.H.F.&S. M.O.N.L. 5/00 EXHIBIT D RECORD AND RETURN TO: Massachusetts Mutual Life Insurance Company 1295 State Street Springfield, Massachusetts 01111-0001 SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT, made and entered into as of the ______ day of _______, 2001 by and between Massachusetts Mutual Life Insurance Company, with a principal office at 1295 State Street, Springfield, Massachusetts 01111-0001 (hereinafter called "Mortgagee"), Two Seventy - M - Edison, with a principal office at 205 Mill Road, Edison, New Jersey 08837 (hereinafter called "Lessor") and Legion Paper Corp. having its principal office at ______________________ (hereinafter called "Lessee") W I T N E S S E T H: WHEREAS, Lessee has by a written lease dated ________________ as amended by ________________ (hereinafter called the "Lease") leased from Lessor all or part of certain real estate and improvements thereon located in the Township of Edison, County of Middlesex and State of New Jersey as more particularly described on Exhibit A attached hereto (the "Demised Premises"); and WHEREAS, Lessor is encumbering the Demised Premises as security for a loan in the original amount of $_______ from Mortgagee to Lessor (the "Mortgage"); and WHEREAS, Lessee, Lessor, and Mortgagee have agreed to the following as respects their mutual rights and obligations pursuant to the Lease and the Mortgage; NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) paid by each party to the other and the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt whereof is hereby acknowledged, the parties hereto do hereby covenant and agree as follows: (1) Lessee's interest in the Lease and all rights of Lessee thereunder, including any purchase option, if any shall be and are hereby declared subject and subordinate to the Mortgage upon the Demised Premises and its terms, and the term "Mortgage" as used herein shall also include any amendment, supplement, modification, renewal or replacement thereof. (2) In the event of any foreclosure of the Mortgage or conveyance in lieu of foreclosure, provided that the Lessee shall not then be in default beyond any grace period under the Lease and the Lease shall then be in full force and effect, then Lessee shall not be made a party in any action or proceeding to remove or evict Lessee or to disturb its possession, nor shall the leasehold estate of Lessee created by the Lease be affected in any way, and the Lease shall continue in full force and effect as a direct lease between Lessee and Mortgagee. (3) After the receipt by Lessee of notice from Mortgagee of any foreclosure of the Mortgage or any conveyance of the Demised Premises in lieu of foreclosure, Lessee will thereafter attorn to and recognize Mortgagee or any purchaser from Mortgagee at foreclosure sale or otherwise as its substitute lessor, having thus attorned, Lessee's possession shall not thereafter be disturbed, providing, and as long as, it shall continue to timely pay all rentals under the Lease, and otherwise observes or performs the covenants, terms and conditions of the Lease. (4) Lessee shall not prepay any of the rents under the Lease more than one month except with the prior written consent of Mortgagee. (5) In no event shall Mortgagee be liable for any prior act or omission of the Lessor, nor shall Mortgagee be subject to any offsets or deficiencies which Lessee may be entitled to assert against the Lessor as a result of any act or omissions of Lessor occurring prior to Mortgagee's obtaining possession of the premises. (6) No conveyance by Lessor of its interest in the Demised Premises or any part thereof to Lessee, shall, insofar as Mortgagee is concerned, cause the fee estate and the Lessee's leasehold estate created by the Lease to merge, rather said estate shall remain separate and distinct notwithstanding the vesting of the Leasehold and fee estates in any single person or entity by reason of such conveyance or otherwise. (7) The Lease may not be amended, altered or terminated without the prior written consent of Mortgagee. (8) This Agreement and its terms shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including without limitation, any purchaser at any foreclosure sale. PREPARED BY: ______________ I.H.F.&S. M.O.N.L. 5/00 IN WITNESS WHEREOF, this Agreement has been fully executed under seal on the day and year first above written TWO SEVENTY - M- EDISON, LESSOR MASSACHUSETTS MUTUAL LIFE INSURANCE by: ISAAC HELLER, Managing Partner COMPANY, MORTGAGEE by HELLER INDUSTRIAL PARKS, INC., MANAGER by: David L. Babson & Company., Inc., its authorized agent by:__________________________________ President by::_____________________________________ _____________________________, LESSEE by::_________________________________ MASSACHUSETTS ) ) SS. ________________ ) On this _________ day of __________, 2001 before me, a Notary Public in and for said County, personally appeared _____________________________ to me personally known to be the identical person whose name is subscribed to the instrument as an officer herein named, who being by me duly sworn did say that he/she is the __________________________ of David L. Babson & Company Inc., a corporation, authorized agent for Massachusetts Mutual Life Insurance Company, Mortgagee, and that the seal affixed to said instrument is the seal of said corporation, and that said instrument was signed and seated on behalf of said corporation in its capacity as authorized agent by authority of Mortgagee's Board of Directors and the aforesaid officer acknowledged the execution of said instrument to be the voluntary act and deed of said corporation in its capacity as authorized agent of Mortgagee, by it and by him/her voluntarily executed. _______________________________________________________ Notary Public in and for County, Massachusetts NEW JERSEY ) ) SS. MIDDLESEX ) On this _________ day of __________, 2001 before me, a Notary Public in and for said County, personally appeared _____________________________ to me personally known to be the identical person whose name is subscribed to the instrument as an officer herein named, who being by me duly sworn did say that he/she is the __________________________ of Heller Industrial Parks, Inc., a New Jersey corporation, manager for Two Seventy - M - Edison, a New Jersey general partnership, Lessor, and that said instrument was signed on behalf of said partnership by authority of Lessor's managing partner, and the aforesaid officer acknowledged the execution of said instrument to be the voluntary act and deed of said partnership, in its capacity as manager of Lessor, by it and by him/her voluntarily executed. _______________________________________________________ Notary Public in and for Middlesex County, New Jersey ) ) SS. ) On this ________ day of _________, 2001 before me, a Notary Public in and for said County. personally appeared _______________________________ to me personally known to be the identical person whose name is subscribed to the instrument as an officer for the Lessee herein named, who being by me duly sworn did say that he/she is the _______________________ of _______________________, a ___________________ corporation, and that said instrument was signed on behalf of said corporation by authority of its Board of Directors, and the aforesaid officer acknowledged the execution of said instrument to be the voluntary act and deed of said corporation, by it and by him/her voluntarily executed. _______________________________________________________ Notary Public in and for County, -2- EX-21 7 ex-21.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT NAME STATE OF INCORPORATION Albert's Organics, Inc. California Blooming Prairie Delaware Mother Earth Market, Inc. Georgia Mountain People's Warehouse Inc. California Natural Retail Group, Inc. Delaware Nutrasource, Inc. Washington Rainbow Natural Foods, Inc. Colorado Stow Mills, Inc. Vermont United Natural Foods Pennsylvania, Inc Pennsylvania United Natural Transportation Co. Delaware United Natural Trading, Inc Co. Delaware d/b/a Hershey Import Co. EX-23 8 ex-23.txt EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors United Natural Foods, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 333-19945, 333-19947, 333-19949, 333-56652 and 333-71673 on Form S-8) of United Natural Foods, Inc. of our reports dated September 4, 2002, relating to the consolidated balance sheets of United Natural Foods, Inc. and Subsidiaries as of July 31, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 2002, and the related schedule, which reports appear in the July 31, 2002 annual report on Form 10-K of United Natural Foods, Inc. /s/ KPMG LLP KPMG LLP Providence, Rhode Island October 24, 2002 -----END PRIVACY-ENHANCED MESSAGE-----