-----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, KvUMzQzU9rgq8tLfBoCrGwvuWWkEtAMF53HwXnP1SE6DNxheLEm0+vLw3IZWd721 QGadIYYJI4jEAZOa9CuH7w== 0000043300-08-000007.txt : 20080108 0000043300-08-000007.hdr.sgml : 20080108 20080107183713 ACCESSION NUMBER: 0000043300-08-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20071201 FILED AS OF DATE: 20080108 DATE AS OF CHANGE: 20080107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT ATLANTIC & PACIFIC TEA CO INC CENTRAL INDEX KEY: 0000043300 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 131890974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0225 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04141 FILM NUMBER: 08516259 BUSINESS ADDRESS: STREET 1: 2 PARAGON DR CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2015739700 MAIL ADDRESS: STREET 1: 2 PARAGON DRIVE CITY: MONTVALE STATE: NJ ZIP: 07645 10-Q 1 f10q32007.txt FORM 10Q FOR THIRD QUARTER ENDED DECEMBER 1, 2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q MARK ONE [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED DECEMBER 1, 2007 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 1-4141 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. ------------------------------------------------- (Exact name of registrant as specified in charter) MARYLAND 13-1890974 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 PARAGON DRIVE MONTVALE, NEW JERSEY 07645 --------------------------------------- (Address of principal executive offices) (201) 573-9700 -------------------------------------------------- Registrant's telephone number, including area code 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 WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED FILER AND LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE EXCHANGE ACT. (CHECK ONE): LARGE ACCELERATED FILER [ ] ACCELERATED FILER [X] NON-ACCELERATED FILER [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X] AS OF JANUARY 4, 2008 THE REGISTRANT HAD A TOTAL OF 57,000,320 SHARES OF COMMON STOCK - $1 PAR VALUE OUTSTANDING. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share and per share amounts) (Unaudited)
12 Weeks Ended 40 weeks Ended ---------------------------------- --------------------------------- Dec. 1, 2007 Dec. 2, 2006 Dec. 1, 2007 Dec. 2, 2006 -------------- -------------- -------------- ------------- Sales $ 1,251,123 $ 1,213,476 $ 4,204,630 $ 4,103,430 Cost of merchandise sold (869,448) (837,749) (2,901,336) (2,828,584) -------------- -------------- -------------- ------------- Gross margin 381,675 375,727 1,303,294 1,274,846 Store operating, general and administrative expense (402,808) (381,426) (1,323,411) (1,294,499) -------------- -------------- -------------- ------------- Loss from operations (21,133) (5,699) (20,117) (19,653) Gain (loss) on sale of Canadian operations 495 (599) 209 (890) Gain on disposition of Metro, Inc. 106,063 -- 184,451 -- Interest expense (14,499) (15,342) (48,806) (50,167) Interest and dividend income 3,910 1,697 12,231 7,977 Equity in earnings of Metro, Inc. -- 11,023 7,869 30,840 -------------- -------------- -------------- ------------- Income (loss) from continuing operations before income taxes 74,836 (8,920) 135,837 (31,893) (Provision for) benefit from income taxes (1,754) 41,177 (4,288) 55,632 -------------- -------------- -------------- ------------- Income from continuing operations 73,082 32,257 131,549 23,739 Discontinued operations: (Loss) income from operations of discontinued businesses, net of tax provision of $0 and $180 for the 12 weeks ended 12/1/07 and 12/2/06, respectively, and net of tax benefit of $0 and $593 for the 40 weeks ended 12/1/07 and 12/2/06, respectively (13,540) 651 (179,667) 2,758 (Loss) gain on disposal of discontinued businesses, net of tax benefit of $0 and $2,158 for the 12 weeks ended 12/1/07 and 12/2/06, respectively, and $0 and $2,100 for the 40 weeks ended 12/1/07 and 12/2/06, respectively (2,235) 7,799 (51,039) 7,590 -------------- -------------- -------------- ------------- (Loss) income from discontinued operations (15,775) 8,450 (230,706) 10,348 -------------- -------------- -------------- ------------- Net income (loss) $ 57,307 $ 40,707 $ (99,157) $ 34,087 ============== ============== ============== ============= Net income (loss) per share - basic: Continuing operations $ 1.74 $0.78 $ 3.14 $ 0.57 Discontinued operations (0.38) 0.20 (5.51) 0.25 -------------- -------------- -------------- ------------- Net income (loss) per share - basic $ 1.36 $ 0.98 $ (2.37) $ 0.82 ============== ============== ============== ============= Net income (loss) per share - diluted: Continuing operations $ 1.73 $ 0.77 $ 3.11 $ 0.57 Discontinued operations (0.38) 0.20 (5.45) 0.24 -------------- -------------- -------------- ------------- Net income (loss) per share - diluted $ 1.35 $ 0.97 $ (2.34) $ 0.81 ============== ============== ============== ============= Weighted average number of common shares outstanding 41,961,253 41,499,554 41,888,969 41,403,346 Common stock equivalents 402,650 520,892 417,379 501,420 -------------- -------------- -------------- ------------- Weighted average number of common and common equivalent shares outstanding 42,363,903 42,020,446 42,306,348 41,904,766 ============== ============== ============== =============
See Notes to Quarterly Report 2 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Dollars in thousands, except share amounts) (Unaudited)
Retained Accumulated Common Stock Additional Earnings Other Total ------------------------- Paid-in (Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit) Income Equity ---------- ---------- ----------- ------------- ------------- ------------- 40 WEEK PERIOD ENDED DECEMBER 1, 2007 Balance at beginning of period, as previously reported 41,589,195 $ 41,589 $ 212,868 $ 153,325 $ 22,888 $ 430,670 Impact of the adoption of change in measurement date under FAS 158 (643) (643) Cumulative impact of the adoption of FIN48 24,421 24,421 ---------- ---------- ----------- ------------- ------------- ------------- Balance at beginning of period, as adjusted 41,589,195 41,589 212,868 177,103 22,888 454,448 Net loss (99,157) (99,157) Other comprehensive loss (10,802) (10,802) Stock options exercised 368,974 369 5,848 6,217 Tax benefit on stock options 2,374 2,374 Other share based awards 6,597 7 7,275 7,282 ---------- ---------- ----------- ------------- ------------- ------------- Balance at end of period 41,964,766 $ 41,965 $ 228,365 $ 77,946 $ 12,086 $ 360,362 ========== ========== =========== ============= ============= ============= 40 WEEK PERIOD ENDED DECEMBER 2, 2006 Balance at beginning of period 41,148,987 $ 41,149 $ 497,193 $ 126,432 $ 6,953 $ 671,727 Net income 34,087 34,087 Other comprehensive income 3,566 3,566 Cash dividends on common stock - $7.25 per share (299,089) (299,089) Stock options exercised 333,161 333 4,700 5,033 Other share based awards 26,104 26 6,626 6,652 ---------- ---------- ----------- ------------- ------------- ------------- Balance at end of period 41,508,252 $ 41,508 $ 209,430 $ 160,519 $ 10,519 $ 421,976 ========== ========== =========== ============= ============= =============
COMPREHENSIVE (LOSS) INCOME
12 Weeks Ended 40 weeks Ended ------------------------------ -------------------------------- Dec. 1, 2007 Dec. 2, 2006 Dec. 1, 2007 Dec. 2, 2006 ------------ ------------ ------------ ------------ Net income (loss) $ 57,307 $ 40,707 $ (99,157) $ 34,087 ------------ ------------ ------------ ------------ Foreign currency translation adjustment, net of tax (34,268) (9,398) (9,710) 2,904 Reclassification adjustment for sale of investment securities, net of tax (115,385) -- -- -- Net unrealized gain on marketable securities, net of tax -- 277 22 662 Pension and other post-retirement benefits, net of tax (334) -- (1,114) -- ------------ ------------ ------------ ------------ Other comprehensive (loss) income, net of tax (149,987) (9,121) (10,802) 3,566 ------------ ------------ ------------ ------------ Total comprehensive (loss) income $ (92,680) $ 31,586 $ (109,959) $ 37,653 ============ ============ ============ ============
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
Net Unrealized Net Unrealized Pension Accumulated Foreign Gain on (Loss) Gain & Other Other Currency Investment on Marketable Post-retirement Comprehensive Translation Securities Securities Benefits Income ------------- -------------- -------------- --------------- ------------- Balance at February 24, 2007 $ 9,710 $ -- $ (22) $ 13,200 $ 22,888 Current period change (9,710) -- 22 (1,114) (10,802) ------------- -------------- -------------- --------------- ------------ Balance at December 1, 2007 $ -- $ -- $ -- $ 12,086 $ 12,086 ============= ============== ============== =============== ============ Balance at February 25, 2006 $ 12,874 $ -- $ (1,015) $ (4,906) $ 6,953 Current period change 2,904 -- 662 -- 3,566 ------------- -------------- -------------- --------------- ------------ Balance at December 2, 2006 $ 15,778 $ -- $ (353) $ (4,906) $ 10,519 ============= ============== ============== =============== ============
See Notes to Quarterly Report 3 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands except share amounts)
December 1, 2007 February 24, 2007 ---------------- ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 69,410 $ 86,194 Restricted cash 542,109 51,176 Restricted marketable securities -- 20,335 Accounts receivable, net of allowance for doubtful accounts of $5,564 and $4,514 at December 1, 2007 and February 24, 2007, respectively 85,493 117,082 Inventories 334,713 411,370 Prepaid expenses and other current assets 81,317 62,751 ---------------- ----------------- Total current assets 1,113,042 748,908 ---------------- ----------------- Non-current assets: Property: Property owned 745,199 919,322 Property leased under capital leases 12,461 20,676 ---------------- ----------------- Property - net 757,660 939,998 Equity investment in Metro, Inc. -- 368,871 Other assets 192,313 53,846 ---------------- ----------------- Total assets $ 2,063,015 $ 2,111,623 ================ ================= LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 92 $ 32,069 Current portion of obligations under capital leases 1,375 1,554 Accounts payable 165,546 197,500 Book overdrafts 33,281 31,833 Accrued salaries, wages and benefits 91,625 115,719 Accrued taxes 28,801 34,452 Other accruals 142,776 145,264 ---------------- ----------------- Total current liabilities 463,496 558,391 ---------------- ----------------- Non-current liabilities: Long-term debt 225,436 284,214 Long-term obligations under capital leases 28,522 29,938 Long-term real estate liabilities 282,866 300,832 Deferred real estate income 24,385 -- Other non-current liabilities 677,948 507,578 ---------------- ----------------- Total liabilities 1,702,653 1,680,953 ---------------- ----------------- Commitments and contingencies Stockholders' equity: Preferred stock--no par value; authorized - 3,000,000 shares; issued - none -- -- Common stock--$1 par value; authorized - 80,000,000 shares; issued and outstanding - 41,964,766 and 41,589,195 shares at December 1, 2007 and February 24, 2007, respectively 41,965 41,589 Additional paid-in capital 228,365 212,868 Accumulated other comprehensive income 12,086 22,888 Retained earnings 77,946 153,325 ---------------- ----------------- Total stockholders' equity 360,362 430,670 ---------------- ----------------- Total liabilities and stockholders' equity $ 2,063,015 $ 2,111,623 ================ =================
See Notes to Quarterly Report 4 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
40 weeks Ended ----------------------------- Dec. 1, 2007 Dec. 2, 2006 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (99,157) $ 34,087 Adjustments to reconcile net (loss) income to net cash used in operating activities: Asset disposition initiatives 120,422 3,673 Depreciation and amortization 122,614 135,775 Income tax benefit -- (61,545) Loss (gain) on disposal of owned property and write-down of property, net 2,514 (17,844) Loss (gain) on disposal of discontinued operations 51,039 (7,590) Other property impairments 3,551 3,552 (Gain) loss on sale of Canadian operations (209) 890 Other share based awards 7,282 6,652 Equity in earnings of Metro, Inc. (7,869) (30,840) Proceeds from dividends from Metro, Inc. -- 5,067 Gain on disposition of Metro, Inc. (184,451) -- Other changes in assets and liabilities: Decrease in receivables 31,915 49,780 Decrease (increase) in inventories 72,741 (32,401) Increase in prepaid expenses and other current assets (14,230) (16,486) Increase in other assets (3,131) (2,897) Decrease in accounts payable (27,285) (10,221) Decrease in accrued salaries, wages, benefits and taxes (56,368) (30,508) Decrease in other accruals (2,012) (57,063) Decrease in other non-current liabilities (42,559) (20,381) Other operating activities, net 2,386 5,436 ------------ ------------ Net cash used in operating activities (22,807) (42,864) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property (98,447) (184,017) Proceeds from disposal of property 121,583 37,489 Purchase of business (765) (24,652) Disposal related expenditures for sale of Canadian operations (395) (890) Acquisition related expenditures for the purchase of Pathmark Stores, Inc. (18,668) -- (Increase) decrease in restricted cash (490,933) 142,724 Net proceeds from the sale of shares of Metro, Inc. 551,238 -- Purchases of marketable securities -- (148,700) Proceeds from maturities of marketable securities 20,446 230,904 ------------ ------------ Net cash provided by investing activities 84,059 52,858 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds under revolving lines of credit 459,200 1,262,900 Principal payments on revolving lines of credit (517,900) (1,134,400) Principal payments on long-term borrowings (31,977) (66) Total long term real estate liabilities 6,419 3,365 Principal payments on capital leases (2,715) (4,098) Increase in book overdrafts 1,448 19,673 Deferred financing fees (257) (233) Acquisition related expenditures for financing the purchase of Pathmark Stores, Inc. (865) -- Dividends paid -- (299,089) Tax benefit on stock options 2,374 -- Proceeds from exercises of stock options 6,217 5,033 ------------ ------------ Net cash used in financing activities (78,056) (146,915) Effect of exchange rate changes on cash and cash equivalents 20 80 ------------ ------------ Net decrease in cash and cash equivalents (16,784) (136,841) Cash and cash equivalents at beginning of period 86,194 229,589 ------------ ------------ Cash and cash equivalents at end of period $ 69,410 $ 92,748 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 17,380 $ 20,504 Cash paid during the year for income taxes $ 1,853 $ 4,952
See Notes to Quarterly Report 5 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 1. BASIS OF PRESENTATION The accompanying Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006, Consolidated Statements of Stockholders' Equity and Comprehensive Income and Consolidated Statements of Cash Flows for the 40 weeks ended December 1, 2007 and December 2, 2006, and the Consolidated Balance Sheets at December 1, 2007 and February 24, 2007 of The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company"), are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary for a fair statement of financial position and results of operations for such periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our revised Fiscal 2006 Annual Report on Form 8-K dated October 24, 2007. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of our Company and all subsidiaries. Intercompany accounts and transactions have been eliminated. Our Company used the equity method of accounting for our investment in Metro, Inc. through March 13, 2007 as we exerted significant influence over substantive operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its committees and through an information technology services agreement with Metro, Inc. However, as a result of the sale of 6,350,000 shares of our holdings in Metro, Inc., on March 13, 2007, our Company began recording our investment in Metro, Inc. under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") as a cost investment. On November 26, 2007, our Company sold the remaining 11,726,645 shares of our holdings in Metro, Inc. As a result of these sales, our Company no longer holds Class A subordinate shares of Metro, Inc. as our investment has been fully liquidated as of the balance sheet date. As discussed in Note 7 - Discontinued Operations, the criteria necessary to classify the operations for the Midwest and the Greater New Orleans area as discontinued have been satisfied and as such, have been reclassified in our Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006. 2. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement 109 ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we determine whether the benefits of our tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is more likely than not of being sustained in our Consolidated Financial Statements. For tax positions that are not more likely than not of being sustained upon audit, we do not 6 recognize any portion of the benefit in our Consolidated Financial Statements. The provisions of FIN 48 also provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. We adopted these requirements as of February 25, 2007. The cumulative effect of the adoption of the recognition and measurement provisions of FIN 48 resulted in a $24.4 million increase to the February 25, 2007 balance of retained earnings. Results of prior periods have not been restated. Our policy for interest and penalties under FIN 48 related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN 48. Therefore, we continue to recognize interest and penalties as incurred within "(Provision for) benefit from income taxes" in our Consolidated Statements of Operations. Refer to Note 11 - Income Taxes for further discussion. In October 2004, the government passed the Homeland Investment Act which allows companies to repatriate cash balances from their controlled foreign subsidiaries at a reduced rate. This was achieved by permitting a one time 85% dividends received deduction. Our Company completed the sale of our Canadian subsidiary to Metro, Inc. during fiscal 2005. As a result of this transaction, our Company repatriated $949.0 million from our foreign subsidiaries, of which $500.0 million is intended to qualify for the 85% dividends received deduction. Until such time as the taxing authorities have affirmed the adequacy of our Company's Domestic Reinvestment Plan, the balance sheet is and will be grossed-up to reflect liabilities for uncertain tax positions and deferred tax assets for net operating losses in accordance with FIN 48. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007 (our year ending February 28, 2009). Our Company is currently evaluating the impact, if any, of the provisions of SFAS 157. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 was issued to improve the overall financial statement presentation of pension and other postretirement plans and does not impact the determination of net periodic benefit cost or the measurement of plan assets or obligations. This standard requires companies to recognize the funded status of their defined benefit pension and other postretirement benefit plans as a net liability or asset on their balance sheets and requires any unrecognized prior service costs and actuarial gains or losses to be recognized as a component of accumulated other comprehensive income or loss. We adopted these requirements as of February 24, 2007. Additionally, SFAS 158 no longer allows companies to measure their plans as of any date other than the end of their fiscal year; however, this provision is not effective for companies until fiscal years ending after December 15, 2008 (our year ending February 28, 2009). We have chosen to early adopt this requirement in fiscal 2007. We used the second approach as described in paragraph 19 of SFAS 158 to transition our measurement date from December 31, 2006 to February 24, 2007. Under this approach, we have recorded an adjustment to opening retained earnings in the amount of $0.6 million to decrease the February 25, 2007 balance of retained earnings. Refer to Note 9 - Retirement Plans and Benefits for further discussion. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. 7 Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007 (our year ending February 28, 2009). Our Company is currently evaluating the impact, if any, of the provisions of SFAS 159. In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, the goodwill acquired, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable the evaluation of the nature and financial effect of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 (our year ended February 27, 2010). Our Company is currently evaluating the impact, if any of the provisions of SFAS 141R. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 (our year ended February 27, 2010). We have evaluated the provisions of SFAS 160 and the guidance will not have an impact on our Company's financial condition or results of operations. 3. DEFINITIVE MERGER AGREEMENT WITH PATHMARK STORES, INC. On March 5, 2007, our Company announced that we have reached a definitive merger agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores, Inc., ("Pathmark") for $1.4 billion in cash, stock, and debt assumption or retirement. On November 27, 2007, our Company announced that the Federal Trade Commission ("FTC") has accepted a proposed consent agreement relating to our acquisition of Pathmark. The terms of the consent agreement require the divestiture of six stores located in the state of New York. We have entered into definitive agreements to sell all six stores and have received FTC approval on these divestitures. Included in the Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006 are the sales and operating results of the 5 A&P stores that will be closed. The remaining store to be closed was a Pathmark location as of December 1, 2007 and accordingly the results of operations of that store were not included in our results of operations. The results of these operations are as follows:
12 Weeks Ended 40 Weeks Ended ----------------------------- ----------------------------- December 1, December 2, December 1, December 2, 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Sales $ 25,696 $ 24,916 $ 85,055 $ 83,038 =========== =========== =========== =========== Income from operations $ 228 $ 73 $ 704 $ 33 =========== =========== =========== ===========
8 Subsequent to our third quarter end, on December 3, 2007, our acquisition of Pathmark was completed. Refer to Note 15 - Subsequent Events for further discussion. 4. INVESTMENT IN METRO, INC. On March 13, 2007, in connection with our agreement to acquire Pathmark Stores, Inc., our Company sold 6,350,000 shares of our holdings in Metro, Inc. for proceeds of approximately $203.5 million resulting in a net gain of $78.4 million. Of the proceeds received, $190 million was held as restricted cash collateralizing letters of credit under our Letter of Credit Agreement and was designated to be used to fund a portion of our acquisition of Pathmark Stores, Inc. On November 26, 2007, also in connection with our agreement to acquire Pathmark Stores, Inc., our Company sold the remaining 11,726,645 shares of our holdings in Metro, Inc. for proceeds of approximately $345.3 million, resulting in a net gain of $103.6 million. The proceeds were held to fund a portion of our acquisition of Pathmark Stores, Inc. As a result of these sales, our Company no longer holds Class A subordinate shares of Metro, Inc. as our investment has been fully liquidated as of the balance sheet date. From time to time, we may enter hedging agreements in order to manage risks incurred in the normal course of business including forward exchange contracts to manage our exposure to fluctuations in foreign exchange rates. Prior to the sale of our remaining shares in Metro, Inc., on November 6, 2007, we entered into a currency exchange forward contract to purchase $380 million United States dollars to hedge the value of our shares in Metro, Inc. against adverse movements in exchange rates. Our Company measures ineffectiveness based upon the change in forward exchange rates. In the third quarter of fiscal 2007 and upon completion of the sale of our shares of Metro, Inc., this forward contract was settled. Upon settlement, the effective portion of this hedge contract resulted in a gain of approximately $23.9 million during the 12 and 40 weeks ended December 1, 2007, which was offset by a $23.9 million foreign exchange loss from the underlying investment. This foreign exchange loss would have occurred if the hedge transaction was not entered into. Both the gain and loss were recorded in "Gain on disposition of Metro, Inc." in our Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007. In addition, we recorded a gain of $2.4 million to settle the forward exchange contract during the 12 and 40 weeks ended December 1, 2007, as a result of the favorable movement in the Canadian dollar at the time of sale of our remaining holdings in Metro, Inc. The gain was recorded in "Gain on disposition of Metro, Inc." in our Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007. Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of Metro, Inc., our Company recorded our investment in Metro, Inc. under SFAS 115 as a cost investment on the basis that we no longer exert significant influence over substantive operating decisions made by Metro, Inc. Previous to March 13, 2007, we used the equity method of accounting to account for our investment in Metro, Inc. on the basis that we exerted significant influence over substantive operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its committees and through an information technology services agreement. 9 The following table summarizes the status of our Company's investment in Metro, Inc. from February 24, 2007 through December 1, 2007: Equity investment at February 24, 2007 $ 368,871 Equity earnings in Metro, Inc. 7,869 ------------------ Equity investment at March 13, 2007 376,740 Sale of shares of Metro, Inc. (468,773) Unrealized gain on investment 19,475 Foreign currency translation gain 72,558 ------------------ Investment at December 1, 2007 $ -- ==================
Through March 13, 2007, we recorded our pro-rata equity earnings relating to our equity investment in Metro, Inc. on about a three-month lag period as permitted by APB 18, "The Equity Method of Accounting for Investments in Common Stock." Thus, we recorded nil and $7.9 million during the 12 and 40 weeks ended December 1, 2007, respectively, and $11.0 million and $30.8 million during the 12 and 40 weeks ended December 2, 2006, respectively, in equity earnings relating to our equity investment in Metro, Inc. and included these amounts in "Equity in earnings of Metro, Inc." on our Consolidated Statements of Operations. In accordance with SFAS 115, for the 12 and 40 weeks ended December 1, 2007, we recorded dividend income of $1.4 million and $3.9 million, respectively, based on Metro, Inc.'s dividend declaration on April 17, 2007, August 8, 2007 and September 25, 2007. These amounts are included in "Interest and dividend income" on our Consolidated Statements of Operations. There was no such income for the 12 and 40 weeks ended December 2, 2006, as dividends received were recorded as a reduction of the investment balance under the equity method of accounting. Metro, Inc.'s summarized financial information, derived from its unaudited second quarter ended March 17, 2007, unaudited fourth quarter ended September 30, 2006 and audited year ended September 30, 2006 financial statements, is as follows (in millions):
12 Weeks Ended 13 Weeks Ended 53 Weeks Ended March 17, 2007 Sept. 30, 2006 Sept. 30, 2006 -------------- -------------- -------------- Income statement: Net sales $ 2,096.5 $ 2,370.1 $ 9,705.1 ============== ============== ============== Cost of sales and operating expenses $ 1,967.1 $ 2,216.4 $ 9,138.9 ============== ============== ============== Net income $ 55.0 $ 69.9 $ 224.4 ============== ============== ==============
5. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND AVAILABLE-FOR-SALE SECURITIES At December 1, 2007 and February 24, 2007, we had $542.1 million and $51.2 million, respectively, in restricted cash, of which $538.4 million and $47.6 million, respectively, was held in a money market fund, and can only be used as collateral for our Letter of Credit Agreement that we entered into during fiscal 2005. The remaining amounts of $3.7 million and $3.6 million, respectively, represented monies held in escrow for services which our Company is required to perform in connection with the sale of our real estate properties. 10 The following is a summary of cash, cash equivalents, restricted cash and available-for-sale securities at December 1, 2007 and February 24, 2007:
At December 1, 2007 ------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Costs Gains Losses Value --------- ---------- ---------- --------- CLASSIFIED AS: Cash $ 67,006 $ -- $ -- $ 67,006 Cash equivalents: Money market funds 2,404 -- -- 2,404 --------- ---------- ---------- --------- Total cash and cash equivalents 69,410 -- -- 69,410 --------- ---------- ---------- --------- Restricted cash 542,109 -- -- 542,109 --------- ---------- ---------- --------- Total cash, cash equivalents and restricted cash $ 611,519 $ -- $ -- $ 611,519 ========= ========== ========== =========
At February 24, 2007 ------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Costs Gains Losses Value --------- ---------- ---------- --------- CLASSIFIED AS: Cash $ 81,137 $ -- $ -- $ 81,137 Cash equivalents: Money market funds 5,057 -- -- 5,057 --------- ---------- ---------- --------- Total cash and cash equivalents 86,194 -- -- 86,194 --------- ---------- ---------- --------- Restricted cash 51,176 -- -- 51,176 Available-for-sale securities: Corporate bonds 20,357 -- (22) 20,335 --------- ---------- ---------- --------- Total cash, cash equivalents, restricted cash and available-for-sale securities $ 157,727 $ -- $ (22) $ 157,705 ========= ========== ========== ========= SECURITIES AVAILABLE-FOR-SALE: Maturing within one year $ 20,357 $ 20,335 ========= ========= Maturing greater than one year $ -- $ -- ========= =========
The following table provides the breakdown of the investments with unrealized losses at February 24, 2007:
February 24, 2007 ----------------------------------------------------------------------------------------------------- Less than 12 Months 12 Months or Longer Total ------------------------------- ------------------------------ ------------------------------ Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses -------------- ------------- ------------- ------------- ---------- -------------- Corporate bonds $ 20,335 $ (22) $ -- $ -- $ 20,335 $ (22)
Corporate bonds: Our unrealized losses on investments in corporate bonds were caused by interest rate increases by the Federal Reserve. The contractual terms of those investments did not permit the issuer to settle the security at a price less than the amortized cost of the investment. We did not believe it was probable that we would be unable to collect all amounts due according to the contractual terms of these investments. Therefore, it was expected that the debentures would not be settled at a price less than the amortized cost of the investment. Because we had the ability and intent to hold those investments until a recovery of fair value, which may be maturity, we did not consider those investments to be other-than-temporarily impaired at February 24, 2007. 11 Gross realized gains on sales of investments were $103.6 million and $182.1 million for the 12 and 40 weeks ended December 1, 2007, respectively, and nil and $0.05 million for the 40 weeks ended December 2, 2006, respectively. 6. VALUATION OF LONG-LIVED ASSETS In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), we review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review is primarily based upon groups of assets and the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets is recoverable from their respective cash flows. If such review indicates an impairment exists, we measure such impairment on a discounted basis using a probability-weighted approach and a 7 year U.S. Treasury risk-free rate. During the 12 and 40 weeks ended December 1, 2007 we recorded impairment losses on long-lived assets of $4.7 million and $57.8 million, respectively. During the 12 and 40 weeks ended December 2, 2006, we recorded impairment losses on long-lived assets of $1.0 million and $4.6 million, respectively. Impairments due to closure or conversion in the normal course of business We review assets in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. During the 12 and 40 weeks ended December 1, 2007, we recorded impairment losses on property of $2.5 million and $3.6 million, respectively, related to stores that were or will be closed or converted in the normal course of business, as compared to $1.0 million and $3.6 million in impairment losses on property related to stores that were closed or converted in the normal course of business during the 12 and 40 weeks ended December 2, 2006, respectively. These amounts were included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. Impairments related to our Asset Disposition Initiatives During the 12 and 40 weeks ended December 2, 2006, we recorded impairment losses on property of nil and $1.0 million, respectively, related to property write-downs as a result of our asset disposition initiatives as discussed in Note 8 - Asset Disposition Initiatives. These amounts were included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations for the 12 and 40 weeks ended December 2, 2006. There were no such amounts recorded for the 12 and 40 weeks ended December 1, 2007. Impairments related to our discontinued operations During the 12 and 40 weeks ended December 1, 2007, we recorded impairment losses of $2.2 million and $54.2 million, respectively, related to our discontinued operations as a result of our exit of the Greater New Orleans and Midwest markets as discussed in Note 7 - Discontinued Operations. These amounts were included in our Consolidated Statements of Operations under the caption "Loss on disposal of discontinued operations, net of tax" for the 12 and 40 weeks ended December 1, 2007. There were no such charges for the 12 and 40 weeks ended December 2, 2006. The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. 12 7. DISCONTINUED OPERATIONS On April 24, 2007, based upon unsatisfactory operating trends and the need to devote resources to our expanding Northeast core business, our Company announced negotiations for the sale of our non-core stores within our Midwest operations, including inventory related to these stores. Sale transactions for these stores have been completed. Further, our Company has ceased sales operations in all stores as of July 7, 2007. In connection with the shutdown of these operations, we recorded net occupancy costs of $1.8 million and $60.7 million during the 12 and 40 weeks ended December 1, 2007, respectively, for closed stores and warehouses not sold. As we continue to negotiate lease terminations as well as sublease some of these locations, these estimates may require adjustment in future periods. On May 30, 2007, our Company announced advanced negotiations for the sale of our non-core stores located within the Greater New Orleans area, including inventory related to these stores. Sale transactions for these stores have been completed. Further, our Company has ceased sales operations in all stores as of November 1, 2007. In connection with the shutdown of these operations, we recorded net occupancy costs of $1.6 million during the 12 and 40 weeks ended December 1, 2007. In accordance with SFAS 144, the criteria necessary to classify these operations as discontinued have been satisfied for the Midwest and the Greater New Orleans area and as such, have been reclassified in our Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006. In applying the provisions of SFAS 144, we estimated the assets' fair market value based upon expected proceeds less costs to sell and recorded impairment losses on property, plant and equipment for the 12 and 40 weeks ended December 1, 2007 of $2.2 million and $54.2 million, respectively. These amounts are included in "Loss on disposal of discontinued businesses, net of tax" on our Consolidated Statements of Operations. During fiscal 2003, we adopted a formal plan to exit the New England and Wisconsin markets through the sale and/or disposal of these assets. In February 2003, we announced the sale of a portion of our non-core assets, including nine of our stores in northern New England and seven stores in Madison, Wisconsin. In March 2003, we entered into an agreement to sell an additional eight stores in northern New England. Summarized below are the operating results for these discontinued businesses, which are included in our Consolidated Statements of Operations, under the caption "(Loss) income from operations of discontinued businesses, net of tax" and "Gain (loss) on disposal of discontinued businesses, net of tax" for the 12 and 40 weeks ending December 1, 2007 and December 2, 2006. 13
12 weeks ended December 1, 2007 -------------------------------------------------------------------------------- Greater New Midwest Midwest Midwest Northern Orleans 2007 2005 2004 New England Kohl's Total -------- -------- ------- ------- ----------- ------ -------- LOSS FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ 35,135 $ -- $ -- $ -- $ -- $ -- $ 35,135 Operating expenses (39,125) (8,883) (140) (160) -- (367) (48,675) -------- -------- ------- ------- ----------- ------ -------- Loss from operations of discontinued businesses, before tax (3,990) (8,883) (140) (160) -- (367) (13,540) -------- -------- ------- ------- ----------- ------ -------- Tax benefit -- -- -- -- -- -- -- -------- -------- ------- ------- ----------- ------ -------- Loss from operations of discontinued businesses, net of tax $ (3,990) $ (8,883) $ (140) $ (160) $ -- $ (367) $(13,540) ======== ======== ======= ======= =========== ====== ======== DISPOSAL RELATED COSTS INCLUDED IN OPERATING EXPENSES ABOVE: Severance and benefits $ (795) $ 55 $ -- $ -- $ -- $ -- $ (740) Non-accruable closing costs (509) (2,897) -- -- -- -- (3,406) Occupancy related costs (1,649) (1,792) 650 -- -- (209) (3,000) Gain on lease termination -- 2,197 -- -- -- -- 2,197 Inventory related costs (1,191) (140) -- -- -- -- (1,331) Lease termination costs -- (123) -- -- -- -- (123) Post retirement curtailment change in estimate -- (3,000) -- -- -- -- (3,000) Interest accretion on present value of future occupancy costs (204) (2,212) (790) (160) -- (158) (3,524) -------- -------- ------- ------- ----------- ------ -------- Total disposal related costs $ (4,348) $ (7,912) $ (140) $ (160) $ -- $ (367) $(12,927) ======== ======== ======= ======= =========== ====== ======== LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS Property impairments $ (1,960) $ (275) $ -- $ -- $ -- $ -- $ (2,235) -------- -------- ------- ------- ----------- ------ -------- Loss on disposal of discontinued business, before tax (1,960) (275) -- -- -- -- (2,235) -------- -------- ------- ------- ----------- ------ -------- Tax benefit -- -- -- -- -- -- -- -------- -------- ------- ------- ----------- ------ -------- Loss on disposal of discontinued operations, net of tax $ (1,960) $ (275) $ -- $ -- $ -- $ -- $ (2,235) ======== ======== ======= ======= =========== ====== ========
14
12 weeks ended December 2, 2006 ---------------------------------------------------------------------------------- Greater Northern Eight New Midwest Midwest Midwest New O'Clock Orleans 2007 2005 2004 England Kohl's Coffee Total -------- --------- ------- ------- -------- ------ ------- --------- INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ 90,720 $ 238,808 $ -- $ -- $ -- $ -- $ -- $ 329,528 Operating expenses (84,674) (242,474) (2,682) (169) 25 1,318 (41) (328,697) -------- --------- ------- ------- -------- ------ ------- --------- Income (loss) from operations of discontinued businesses, before tax 6,046 (3,666) (2,682) (169) 25 1,318 (41) 831 -------- --------- ------- ------- -------- ------ ------- --------- Tax (provision) benefit (1,310) 794 581 37 (5) (286) 9 (180) -------- --------- ------- ------- -------- ------ ------- --------- Income (loss) from operations of discontinued businesses, net of tax $ 4,736 $ (2,872) $(2,101) $ (132) $ 20 $1,032 $ (32) $ 651 ======== ========= ======= ======= ======== ====== ======= ========= DISPOSAL RELATED COSTS INCLUDED IN OPERATING EXPENSES ABOVE: Severance and benefits $ -- $ -- $ (4) $ -- $ -- $ -- $ -- $ (4) Non-accruable closing costs -- -- -- -- 25 42 (41) 26 Occupancy related costs 1,128 (108) (1,937) -- -- 970 -- 53 Gain on capital lease termination -- -- 55 -- -- -- -- 55 Proceeds on lease termination -- -- -- -- -- 394 -- 394 Interest accretion on present value of future occupancy costs (236) (117) (796) (169) -- (88) -- (1,406) -------- --------- ------- ------- -------- ------ ------- --------- Total disposal related costs $ 892 $ (225) $(2,682) $ (169) $ 25 $1,318 $ (41) $ (882) ======== ========= ======= ======= ======== ====== ======= ========= GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS Property impairments $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Gain on sale of fixed assets 5,641 -- -- -- -- -- -- 5,641 -------- --------- ------- ------- -------- ------ ------- --------- Gain on disposal of discontinued businesses, before tax 5,641 -- -- -- -- -- -- 5,641 -------- --------- ------- ------- -------- ------ ------- --------- Tax benefit 2,158 -- -- -- -- -- -- 2,158 -------- --------- ------- ------- -------- ------ ------- --------- Gain on disposal of discontinued businesses, net of tax $ 7,799 $ -- $ -- $ -- $ -- $ -- $ -- $ 7,799 ======== ========= ======= ======= ======== ====== ======= =========
15
40 weeks ended December 1, 2007 ---------------------------------------------------------------------------------------- Greater New Midwest Midwest Midwest Northern Orleans 2007 2005 2004 New England Kohl's Total --------- --------- --------- --------- ----------- --------- --------- (LOSS) INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ 230,156 $ 332,498 $ -- $ -- $ -- $ -- $ 562,654 Operating expenses (231,682) (512,748) 4,426 (461) -- (1,856) (742,321) --------- --------- --------- --------- ----------- --------- --------- (Loss) income from operations of discontinued businesses, before tax (1,526) (180,250) 4,426 (461) -- (1,856) (179,667) --------- --------- --------- --------- ----------- --------- --------- Tax benefit -- -- -- -- -- -- -- --------- --------- --------- --------- ----------- --------- --------- (Loss) income from operations of discontinued businesses, net of tax $ (1,526) $(180,250) $ 4,426 $ (461) $ -- $ (1,856) $(179,667) ========= ========= ========= ========= =========== ========= ========= DISPOSAL RELATED COSTS INCLUDED IN OPERATING EXPENSES ABOVE: Severance and benefits $ (1,198) $ (23,446) $ -- $ -- $ -- $ -- $ (24,644) Non-accruable closing costs (529) (6,396) -- -- -- -- (6,925) Occupancy related costs (2,387) (60,705) 7,117 80 -- (1,441) (57,336) Gain on lease termination -- 2,197 -- -- -- -- 2,197 Inventory related costs (1,191) (3,226) -- -- -- -- (4,417) Lease termination costs (822) (753) -- -- -- -- (1,575) Pension withdrawal costs -- (57,007) -- -- -- -- (57,007) Interest accretion on present value of future occupancy costs (680) (3,953) (2,691) (541) -- (415) (8,280) --------- --------- --------- --------- ------------ --------- --------- Total disposal related costs $ (6,807) $(153,289) $ 4,426 $ (461) $ -- $ (1,856) $(157,987) ========= ========= ========= ========= =========== ========= ========= (LOSS) GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS Property impairments $ (16,856) $ (37,393) $ -- $ -- $ -- $ -- $ (54,249) Gain on sale of fixed assets 79 3,131 -- -- -- -- 3,210 --------- --------- --------- --------- ----------- --------- --------- Loss on disposal of discontinued business, before tax (16,777) (34,262) -- -- -- -- (51,039) --------- --------- --------- --------- ----------- --------- --------- Tax benefit -- -- -- -- -- -- -- --------- --------- --------- --------- ----------- --------- --------- Loss on disposal of discontinued operations, net of tax $ (16,777) $ (34,262) $ -- $ -- $ -- $ -- $ (51,039) ========= ========= ========= ========= =========== ========= =========
16
40 weeks ended December 2, 2006 ---------------------------------------------------------------------------------------------- Greater Northern Eight New Midwest Midwest Midwest New O'Clock Orleans 2007 2005 2004 England Kohl's Coffee Total ---------- ---------- ---------- --------- -------- ------ ------- ------------ INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ 317,947 $ 820,772 $ -- $ -- $ -- $ -- $ -- $ 1,138,719 Operating expenses (302,650) (829,373) (7,594) 2,447 -- 657 (41) (1,136,554) ---------- ---------- ---------- --------- -------- ------ ------- ------------ Income (loss) from operations of discontinued businesses, before tax 15,297 (8,601) (7,594) 2,447 -- 657 (41) 2,165 ---------- ---------- ---------- --------- -------- ------ ------- ------------ Tax benefit (provision) 4,190 (2,356) (2,080) 670 -- 180 (11) 593 ---------- ---------- ---------- --------- -------- ------ ------- ------------ Income (loss) from operations of discontinued businesses, net of tax $ 19,487 $ (10,957) $ (9,674) $ 3,117 $ -- $ 837 $ (52) $ 2,758 ========== ========== ========== ========= ======== ====== ======= ============ DISPOSAL RELATED COSTS INCLUDED IN OPERATING EXPENSES ABOVE: Severance and benefits $ -- $ -- $ 16 $ -- $ -- $ 146 $ -- $ 162 Non-accruable closing costs (224) -- (93) -- -- -- (41) (358) Occupancy related costs 3,014 (343) (4,794) 3,021 -- 429 -- 1,327 Inventory costs 66 -- -- -- -- -- -- 66 Gain on capital lease termination -- -- 55 -- -- -- -- 55 Proceeds on lease termination -- -- -- -- -- 394 -- 394 Interest accretion on present value of future occupancy costs (899) (401) (2,778) (574) -- (312) -- (4,964) ---------- ---------- ---------- --------- -------- ------ ------- ------------ Total disposal related costs $ 1,957 $ (744) $ (7,594) $ 2,447 $ -- $ 657 $ (41) $ (3,318) ========== ========== ========== ========= ======== ====== ======= ============ GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS Property impairments $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Gain (loss) on sale of fixed assets 5,622 (86) (46) -- -- -- -- 5,490 ---------- ---------- ---------- --------- -------- ------ ------- ------------ Gain (loss) on disposal of discontinued businesses, before tax 5,622 (86) (46) -- -- -- -- 5,490 ---------- ---------- ---------- --------- -------- ------ ------- ------------ Tax benefit (provision) 2,150 (33) (17) -- -- -- -- 2,100 ---------- ---------- ---------- --------- -------- ------ ------- ------------ Gain (loss) on disposal of discontinued businesses, net of tax $ 7,772 $ (119) $ (63) $ -- $ -- $ -- $ -- $ 7,590 ========== ========== ========== ========= ======== ====== ======= ============
GREATER NEW ORLEANS On May 30, 2007, our Company announced advanced negotiations for the sale of our non-core stores located within the Greater New Orleans area, including inventory related to these stores. Sale transactions for these stores have been completed. During the 12 and 40 weeks ended December 1, 2007, we incurred pre-tax disposal related costs for our operations in this region of $4.3 million and $6.8 million, respectively, related to severance and benefits, inventory costs, occupancy related costs and lease termination costs. During the 12 and 40 weeks ended December 2, 2006, we recorded pre-tax reversals of occupancy related costs for our operations in this region of $1.1 million and $3.0 million, respectively. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations. Additionally, we incurred pre-tax costs for property impairments of $2.0 million and $16.9 million offset by a pre-tax gain on the sale of fixed assets of nil and $0.1 million for the 12 and 40 weeks ended December 1, 2007, respectively. We also recorded a pre-tax gain on the sale of fixed assets of $5.6 million for the 12 and 40 weeks ended December 2, 2006, which was included in "(Gain) loss on disposal of discontinued operations, net of tax" on our Consolidated Statements of Operations. 17 The following table summarizes the activity to date related to the charges recorded for the sale or closing of these facilities:
Severance and Occupancy Benefits Total --------- --------- ------- Original charge (1) $ 5,056 $ 403 $ 5,459 Additions (2) 14 795 809 Utilization (3) (180) (891) (1,071) ------- ------- ------- Balance at December 1, 2007 $ 4,890 $ 307 $ 5,197 ======= ======= =======
(1) The original charge to occupancy of $5.1 million during the 40 weeks ended December 1, 2007 represents charges related to closures of 4 stores in conjunction with our decision to sell stores in the Greater New Orleans area. The original charge to severance and benefits during the 40 weeks ended December 1, 2007 of $0.4 million related to individual severings. (2) The additions to occupancy during the 40 weeks ended December 1, 2007 represents interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. The additions to severance and benefits during the 40 weeks ended December 1, 2007 relates to additional individual severings and retention incentives. (3) Occupancy utilization represents payments made during those periods for rent. Severance and benefits utilization represents payments made to terminated employees during the period. We paid $0.2 million of the total occupancy charges from the time of the original charge through December 1, 2007 which was for rent. The remaining occupancy liability of $4.9 million relates to expected future payments under long term leases and is expected to be paid out in full by 2010. We paid $0.9 million of the total net severance and benefits charges from the time of the original charges through December 1, 2007. The remaining severance liability of $0.3 million at December 1, 2007 relates to expected future payments for severance and benefits payments to individual employees which will be fully paid out by 2008. As of December 1, 2007 approximately $0.3 million of the liability was included in "Accrued salaries, wages and benefits," $2.1 million was included in "Other accruals" and $2.8 million was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the reserve balances as of December 1, 2007 of $5.2 million based on current information and have concluded that it is adequate to cover expected future costs. We will continue to monitor the status of the subsidized properties, and severance and benefits, and adjustments to the reserve balances may be recorded in the future, if necessary. MIDWEST 2007 On April 24, 2007, based upon unsatisfactory operating trends and the need to devote resources to our expanding Northeast core business, our Company announced negotiations for the sale of our non-core stores within our Midwest operations, including inventory related to these stores. During the 12 and 40 weeks ended December 1, 2007, we incurred pre-tax disposal related costs for our operations in this region of $7.9 million and $153.3 million, respectively, primarily related to pension withdrawal costs, severance, inventory costs and occupancy related costs. During the 12 and 40 weeks ended December 2, 2006, we incurred pre-tax disposal related costs for our operations in this region of $0.2 million and $0.7 million, respectively, related to occupancy costs. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations. Additionally, we incurred pre-tax costs for property impairments of $0.3 million and $37.4 million offset by a pre-tax gain on the sale of fixed assets of nil and $3.1 million for the 12 and 40 weeks 18 ended December 1, 2007, respectively. For the 12 and 40 weeks ended December 2, 2006, we recorded a pre-tax loss on the sale of fixed assets of nil and $0.1 million, respectively, which were included in "Gain (loss) on disposal of discontinued operations, net of tax" on our Consolidated Statements of Operations. The following table summarizes the activity to date related to the charges recorded for the sale or closing of these facilities:
Severance and Occupancy Benefits Total --------- --------- --------- Original charge (1) $ 68,440 $ 66,508 $ 134,948 Additions (2) 3,998 14,000 17,998 Utilization (3) (13,589) (18,986) (32,575) Adjustments (4) 1,141 (55) 1,086 --------- --------- --------- Balance at December 1, 2007 $ 59,990 $ 61,467 $ 121,457 ========= ========= =========
(1) The original charge to occupancy of $68.4 million during the 40 weeks ended December 1, 2007 represents charges related to closures of 33 stores in conjunction with our decision to close stores in the Midwest. The original charge to severance and benefits during the 40 weeks ended December 1, 2007 of $66.5 million related to (i.) individual severings and retention incentives that were accrued as earned of $23.5 million as a result of the sale or closing of these facilities and (ii.) costs for future obligations for early withdrawal from multi-employer union pension plans of $43.0 million. (2) The additions to occupancy during the 40 weeks ended December 1, 2007 represents interest accretion on future occupancy costs which were recorded at present value at the time of the original charge and $0.3 million for one additional store that was not sold. The additions to severance and benefits during the 40 weeks ended December 1, 2007 relates to additional costs for future obligations for early withdrawal from multi-employer union pension plans. (3) Occupancy utilization represents payments made during those periods for costs such as rent, common area maintenance and real estate taxes. Severance and benefits utilization represents payments made to terminated employees during the period. (4) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During the 40 weeks ended December 1, 2007, we recorded adjustments for additional vacancy related costs for our properties of $1.1 million due to changes in our estimation of such future costs and a reversal of previously accrued severance payments of $0.1 million that were no longer required to be paid. We paid $13.6 million of the total occupancy charges from the time of the original charge through December 1, 2007 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. The remaining occupancy liability of $60.0 million relates to expected future payments under long term leases and is expected to be paid out in full by 2024. We paid $19.0 million of the total net severance and benefits charges from the time of the original charges through December 1, 2007. The remaining severance and benefits liability of $61.5 million relates to expected future payments for early withdrawals from multi-employer union pension plans and expected future payments for severance and benefits payments to individual employees which will be fully paid out by 2026. As of December 1, 2007 approximately $4.5 million of the liability was included in "Accrued salaries, wages and benefits," $21.8 million was included in "Other accruals" and $95.2 million was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the reserve balances as of December 1, 2007 of $121.5 million based on current information and have concluded that it is adequate to cover expected future costs. We will continue to monitor the status of the vacant properties, the severance and benefits, and pension withdrawal liabilities, and adjustments to the reserve balances may be recorded in the future, if necessary. 19 MIDWEST 2005 During the first quarter of fiscal 2005, we announced plans for a major strategic restructuring that would focus future effort and investment on our core operations in the Northeastern United States. Thus, we initiated efforts to close stores in the Midwest. This planned store closure included the closing of a total of 35 stores, all of which have been closed as of December 1, 2007. During the 12 and 40 weeks ended December 1, 2007, we recorded pre-tax reversals of occupancy related costs for our operations in this region of $0.7 million and $7.1 million, respectively. During the 12 and 40 weeks ended December 2, 2006, we incurred pre-tax disposal related costs for our operations in this region of $2.7 million and $7.6 million, respectively, primarily related to occupancy costs. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations. Additionally, we recorded a pre-tax loss on the sale of fixed assets of nil and $0.1 million, respectively, for the 12 and 40 weeks ended December 2, 2006, which were included in "Gain (loss) on disposal of discontinued operations, net of tax" on our Consolidated Statements of Operations. There were no such similar costs recorded for the 12 and 40 weeks ended December 1, 2007. The following table summarizes the activity to date related to the charges recorded for these store closures:
Severance and Occupancy Benefits Total ---------- ---------- ---------- Original charge (1) $ 14,766 $ 1,337 $ 16,103 Additions (2) 75,259 1,373 76,632 Utilization (3) (9,538) (2,439) (11,977) Adjustment (4) 9,153 (44) 9,109 ---------- ---------- ---------- Balance at February 25, 2006 $ 89,640 $ 227 $ 89,867 Additions (2) 3,567 -- 3,567 Utilization (3) (14,065) (211) (14,276) Adjustment (4) 3,969 (16) 3,953 ---------- ---------- ---------- Balance at February 24, 2007 $ 83,111 $ -- $ 83,111 Additions (2) 2,691 -- 2,691 Utilization (3) (9,804) -- (9,804) Adjustment (4) (7,117) -- (7,117) ---------- ---------- ---------- Balance at December 1, 2007 $ 68,881 $ -- $ 68,881 ========== ========== ==========
(1) The original charge to occupancy during fiscal 2005 represents charges related to closures of the first 8 stores in conjunction with our decision to close stores in the Midwest of $14.8 million. The original charge to severance during fiscal 2005 of $1.3 million related to individual severings as a result of these store closures. (2) The additions to occupancy during fiscal 2005 represent charges related to the closures of an additional 27 stores in the amount of $73.7 million and interest accretion on future occupancy costs which were recorded at present value at the time of the original charge in the amount of $1.6 million. The additions to store occupancy during fiscal 2006 and the 40 weeks ended December 1, 2007 represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. The additional charge to severance during fiscal 2005 of $1.3 million related to individual severings as a result of the additional stores identified for closures. (3) Occupancy utilization represents payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization represents payments made to terminated employees during the period. (4) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2005, we recorded an increase of $9.2 million in occupancy accruals due to changes in our original estimate of our future vacancy obligations for closed stores. We also 20 recorded a decrease of $0.05 million for the reversal of previously accrued severance and benefits due to changes in individual severings and associated benefit costs. During fiscal 2006, we recorded adjustments for additional vacancy related costs for our properties of $4.0 million due to changes in our estimation of such future costs and changes to our estimate to terminate certain leases, partially offset by the favorable result of terminating a lease on one property. We also recorded a decrease of $0.02 million for the reversal of previously accrued severance and benefits due to changes in individual severings and associated benefit costs. During the 40 weeks ended December 1, 2007, we recorded adjustments for a reduction in vacancy related costs for our properties of $7.1 million due to (i.) changes in our estimation of such future costs of $6.4 million and (ii.) a new sublease agreement for one property of $0.7 million. We paid $33.4 million of the total occupancy charges from the time of the original charge through December 1, 2007 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. The remaining occupancy liability of $68.9 million relates to expected future payments under long term leases and is expected to be paid out in full by 2022. We paid $2.7 million of the total net severance charges from the time of the original charges through December 1, 2007, which resulted from the termination of approximately 125 employees. The severance liability has been fully utilized as of December 1, 2007 and no additional future payments for severance and benefits to individual employees will be paid out. None of these stores were open during either of the 40 weeks ended December 1, 2007 and December 2, 2006. At December 1, 2007 and February 24, 2007, approximately $11.0 million and $22.4 million, respectively, of the liability was included in "Other accruals" and $57.9 million and $60.7 million, respectively, was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the reserve balances as of December 1, 2007 of $68.9 million based on current information and have concluded that it is adequate to cover expected future costs. We will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. MIDWEST 2004 During the 12 and 40 weeks ended December 1, 2007, we incurred pre-tax disposal related costs for our operations in this region of $0.2 million and $0.5 million, respectively, related to occupancy costs. During the 12 weeks ended December 2, 2006, we incurred pre-tax disposal related costs for our operations in this region of $0.2 million and we recorded pre-tax reversals of occupancy related costs of $3.0 million during the 40 weeks ended December 2, 2006. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations. 21 The following table summarizes the activity related to this phase of the initiative over the last three fiscal years:
Severance and Occupancy Benefits Total ---------- ---------- ---------- Balance at February 28, 2004 $ 19,962 $ 4,819 $ 24,781 Addition (1) 687 -- 687 Utilization (2) (4,747) (4,813) (9,560) ---------- ---------- ---------- Balance at February 26, 2005 $ 15,902 $ 6 $ 15,908 Addition (1) 710 -- 710 Utilization (2) (2,738) (6) (2,744) Adjustment (3) 4,376 -- 4,376 ---------- ---------- ---------- Balance at February 25, 2006 $ 18,250 $ -- $ 18,250 Addition (1) 741 -- 741 Utilization (2) (1,656) -- (1,656) Adjustment (3) (3,021) -- (3,021) ---------- ---------- ---------- Balance at February 24, 2007 $ 14,314 $ -- $ 14,314 Addition (1) 541 -- 541 Utilization (2) (841) -- (841) Adjustment (3) (80) -- (80) ---------- ---------- ---------- Balance at December 1, 2007 $ 13,934 $ -- $ 13,934 ========== ========== ==========
(1) The additions to store occupancy represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. (2) Occupancy utilization represents payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization represents payments made to terminated employees during the period. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2005, we recorded an increase of $4.4 million in occupancy accruals due to changes in our original estimate of when we would terminate certain leases, obtain sublease rental income related to such leases and changes in our original estimate of our future vacancy obligations for closed stores. During fiscal 2006, we recorded adjustments for a reduction in vacancy related costs for our properties of $3.0 million due to changes in our estimation of such future costs. During the 40 weeks ended December 1, 2007, we recorded adjustments for a reduction in vacancy related costs for our properties of $0.1 million due to changes in our estimation of such future costs. We paid $11.1 million of the total occupancy charges from the time of the original charge through December 1, 2007 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. The remaining occupancy liability of $13.9 million relates to expected future payments under long term leases and is expected to be paid out in full by 2022. We paid $8.9 million of the total net severance charges from the time of the original charges through December 1, 2007, which resulted from the termination of approximately 300 employees. The severance liability has been fully utilized and no additional future payments for severance and benefits to individual employees will be paid out. None of these stores were open during either of the 12 and 40 weeks ended December 1, 2007 or December 2, 2006. At December 1, 2007 and February 24, 2007, approximately $1.3 million and $1.3 million, respectively, of the liability was included in "Other accruals" and $12.6 million and $13.0 million, respectively, was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the reserve balances as of December 1, 2007 of $13.9 million based on current information and have concluded that it is adequate to cover expected future costs. We will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. 22 NORTHERN NEW ENGLAND During the 12 and 40 weeks ended December 2, 2006, we recorded pre-tax reversals of non-accruable closing costs in this region subsequent to the sale of these stores of $0.03 million and nil, respectively, primarily related to adjustments as a result of changes in estimates. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations for the 12 and 40 weeks ended December 2, 2006. There were no such similar costs recorded for the 12 and 40 weeks ended December 1, 2007 KOHL'S MARKET During the 12 and 40 weeks ended December 1, 2007, we recorded costs of $0.4 million and $1.9 million, respectively, due to interest accretion on future occupancy payments that were recorded at present value at the time of the original charge and adjustments to occupancy related costs as a result of changes in estimates. During the 12 and 40 weeks ended December 2, 2006, we recorded gains of $1.3 million and $0.7 million, respectively, primarily due to favorable results of terminating leases at certain locations and adjustments as a result of changes in estimates partially offset by interest accretion on future occupancy payments that were recorded at present value at the time of the original charge. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006. The following table summarizes the reserve activity related to the exit of the Kohl's market over the last three fiscal years:
Severance and Fixed Occupancy Benefits Assets Total -------------- -------------- -------------- -------------- Balance at February 28, 2004 $ 19,039 $ 4,834 $ -- $ 23,873 Additions (1) 688 52 602 1,342 Utilization (2) (1,918) (2,201) (602) (4,721) Adjustments (3) (354) -- -- (354) -------------- -------------- -------------- -------------- Balance at February 26, 2005 $ 17,455 $ 2,685 $ -- $ 20,140 Additions (1) 562 44 -- 606 Utilization (2) (3,235) (2,128) -- (5,363) Adjustments (3) (4,299) 582 -- (3,717) -------------- -------------- -------------- -------------- Balance at February 25, 2006 $ 10,483 $ 1,183 $ -- $ 11,666 Additions (1) 385 4 -- 389 Utilization (2) (2,504) (1,041) -- (3,545) Adjustments (3) (416) (146) -- (562) -------------- -------------- -------------- -------------- Balance at February 24, 2007 $ 7,948 $ -- $ -- $ 7,948 Additions (1) 415 -- -- 415 Utilization (2) (1,504) -- -- (1,504) Adjustments (3) 1,441 -- -- 1,441 -------------- -------------- -------------- -------------- Balance at December 1, 2007 $ 8,300 $ -- $ -- $ 8,300 ============== ============== ============== ==============
(1) The fiscal 2004, fiscal 2005, fiscal 2006 and the 40 weeks ended December 1, 2007 additions to occupancy and severance and benefits represent the interest accretion on future occupancy costs and future obligations for early withdrawal from multi-employer union pension plans which were recorded at present value at the time of the original charge. In fiscal 2004, the addition to fixed assets represents additional impairment losses recorded as a result of originally estimated proceeds on the disposal of these assets not being achieved. (2) Occupancy utilization represents vacancy related payments for closed locations such as rent, common area maintenance, real estate taxes and lease termination payments. Severance and benefits utilization represents payments made to terminated employees during the period and payments for pension withdrawal. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2004, we recorded a reversal of previously accrued occupancy related costs due to favorable results of terminating leases. During fiscal 2005, we recorded adjustments 23 relating to (i.) a reversal of previously accrued occupancy costs of $3.7 million due to favorable results of terminating the Kohl's warehouse lease and (ii.) the reclassification of $0.6 million between the liabilities for occupancy and severance and benefits to properly state their respective ending balances at February 25, 2006. During fiscal 2006, we recorded adjustments for (i.) a reduction in vacancy related costs for our properties due to favorable results of terminating leases at certain locations of $0.7 million partially offset by changes in our estimation of such future costs of $0.3 million and (ii.) a reversal of previously accrued pension withdrawal payments of $0.1 million that were no longer required to be paid. During the 40 weeks ended December 1, 2007, we recorded adjustments for additional vacancy related costs for our properties of $1.4 million due to changes in our estimation of such future costs. We paid $14.5 million of the total occupancy charges from the time of the original charge through December 1, 2007 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. The remaining occupancy liability of $8.3 million relates to expected future payments under long term leases and is expected to be paid out in full by 2020. We paid $13.6 million of the total original severance and benefits charges from the time of the original charges through December 1, 2007, which resulted from the termination of approximately 2,000 employees. At December 1, 2007, there are no future obligations for severance and benefits. At December 1, 2007 and February 24, 2007, $1.9 million and $2.3 million, respectively, of the Kohl's exit reserves was included in "Other accruals" and $6.4 million and $5.6 million, respectively, was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the liability balance of $8.3 million as of December 1, 2007 based upon current available information and have concluded that it is adequate. We will continue to monitor the status of the vacant properties and adjustments to the reserve balance may be recorded in the future, if necessary. 24 8. ASSET DISPOSITION INITIATIVES Presented below is a reconciliation of the charges recorded on our Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006. Present value ("PV") interest represents interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. Non-accruable items represent charges related to the restructuring that are required to be expensed as incurred in accordance with SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities".
12 weeks ended December 1, 2007 ------------------------------------------------------------------------------------------------------------- Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals --------------------- ----------------------- --------------------------- ------------------------------- NE* MW* Total NE GNO* Total NE MW GNO Total NE MW GNO Total ------ ------ ----- ----- ----- ----- ----- ------ ----- ------- ---- ----- ------- ------ Balance Sheet Accruals Vacancy $ - $ - $ - $ - $ - $ - $ 119 $ - $ - $ 119 $119 $ - $ - $ 119 PV Interest 95 17 112 93 169 262 12 - 3 15 200 17 172 389 Severance - - - - - - 81 - - 81 81 - - 81 ------ ------ ------- ------ ----- ----- ------ ------ ----- ------ ------ ----- ------ ------ Total accrued to balance sheet 95 17 112 93 169 262 212 - 3 215 400 17 172 589 ------ ------ ------- ------ ----- ----- ------ ------ ----- ------ ------ ----- ------ ------- Non-accruable items recorded on Statements of Operations Closing costs - - - - - - 78 - - 78 78 - - 78 ------ ------ ------- ----- ----- ----- ------ ------ ----- ------ ------ ----- -------- ------- Total non-accruable items - - - - - - 78 - - 78 78 - - 78 ------ ------ ------- ------ ----- ----- ------ ------ ----- ------ ------ ----- -------- ------- Less PV interest (95) (17) (112) (93) (169) (262) (12) - (3) (15) (200) (17) (172) (389) ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ -------- ------ -------- ------- (389) Total amount recorded on Statements of Operations excluding PV interest $ - $ - $ - $ - $ - $ - $ 278 $ - $ - $ 278 $ 278 $ - $ - $ 278 ====== ====== ====== ===== ===== ===== ====== ===== ===== ====== ====== ====== ====== ====== *The headings in the tables included in Note 8 - Asset Disposition Initiatives have been indexed with the following abbreviations: Northeast (NE), Midwest (MW) and Greater New Orleans (GNO).
25
12 weeks ended December 2, 2006 ---------------------------------------------------------------------------------------------------------- Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals ----------------------- ---------------------- ----------------------- ---------------------------- NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total ------- ----- ------- ----- ------ ----- ------ --- --- ----- ------- ---- ----- ------- BALANCE SHEET ACCRUALS Vacancy $(3,796) $ -- $(3,796) $ 49 $ -- $ 49 $ 604 $ -- $ -- $604 $(3,143) $ -- $ -- $(3,143) PV Interest 173 24 197 118 182 300 7 32 17 56 298 56 199 553 Severance -- -- -- -- -- -- 32 -- -- 32 32 -- -- 32 ------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- ------- Total accrued to balance sheet (3,623) 24 (3,599) 167 182 349 643 32 17 692 (2,813) 56 199 (2,558) ------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- ------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Loss on sale of property -- -- -- -- -- -- 24 -- -- 24 24 -- -- 24 Closing costs (5) -- (5) -- -- -- 86 -- -- 86 81 -- -- 81 ------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- ------- Total non-accruable items (5) -- (5) -- -- -- 110 -- -- 110 105 -- -- 105 ------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- ------- Less PV interest (173) (24) (197) (118) (182) (300) (7) (32) (17) (56) (298) (56) (199) (553) ------- ----- ------- ----- ----- ----- ----- ---- ---- ---- ------- ---- ----- ------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST $(3,801) $ -- $(3,801) $ 49 $ -- $ 49 $ 746 $ -- $ -- $746 $(3,006) $ -- $ -- $(3,006) ======= ===== ======= ===== ===== ===== ===== ==== ==== ==== ======= ==== ===== ======
26
40 weeks ended December 1, 2007 ------------------------------------------------------------------------------------------------------------ Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals ----------------------- ---------------------- --------------------------- ----------------------------- NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total ------- ----- ------- ----- ------ ----- ------ ---- --- ----- ------- ---- ----- ------- Balance Sheet Accruals Vacancy $(351) $ - $(351) $ 10 $ - $ 10 $(838) $(2,631) $ - $(3,469) $(1,179) $(2,631) $ - $(3,810) PV Interest 342 63 405 312 580 892 40 69 22 131 694 132 602 1,428 Severance - - - - - - 1,592 - - 1,592 1,592 - - 1,592 Pension withdrawal costs - - - - - - 726 - - 726 726 - - 726 ------ ------ ------- ------ ----- ---- ------ ------- ----- ------ ------ ------- ----- ------- Total accrued to balance sheet (9) 63 54 322 580 902 1,520 (2,562) 22 (1,020) 1,833 (2,499) 602 (64) ------ ------ ------ ------ ----- ---- ----- ------- ----- ------ ------ ------- ----- ------- Non-accruable items recorded on Statements of Operations Proceeds from lease termination (1,100) - (1,100) - - - - - - - (1,100) - - (1,100) Gain on sale of property - - - - - - (20,824) - - (20,824) (20,824) - - (20,824) Closing costs - - - - - - 1,542 - - 1,542 1,542 - - 1,542 ------ ------ ------- ------ ------- ---- ------ ----- ----- ------ ------- -------- ------ ------- Total non-accruable items (1,100) - (1,100) - - - (19,282) - - (19,282) (20,382) - - (20,382) ------- ------ ------ ------ ------- --- ------- ----- ----- ------ ------- -------- ------ ------ Less PV interest (342) (63) (405) (312) (580) (892) (40) (69) (22) (131) (694) (132)(602) (1,428) ------- ------- ------ ------- ----- ------ ------- ----- ------ ------ -------- ------- ------ ------ Total amount recorded on Statements of Operations excluding PV interest (1,451) - (1,451) 10 - 10 (17,802)(2,631) - (20,433) (19,243) (2,631) - (21,874) ======= ===== ======= ======= ===== ==== ======= ===== ==== ====== ====== ===== ==== ====== Less closing costs - - - - - - (1,542) - - (1,542) (1,542) - - (1,542) Less vacancy costs included in discontinued operations - - - - - - - 2,631 - 2,631 - 2,631 - 2,631 ------ ------ ------ ------ ----- ---- ------ ------ ----- ------- ------- ------ ----- ------ Total amount recorded in Statements of Cash Flows $(1,451) $ - $(1,451) $ 10 $ - $ 10 $(19,344) $ - $ - $(19,344)$(20,785) $ - $ - $(20,785) ======== ==== ======= ====== ===== ===== ========= ===== ==== ======== ======== ===== === ========
27
40 weeks ended December 2, 2006 ---------------------------------------------------------------------------------------------------- Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals ----------------------- ---------------------- ------------------------ ----------------------------- NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total ------- ----- ------- ----- ------ ----- ------ ---- --- ----- ------- ---- ----- -------- Balance Sheet Accruals Vacancy $(5,429) $ - (5,429) $4,482 $ - $4,482 $2,348 $ - $ - $2,348 $1,401 $ - $ - $ 1,401 PV Interest 666 90 756 520 630 1,150 14 110 63 187 1,200 200 693 2,093 Severance (95) - (95) - - - 167 - - 167 72 - - 72 ------ ------ ------- ------ --- ------ ----- ----- ---- ----- ------ ----- ---- -------- Total accrued to balance sheet (4,858) 90 (4,768) 5,002 630 5,632 2,529 110 63 2,702 2,673 200 693 3,566 ------ ----- ------- ------ --- ------ ----- ---- ---- ----- ------ ----- ---- ------- Non-accruable items recorded on Statements of Operations Property writeoffs - - - - - - 1,049 - 1,049 1,049 - - 1,049 Inventory related costs - - - - - - (505) - (66) (571) (505) - (66) (571) Loss (gain) on sale of property - - - - - - 31 - (11) 20 31 - (11) 20 Closing costs (5) - (5) - - - 1,939 - 222 2,161 1,934 - 222 2,156 ------ ------ ----- ------ ----- ----- ----- ----- --- ----- ----- ---- ---- ----- Total non-accruable items (5) - (5) - - - 2,514 - 145 2,659 2,509 - 145 2,654 ------ ------ ----- ------ ----- ----- ----- ----- --- ----- ----- ---- ---- ----- Less PV interest (666) (90) (756) (520) (630)(1,150) (14) (110)(63) (187) (1,200) (200) (693) (2,093) ------ ------ ----- ------ ------ ----- ----- ----- --- ----- ----- ---- ---- ----- Total amount recorded on Statements of Operations excluding PV interest (5,529) - (5,529) 4,482 - 4,482 5,029 - 145 5,174 3,982 - 145 4,127 Less closing costs 5 - 5 - - - (1,939) -(222)(2,161) (1,934) - (222) (2,156) Less costs included in discontinued operations - - - - - - - - 77 77 - - 77 77 ------ ----- ----- ----- ----- ----- ----- ----- ---- ----- ------ ------ ------ ------ Total amount recorded in Statements of Cash Flows $(5,524) $ - $(5,524) $ 4,482 $ - $4,482 $3,090 $ - $ - $3,090 $ 2,048 $ - $ - $2,048 ======= ==== ======= ====== ===== ====== ====== ==== === ====== ======= ===== ==== ======
28 PROJECT GREAT RENEWAL The following table summarizes the activity related to this phase of the initiative over the last three fiscal years:
Occupancy Severance and Benefits Total ------------------------------ ------------------------------ ------------------------------- U.S. Canada Total U.S. Canada Total U.S. Canada Total -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ -- $ 2,157 $ 33,629 $ 452 $ 34,081 Addition (1) 1,902 20 1,922 -- -- -- 1,902 20 1,922 Utilization (2) (5,410) (222) (5,632) (497) -- (497) (5,907) (222) (6,129) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ -- $ 1,660 $ 29,624 $ 250 $ 29,874 Addition (1) 1,541 7 1,548 -- -- -- 1,541 7 1,548 Utilization (2) (5,858) (167) (6,025) (223) -- (223) (6,081) (167) (6,248) Adjustments (3) (3,648) (90) (3,738) -- -- -- (3,648) (90) (3,738) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 25, 2006 $ 19,999 $ -- $ 19,999 $ 1,437 $ -- $ 1,437 $ 21,436 $ -- $ 21,436 Addition (1) 894 -- 894 -- -- -- 894 -- 894 Utilization (2) (4,428) -- (4,428) (132) -- (132) (4,560) -- (4,560) Adjustments (3) (5,429) -- (5,429) (95) -- (95) (5,524) -- (5,524) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 24, 2007 $ 11,036 $ -- $ 11,036 $ 1,210 $ -- $ 1,210 $ 12,246 $ -- $ 12,246 Addition (1) 405 -- 405 -- -- -- 405 -- 405 Utilization (2) (2,476) -- (2,476) (163) -- (163) (2,639) -- (2,639) Adjustments (3) (351) -- (351) -- -- -- (351) -- (351) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at December 1, 2007 $ 8,614 $ -- $ 8,614 $ 1,047 $ -- $ 1,047 $ 9,661 $ -- $ 9,661 ======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. During the 40 weeks ended December 1, 2007, $0.06 million was recorded to Midwest 2007 in discontinued operations. (2) Occupancy utilization represents payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization represents payments to individuals for severance and benefits, as well as payments to pension funds for early withdrawal from multi-employer union pension plans. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. We have continued to make favorable progress in marketing and subleasing the closed stores. As a result, during fiscal 2005, we recorded an additional reduction of $3.6 million in occupancy accruals due to subleasing additional closed stores and converting a previously closed store to a store that was opened in fiscal 2006. In addition, we sold our Canadian business and as a result, the Canadian occupancy accruals of $0.1 million are no longer consolidated in our Consolidated Balance Sheet at February 25, 2006. During fiscal 2006, we recorded adjustments for a reduction in vacancy related costs for our properties of $5.4 million due to lease terminations for two properties, assignment of one property and changes in our estimation of such future costs. We also recorded a decrease of $0.1 million for the reversal of previously accrued severance and benefits due to changes in individual severings and associated benefit costs. During the 40 weeks ended December 1, 2007, we recorded adjustments for a reduction in vacancy related costs for our properties of $0.4 million due to changes in our estimation of such future costs. We paid $111.3 million of the total occupancy charges from the time of the original charges through December 1, 2007 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $30.4 million of the total net severance charges from the time of the original charges through December 1, 2007, which resulted from the termination of approximately 3,400 employees. The remaining occupancy liability of $8.6 million relates to expected future payments under long term leases and is expected to be paid in full by 2013. The remaining 29 severance liability of $1.0 million primarily relates to expected future payments for early withdrawals from multi-employer union pension plans and will be fully paid out in 2020. None of these stores were open during either of the 12 and 40 weeks ended December 1, 2007 or December 2, 2006. At December 1, 2007 and February 24, 2007, approximately $2.8 million and $3.0 million, respectively, of the reserve was included in "Other accruals" and $6.9 million and $9.2 million, respectively, was included in "Other non-current liabilities" on the Company's Consolidated Balance Sheets. We have evaluated the reserve balances as of December 1, 2007 of $9.7 million based on current information and have concluded that it is adequate to cover expected future costs. We will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. 2001 ASSET DISPOSITION The following table summarizes the activity related to this phase of the initiative recorded on the Consolidated Balance Sheets over the last three fiscal years:
Occupancy Severance and Benefits Total ------------------------------ ------------------------------ ------------------------------- U.S. Canada Total U.S. Canada Total U.S. Canada Total -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328 Addition (1) 2,449 -- 2,449 -- -- -- 2,449 -- 2,449 Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276) Adjustments (3) (4,488) -- (4,488) -- -- -- (4,488) -- (4,488) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 26, 2005 $ 31,899 $ -- $ 31,899 $ 114 $ -- $ 114 $ 32,013 $ -- $ 32,013 Addition (1) 2,170 -- 2,170 -- -- -- 2,170 -- 2,170 Utilization (2) (5,262) -- (5,262) (97) -- (97) (5,359) -- (5,359) Adjustments (3) (2,089) -- (2,089) -- -- -- (2,089) -- (2,089) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 25, 2006 $ 26,718 $ -- $ 26,718 $ 17 $ -- $ 17 $ 26,735 $ -- $ 26,735 Addition (1) 1,444 -- 1,444 -- -- -- 1,444 -- 1,444 Utilization (2) (11,875) -- (11,875) (17) -- (17) (11,892) -- (11,892) Adjustments (3) 4,299 -- 4,299 -- -- -- 4,299 -- 4,299 -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 24, 2007 $ 20,586 $ -- $ 20,586 $ -- $ -- $ -- $ 20,586 $ -- $ 20,586 Addition (1) 892 -- 892 -- -- -- 892 -- 892 Utilization (2) (1,740) -- (1,740) -- -- -- (1,740) -- (1,740) Adjustments (3) 10 -- 10 -- -- -- 10 -- 10 -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at December 1, 2007 $ 19,748 $ -- $ 19,748 $ -- $ -- $ -- $ 19,748 $ -- $ 19,748 ======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. During the 40 weeks ended December 1, 2007, $0.6 million was recorded to Greater New Orleans in discontinued operations. (2) Occupancy utilization represents payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization represents payments made to terminated employees during the period. (3) At each balance sheet date, we assess the adequacy of the reserve balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2004, we recorded adjustments of $4.5 million related to the reversals of previously accrued occupancy costs due to the disposals and subleases of locations at more 30 favorable terms than originally anticipated at the time of the original charge. During fiscal 2005, we recorded adjustments of $2.1 million related to the reversals of previously accrued occupancy costs due to the favorable result of subleasing one of the closed properties and changes in our original estimate of our future vacancy obligations for closed stores. During fiscal 2006, we recorded adjustments for additional vacancy related costs of $4.3 million due to changes in our estimate to terminate certain leases and changes in our estimation of future costs. During the 40 weeks ended December 1, 2007, we recorded adjustments for additional vacancy related costs of $0.01 million due to changes in our estimation of such future costs. We paid $58.1 million ($55.1 million in the U.S. and $3.0 million in Canada) of the total occupancy charges from the time of the original charges through December 1, 2007 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $28.2 million ($19.2 million in the U.S. and $9.0 million in Canada) of the total net severance charges from the time of the original charges through December 1, 2007, which resulted from the termination of approximately 1,100 employees. The remaining occupancy liability of $19.7 million primarily relates to expected future payments under long term leases through 2022. The severance liability has been fully utilized as of December 1, 2007 and no additional future payments for severance and benefits to individual employees will be paid out. None of these stores were open during either of the 12 and 40 weeks ended December 1, 2007 or December 2, 2006. At December 1, 2007 and February 24, 2007, approximately $2.9 million and $3.0 million of the reserve, respectively, was included in "Other accruals" and $16.8 million and $17.6 million, respectively, was included in "Other non-current liabilities" on the Company's Consolidated Balance Sheets. We have evaluated the reserve balances as of December 1, 2007 of $19.7 million based on current information and have concluded that it is adequate to cover expected future costs. We will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. DISTRIBUTION 2005 During fiscal 2005, our Company sold our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers, Inc. On June 27, 2005, the definitive agreements, including an Asset Purchase Agreement and a 15 year Supply Agreement, were finalized and signed. The Asset Purchase Agreement included the assignment of our leases in Central Islip, New York and Baltimore, Maryland, and a warranty deed for our owned facilities in Dunmore, Pennsylvania. In the Supply Agreement, C&S Wholesale Grocers, Inc. will supply our Company with all of our requirements for groceries, perishables, frozen food and other merchandise in the product categories carried by C&S Wholesale Grocers, Inc. The transition of our owned warehouses and operations began in the third quarter of fiscal 2005 and was completed during the fourth quarter of fiscal 2005. 31 The following table summarizes the activity to date related to the charges recorded for the closing of these facilities.
Severance and Occupancy Benefits Total ----------- ------------- --------- Original charge (1) $ -- $ 40,417 $ 40,417 Additions (2) 15,420 7,296 22,716 Utilization (3) (337) (43,597) (43,934) Adjustments (4) -- (493) (493) ----------- ------------- --------- Balance at February 25, 2006 $ 15,083 $ 3,623 $ 18,706 Additions (2) 244 32 276 Utilization (3) (12,075) (2,780) (14,855) Adjustment (4) 2,198 1 2,199 ----------- ------------- --------- Balance at February 24, 2007 $ 5,450 $ 876 $ 6,326 Additions (2) 131 2,318 2,449 Utilization (3) (771) (1,440) (2,211) Adjustment (4) (3,469) -- (3,469) ----------- ------------- --------- Balance at December 1, 2007 $ 1,341 $ 1,754 $ 3,095 =========== ============= =========
(1) The original charge to severance and benefits during the first quarter of fiscal 2005 of $40.4 million related to (i.) individual severings as well as retention and productivity incentives that were accrued as earned of $7.6 million and (ii.) costs for future obligations for early withdrawal from multi-employer union pension plans of $32.8 million. (2) The additions to occupancy during fiscal 2005 related to future occupancy costs such as rent, common area maintenance and real estate taxes, and future obligations for the warehouses sold to C&S Wholesale Grocers, Inc. The additions to occupancy during fiscal 2006 and the 40 weeks ended December 1, 2007 represent interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. During the 40 weeks ended December 1, 2007, $0.02 million was recorded to Greater New Orleans and $0.07 million was recorded to Midwest 2007 in discontinued operations. The additions to severance and benefits represented charges related to additional individual severings as well as retention and productivity incentives that were accrued as earned. During the 40 weeks ended December 1, 2007, we recorded additions to severance and benefits of $2.3 million for health and welfare benefits for warehouse retirees of $1.6 million and pension withdrawal costs of $0.7 million. (3) Occupancy utilization represents payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance and benefits utilization represents payments made to terminated employees during the period as well as payments made to pension funds for early withdrawal from multi-employer union pension plans. (4) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During the fiscal 2005, we recorded adjustments of $0.5 million primarily related to reversals of previously accrued severance and benefits due to changes in individual severings and associated benefit costs. During fiscal 2006, we recorded adjustments for additional vacancy related costs for our properties of $2.2 million due to changes in our estimation of such future costs. During the 40 weeks ended December 1, 2007, we recorded adjustments for a reduction in vacancy related costs for our properties of $3.5 million due to (i.) changes in our estimation of such future costs of $0.9 million and (ii.) $2.6 million for one property that was reclassified to Midwest 2007 in discontinued operations. We paid $13.2 million of the total occupancy charges from the time of the original charge through December 1, 2007 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. The remaining occupancy liability of $1.3 million relates to expected future payments under long term leases and is expected to be paid out in full by 2021. We paid $47.8 million of the total net severance and benefits charges from the time of the original charges through December 1, 2007. The remaining severance liability of $1.8 million relates to expected 32 future payments for early withdrawals from multi-employer union pension plans and expected future payments for severance and benefits payments to individual employees which will be fully paid out by 2015. As of December 1, 2007 and February 24, 2007, approximately $0.5 million and $1.7 million, respectively, was included in "Other Accruals" and $2.6 million and $4.6 million, respectively, was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the reserve balances as of December 1, 2007 of $3.1 million based on current information and have concluded that it is adequate to cover expected future costs. We will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. Our Company currently acquires a significant amount of our saleable inventory from one supplier, C&S Wholesale Grocers, Inc. Although there are a limited number of distributors that can supply our stores, we believe that other suppliers could provide similar product on comparable terms. However, a change in suppliers could cause a delay in distribution and a possible loss of sales, which would affect operating results adversely. 9. RETIREMENT PLANS AND BENEFITS On February 24, 2007, we adopted SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("SFAS 158") which required that we recognize the funded status of our defined benefit pension and other postretirement benefit plans as a net liability or asset on our balance sheets and requires any unrecognized prior service costs and actuarial gains or losses to be recognized as a component of accumulated other comprehensive income or loss. Minimum pension liabilities and related intangible assets were derecognized upon adoption. Beginning in our fiscal 2008, SFAS 158 requires that our assumptions used to measure our annual expenses be determined as of the balance sheet date (February 28, 2009), and all plan assets and liabilities to be reported as of that date. We have chosen to early adopt this requirement in fiscal 2007. We used the second approach as described in paragraph 19 of SFAS 158 to transition our measurement date from December 31, 2006 to February 24, 2007. Under this approach, we have recorded an adjustment to opening retained earnings in the amount of $0.6 million to decrease the February 25, 2007 balance of retained earnings. DEFINED BENEFIT PLANS We provide retirement benefits to certain non-union and union employees under various defined benefit plans. Our defined benefit pension plans are non-contributory and benefits under these plans are generally determined based upon years of service and, for salaried employees, compensation. We fund these plans in amounts consistent with the statutory funding requirements. In the third quarter of fiscal 2007, we recorded a curtailment gain of $0.2 million reflecting a reduction in the estimated future costs of previously recorded pension benefits as a result of the closure of stores in the Midwest. This amount was included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations. In addition, we recorded a settlement gain of $1.0 million resulting from lump sum payments of benefits in excess of our recorded liabilities for both former employees in the Midwest and the Northeast. Of this amount $0.9 million was included in "(Loss) income 33 from operations of discontinued businesses, net of tax" and $0.1 million was included in "Store operating, general and administrative expense" on our Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007. The components of net pension cost were as follows:
For the 12 Weeks Ended --------------------------- December 1, December 2, 2007 2006 ---------- ----------- Service cost $ 1,137 $ 1,219 Interest cost 2,800 2,612 Expected return on plan assets (3,031) (2,850) Amortization of unrecognized net prior service cost (gain) 58 (41) Amortization of unrecognized net loss 23 38 Curtailment gain (167) -- Settlement gain (1,047) -- Administrative expenses and other -- 116 ---------- ----------- Net pension (income) cost $ (227) $ 1,094 ========== ===========
For the 40 Weeks Ended --------------------------- December 1, December 2, 2007 2006 ---------- ----------- Service cost $ 3,789 $ 4,064 Interest cost 9,334 8,705 Expected return on plan assets (10,103) (9,500) Amortization of unrecognized net prior service cost (gain) 196 (137) Amortization of unrecognized net loss 76 125 Curtailment gain (167) -- Settlement gain (1,047) -- Administrative expenses and other -- 311 ----------- ---------- Net pension cost $ 2,078 $ 3,568 =========== ==========
CONTRIBUTIONS We previously disclosed in our consolidated financial statements for the year ended February 24, 2007, that we expected to contribute $5.6 million in cash to our defined benefit plans in fiscal 2007. As of December 1, 2007, we contributed approximately $3.5 million to our defined benefit plans. We plan to contribute approximately $2.1 million to our plans during the remainder of fiscal 2007. POSTRETIREMENT BENEFITS We provide postretirement health care and life benefits to certain union and non-union employees. We recognize the cost of providing postretirement benefits during employees' active service periods. We use a February 24 measurement date for our postretirement benefits. The components of net postretirement benefits income were as follows:
For the 12 Weeks Ended --------------------------- December 1, December 2, 2007 2006 ---------- ----------- Service cost $ 75 $ 87 Interest cost 243 270 Amortization of gain (105) (51) Prior service gain (311) (311) Curtailment change in estimate 3,000 -- ---------- ----------- Net postretirement benefits cost (income) $ 2,902 $ (5) ========== ===========
34
For the 40 Weeks Ended --------------------------- December 1, December 2, 2007 2006 ---------- ----------- Service cost $ 251 $ 288 Interest cost 809 902 Amortization of gain (350) (171) Prior service gain (1,036) (1,036) ---------- ----------- Net postretirement benefits income $ (326) $ (17) ========== ===========
During the third quarter of fiscal 2007, we recorded a change in estimate of $3.0 million based on our revised actuarial estimate that originally reflected a reduction in the estimated future costs of previously recorded postretirement benefits. 10. STOCK BASED COMPENSATION During the 12 and 40 weeks ended December 1, 2007, compensation expense related to share-based incentive plans was $2.0 million and $7.3 million, after tax, respectively, compared to $0.8 million and $6.6 million, after tax, during the 12 and 40 weeks ended December 2, 2006, respectively. Included in share-based compensation expense recorded during the 12 and 40 weeks ended December 1, 2007 was $0.1 million and $0.4 million, respectively, related to expensing of stock options, $1.8 million and $6.5 million, respectively, relating to expensing of restricted stock, and $0.1 million and $0.4 million, respectively, relating to expensing of common stock to be granted to our Board of Directors at the Annual Meeting of Stockholders. Included in share-based compensation expense recorded during the 12 and 40 weeks ended December 2, 2006 was $0.2 million and $0.9 million, respectively, related to expensing of stock options, $0.5 million and $4.8 million, respectively, relating to expensing of restricted stock, and $0.1 million and $0.9 million, respectively, relating to expensing of common stock to be granted to our Board of Directors at the Annual Meeting of Stockholders. At December 1, 2007, we had two stock-based compensation plans. The general terms of each plan, the method of estimating fair value for each plan and fiscal 2007 and 2006 activity is reported below. I. The 1998 Long Term Incentive and Share Award Plan: This plan provides for the grant of awards in the form of options, SAR's, restricted shares, restricted share units, performance shares, performance units, dividend equivalent, or other share based awards to our Company's officers and key employees. The total number of shares available for issuance under this plan is 6,000,000 subject to anti-dilution provisions. Options and SAR's issued under this plan vest 25% on each anniversary date of issuance over a four year period. Performance restricted stock units issued under this plan during fiscal 2005 are earned based on our Company achieving in fiscal 2007 a profit after taxes, after adjusting for specific matters which our Company considers to be of a non-operating nature, with an outlook for continued, sustainable profitability on the same basis. On June 15, 2007, the Human Resources & Compensation Committee and the Governance Committee (together, the "Committees") decided to recognize our Company's performance to date for these units subject to the closing of the Pathmark transaction. Upon the closing of the Pathmark transaction, which occurred subsequent to our quarter end, the applicable performance criteria was deemed to have been met with respect to two-thirds of the units granted in fiscal 2005. These units will vest 50% on the first day of fiscal 2008 and the remaining 50% will vest on the first day of fiscal 2009, in accordance with and subject to all other terms, conditions, limitations, restrictions and eligibility requirements. As two-thirds of the units will only be considered earned upon the closing of the Pathmark transaction on December 3, 35 2007, this modification of terms did not result in the recording of any additional compensation expense during the 12 and 40 weeks ended December 1, 2007. Refer to Note 15 - Subsequent Events for further discussion. Performance restricted stock units issued under this plan during fiscal 2006 are earned based on our Company achieving certain operating targets in fiscal 2008 and are 100% vested in fiscal 2008 upon achievement of those targets. On June 15, 2007, the Committees decided to recognize our Company's performance to date for these units subject to the closing of the Pathmark transaction. Upon the closing of the Pathmark transaction, which occurred subsequent to our quarter end, the applicable performance criteria was deemed to have been met with respect to 125% of one-third of the units granted in fiscal 2006. These units will vest on or around May of 2009, in accordance with and subject to all other terms, conditions, limitations, restrictions and eligibility requirements. As one-third of the units will only be considered earned upon the closing of the Pathmark transaction on December 3, 2007, this modification of terms did not result in the recording of any additional compensation expense during the 12 or 40 weeks ended December 1, 2007. Refer to Note 15 - Subsequent Events for further discussion. Performance restricted stock units issued under this plan during fiscal 2007, are earned based on our Company achieving certain operating targets in fiscal 2009 and are 100% vested in fiscal 2009 upon achievement of those targets. On June 15, 2007, the Committees approved an executive Acquisition Closing and Integration Incentive Compensation Program (the "Integration Program"). The executive Integration Program is subject to: a) the closing of the Pathmark transaction; b) the achievement of certain Pathmark transaction closing performance criteria or certain Pathmark transaction synergy targets; c) the achievement of certain Company stock price targets over a performance period comprised of the three calendar years following the closing of the Pathmark transaction; and d) other terms, conditions, limitations, restrictions and eligibility requirements. Depending on actual performance as compared with the foregoing targets, each executive officer can earn up to a maximum of 200% of the performance restricted share units awarded them under the Integration Plan. Also on June 15, 2007, the Committees approved a non-executive Integration Program. The non-executive Integration Program is subject to: a) the closing of the Pathmark transaction; b) the achievement of certain Pathmark transaction closing performance criteria or certain Pathmark transaction synergy targets; c) the achievement of certain Company stock price targets over a performance period comprised of the 24 month period following the closing of the Pathmark transaction; and d) other terms, conditions, limitations, restrictions and eligibility requirements. Depending on actual performance as compared with the foregoing targets, each non-executive officer can earn up to a maximum of 125% of the performance restricted share units awarded them under the Integration Plan. In accordance with SFAS 123R (revised 2004), "Share-Based Payment" ("SFAS 123R"), although the executive and non-executive Integration Programs were contingent upon the closing of the Pathmark transaction, the restricted share units awarded to each executive officer were considered granted on June 15, 2007 and each non-executive officer were considered granted on August 7, 2007. Upon the closing of the Pathmark transaction on December 3, 2007, compensation expense will be recorded over the vesting period as these units are earned upon achievement of the other terms as described above. Refer to Note 15 - Subsequent Events for further discussion. 36 The stock option awards under The 1998 Long Term Incentive and Share Award Plan are granted at the fair market value of the Company's common stock at the date of grant. Fair value calculated under SFAS 123, as amended, "Accounting for Stock-Based Compensation" is used to recognize expense upon adoption of SFAS 123R. Fair values for each grant were estimated using a Black-Scholes valuation model which utilized assumptions as detailed in the following table for expected life based upon historical option exercise patterns, historical volatility for a period equal to the stock option's expected life, and risk-free rate based on the U.S. Treasury constant maturities in effect at the time of grant. Our stock options have a contractual term of 10 years. During the 12 weeks ended December 1, 2007 and December 2, 2006, our Company did not grant any stock options under this plan. The following assumptions were in place during the 40 weeks ended December 1, 2007 and December 2, 2006:
40 weeks ended 40 weeks ended Dec. 1, 2007 Dec. 2, 2006 -------------- -------------- Expected life 7 years 7 years Volatility 54% - 55% 56% Risk-free interest rate 4.46% - 4.57% 4.96%
Performance restricted stock units issued under The 1998 Long Term Incentive and Share Award Plan are granted at the fair market value of the Company's common stock at the date of grant, adjusted by an estimated forfeiture rate. Stock options The following is a summary of the stock option activity during the 40 weeks ended December 1, 2007:
Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term (years) Value ------------- ------------- ------------ ------------- Outstanding at February 24, 2007 1,324,980 $ 15.50 Granted 84,961 32.28 Canceled or expired (23,161) 16.40 Exercised (368,974) 16.85 ------------- ---------- Outstanding at December 1, 2007 1,017,806 $ 16.39 3.9 $ 13,905 ============= ========== ============= =========== Exercisable at: December 1, 2007 869,637 $ 14.29 3.1 $ 13,704 ============= =========== Nonvested at: December 1, 2007 148,169 $ 28.70 8.7 $ 201 ============= ===========
The total intrinsic value of options exercised during the 40 weeks ended December 1, 2007 was $5.7 million. The weighted average grant date fair value of stock options granted during the 40 weeks ended December 1, 2007 was $19.47. As of December 1, 2007, approximately $1.3 million, after tax, of total unrecognized compensation expense related to unvested stock option awards will be recognized over a weighted average period of 2.8 years. The amount of cash received from the exercise of stock options was approximately $6.2 million. 37 Performance Restricted Stock Units During the 12 and 40 weeks ended December 1, 2007, our Company granted nil and 708,696 shares of performance restricted stock units to selected employees, respectively, for a total grant date fair value of $23.2 million. Approximately $12.3 million of unrecognized fair value compensation expense relating to all of our performance restricted stock units, with the exception of those granted under the Integration Program, is expected to be recognized through fiscal 2009 based on estimates of attaining vesting criteria. Upon closing of the Pathmark transaction, which occurred subsequent to our quarter end, and achievement of other terms as described under the Integration Program above, approximately $10.1 million of additional unrecognized fair value compensation expense relating to the performance restricted stock units granted on June 15, 2007 and August 7, 2007 is expected to be recognized through 2010. The following is a summary of the performance restricted stock units activity during the 40 weeks ended December 1, 2007:
Weighted Average Exercise Shares Price ------------- ------------- Nonvested at February 24, 2007 1,767,451 $ 14.73 Granted 708,696 32.77 Canceled or expired (207,494) 13.59 Exercised -- -- ------------- ------------- Nonvested at December 1, 2007 2,268,653 $ 20.47 ============= =============
II. 2004 Non-Employee Director Compensation Plan: This plan provides for the annual grant of Company common stock equivalent of $90 to members of our Board of Directors. The $90 grant of common stock shall be made on the first business day following the Annual Meeting of Stockholders. The number of shares of our Company's $1.00 common stock granted annually to each non-employee Director will be based on the closing price of the common stock on the New York Stock Exchange, as reported in the Wall Street Journal on the date of grant. Only whole shares will be granted; any remaining amounts will be paid in cash as promptly as practicable following the date of grant. 11. INCOME TAXES The income tax provision recorded for the 40 weeks ended December 1, 2007 and December 2, 2006 reflects our estimated expected annual tax rates applied to our respective domestic and foreign financial results. SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") provides that a deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for carryforwards. In addition, SFAS 109 requires that a valuation allowance be recognized if, based on existing facts and circumstances, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Based upon our continued assessment of the realization of our net deferred tax asset, we recorded a valuation allowance in an amount that would appropriately reduce our net deferred tax asset to reflect our assessment of its realizability. For the 12 and 40 weeks ended December 1, 2007, the valuation allowance was decreased by $4.4 million and increased by $36.7 million, respectively, as compared to decreased by $11.9 million and $19.0 million during the 12 and 40 weeks ended December 2, 2006. To the extent that our operations generate sufficient taxable income in future periods, we will reverse the income tax valuation allowance. In future periods, we will continue to record a valuation allowance 38 against net deferred tax assets that are created by losses until such time as the certainty of future tax benefits can be reasonably assured. Effective February 25, 2007, we adopted FIN 48. Refer to Note 2 - Impact of New Accounting Pronouncements for further discussion. As a result of our adoption of FIN 48, we recorded the following transition adjustments: - - a decrease in our tax liabilities for uncertain tax positions of $24.4 million; - - a $165.0 million increase in our tax liabilities for uncertain tax positions and deferred tax assets to gross-up our balance sheet for the tax benefits of net operating losses ("NOLs") that had previously been netted in our uncertain tax position liability; and - - an increase in deferred tax assets of $38.5 million related to foreign tax credit carryforwards offset by an increase in deferred tax liabilities of $25.1 million as a result of the book versus tax basis of our foreign subsidiary and a corresponding increase in the valuation allowance of $13.4 million upon initial adoption of the standard. For the 12 and 40 weeks ended December 1, 2007 and December 2, 2006, no amounts were recorded for interest and penalties within "(Provision for) benefit from income taxes" in our Consolidated Statements of Operations. Our Company is subject to U.S. federal income tax, as well as income tax in multiple state and foreign jurisdictions. As of December 1, 2007, we were subject to examination in the U.S. federal tax jurisdiction for the 1997 to 2006 tax years and we were also subject to examination in most state jurisdictions for the 1997 to 2006 tax years as well. The effective tax rate on continuing operations of 2.3% for the 12 weeks ended December 1, 2007 varied from the statutory rate of 35% primarily due to state and local income taxes and a decrease to our valuation allowance as a result of the utilization of loss carryforwards that were not previously tax benefited. The effective tax rate on continuing operations of 461.6% for the 12 weeks ended December 2, 2006 varied from the statutory rate of 35% primarily due to a reduction in our valuation allowance and taxes not being provided on undistributed earnings of Metro, Inc. The effective tax rate on continuing operations of 3.2% for the 40 weeks ended December 1, 2007 varied from the statutory rate of 35% primarily due to state and local income taxes and a decrease to our valuation allowance as a result of the utilization of loss carryforwards that were not previously tax benefited. The effective tax rate on continuing operations of 174.4% for the 40 weeks ended December 2, 2006 varied from the statutory rate of 35% primarily due to a reduction in our valuation allowance and taxes not being provided on undistributed earnings of Metro, Inc. At December 1, 2007, we had NOL carryfowards for federal income tax purposes of $245.8 million that expire beginning in 2033. At December 1, 2007 and February 24, 2007, we had a net current deferred tax asset which is included in "Prepaid expenses and other current assets" on our Consolidated Balance Sheets of $43.4 million and $40.2 million, respectively, a net non-current deferred tax asset which is included in "Other Assets" on our Consolidated Balance Sheets of $121.5 million and nil, respectively, a net non-current deferred tax liability 39 which is included in "Other non-current liabilities" on our Consolidated Balance Sheets of nil and $40.2 million, respectively, and a non-current tax liability for uncertain tax positions which is included in "Other non-current liabilities" on our Consolidated Balance Sheets of $165.0 million and $24.4 million, respectively. 12. OPERATING SEGMENTS Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. During fiscal 2006, our retail supermarkets were reported in one segment; however, during the first quarter of fiscal 2007, we announced our intentions to sell our operations in the Greater New Orleans area and in the Midwest, resulting in a change in management's review of these operations. The criteria necessary to classify the Midwest and Greater New Orleans area as discontinued have been satisfied and these operations have been reclassified as such in our Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006. Refer to Note 7 - Discontinued Operations for further discussion. Prior year information has been restated to conform to current year presentation. During the 12 and 40 weeks ended December 1, 2007, we operated in two reportable segments: Northeast and our investment in Metro, Inc. Our Northeast segment is comprised of retail supermarkets and all corporate related charges. Our investment in Metro, Inc. represents our economic interest in Metro, Inc. and is required to be reported as an operating segment in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" as our investment was greater than 10% of our Company's combined assets of all operating segments and the investment generated operating income during the 40 weeks ended December 1, 2007. The accounting policies for these segments are the same as those described in the summary of significant accounting policies included in our revised Fiscal 2006 Annual Report on Form 8-K dated October 24, 2007. We measure segment performance based upon segment (loss) income. Interim information on segments is as follows:
For the 12 weeks ended December 1, 2007 ----------------------------------------------------------------------------------- Grocery (1) Meat (2) Produce (3) Other (4) Total --------------- --------------- --------------- --------------- ------------- Sales by Category $ 851,860 $ 241,636 $ 157,611 $ 16 $ 1,251,123 =============== ============== =============== =============== =============
(1) The grocery category includes grocery, frozen foods, dairy, general merchandise/health and beauty aids, liquor and pharmacy. (2) The meat category includes meat, deli, bakery and seafood. (3) The produce category includes produce and floral. (4) Other includes sales from an information technology services agreement with Metro, Inc. 40
For the 12 weeks ended December 1, 2007 -------------------------------------------------- Northeast Metro, Inc. Total --------------- -------------- --------------- Sales $ 1,251,123 $ -- $ 1,251,123 =============== ============== =============== Segment loss $ (12,140) $ -- $ (12,140) Reconciliation: Net restructuring (168) -- (168) Pathmark acquisition (4,392) -- (4,392) Real estate related activity (4,449) -- (4,449) Income from an information technology services agreement with Metro, Inc. 16 -- 16 --------------- -------------- --------------- Loss from operations $ (21,133) $ -- $ (21,133) =============== ============== =============== Gain on sale of Canadian operations $ 495 $ -- $ 495 Gain on disposition of Metro, Inc. -- 106,063 106,063 Interest expense (14,499) -- (14,499) Interest and dividend income 2,535 1,375 3,910 --------------- -------------- --------------- (Loss) income from continuing operations before income taxes $ (32,602) $ 107,438 $ 74,836 =============== ============== =============== Depreciation and amortization by segment $ 32,654 $ -- $ 32,654 =============== ============== --------------- Depreciation and amortization for discontinued operations -- --------------- Total Company $ 32,654 =============== Capital expenditures by segment $ 18,687 $ -- $ 18,687 =============== ============== --------------- Capital expenditures for discontinued operations -- --------------- Total Company $ 18,687 ===============
For the 12 weeks ended December 2, 2006 ----------------------------------------------------------------------------------- Grocery (1) Meat (2) Produce (3) Other (4) Total --------------- --------------- --------------- --------------- ------------- Sales by Category $ 828,629 $ 232,270 $ 148,449 $ 4,128 $ 1,213,476 =============== =============== =============== ============== =============
For the 12 weeks ended December 2, 2006 -------------------------------------------------- Northeast Metro, Inc. Total --------------- -------------- --------------- Sales $ 1,213,476 $ -- $ 1,213,476 =============== ============== =============== Segment loss $ (17,653) $ -- $ (17,653) Reconciliation: Net restructuring (402) -- (402) Real estate related activity 8,228 -- 8,228 Income from an information technology services agreement with Metro, Inc. 4,128 -- 4,128 --------------- -------------- --------------- Loss from operations $ (5,699) $ -- $ (5,699) =============== ============== =============== Loss on sale of Canadian operations $ (599) $ -- $ (599) Interest expense (15,342) -- (15,342) Interest and dividend income 1,697 -- 1,697 Equity in earnings of Metro, Inc. -- 11,023 11,023 --------------- -------------- --------------- (Loss) income from continuing operations before income taxes $ (19,943) $ 11,023 $ (8,920) =============== ============== ===============
41
For the 12 weeks ended December 2, 2006 -------------------------------------------------- Northeast Metro, Inc. Total --------------- -------------- --------------- Depreciation and amortization by segment $ 33,930 $ -- $ 33,930 =============== ============== --------------- Depreciation and amortization for discontinued operations 6,626 --------------- Total Company $ 40,556 =============== Capital expenditures by segment $ 60,730 $ -- $ 60,730 =============== ============== --------------- Capital expenditures for discontinued operations 2,941 --------------- Total Company $ 63,671 ===============
For the 40 weeks ended December 1, 2007 ----------------------------------------------------------------------------------- Grocery (1) Meat (2) Produce (3) Other (4) Total --------------- -------------- --------------- -------------- ------------- Sales by Category $ 2,811,474 $ 826,217 $ 561,147 $ 5,792 $ 4,204,630 =============== ============== =============== ============== =============
For the 40 weeks ended December 1, 2007 ------------------------------------------------- Northeast Metro, Inc. Total -------------- -------------- --------------- Sales $ 4,204,630 $ -- $ 4,204,603 ============== ============== =============== Segment loss $ (26,765) $ -- $ (26,765) Reconciliation: Net restructuring (4,420) -- (4,420) Pathmark acquisition (6,761) -- (6,761) Real estate related activity 12,037 -- 12,037 Income from an information technology services agreement with Metro, Inc. 5,792 -- 5,792 -------------- -------------- --------------- Loss from operations $ (20,117) $ -- $ (20,117) ============== ============== =============== Gain on sale of Canadian operations $ 209 $ -- $ 209 Gain on disposition of Metro, Inc. -- 184,451 184,451 Interest expense (48,806) -- (48,806) Interest and dividend income 8,323 3,908 12,231 Equity in earnings of Metro, Inc. -- 7,869 7,869 -------------- -------------- --------------- (Loss) income from continuing operations before income taxes $ (60,391) $ 196,228 $ 135,837 ============== ============== =============== Depreciation and amortization by segment $ 113,977 $ -- $ 113,977 ============== ============== --------------- Depreciation and amortization for discontinued operations 8,637 --------------- Total Company $ 122,614 =============== Capital expenditures by segment $ 96,878 $ -- $ 96,878 ============== ============== --------------- Capital expenditures for discontinued operations 1,569 --------------- Total Company $ 98,447 ===============
At December 1, 2007 -------------------------------------------------- Northeast Metro, Inc. Total --------------- -------------- --------------- Total assets by segment $ 2,057,394 $ -- $ 2,057,394 =============== ============== --------------- Total assets for discontinued operations 5,621 --------------- Total Company $ 2,063,015 ===============
For the 40 weeks ended December 2, 2006 ----------------------------------------------------------------------------------- Grocery (1) Meat (2) Produce (3) Other (4) Total --------------- -------------- --------------- -------------- ------------- Sales by Category $ 2,762,474 $ 792,082 $ 535,202 $ 13,672 $ 4,103,430 =============== ============== =============== ============== =============
42
For the 40 weeks ended December 2, 2006 ------------------------------------------------- Northeast Metro, Inc. Total -------------- ------------- --------------- Sales $ 4,103,430 $ -- $ 4,103,430 ============== ============= =============== Segment loss $ (34,582) $ -- $ (34,582) Reconciliation: Net restructuring (7,562) -- (7,562) Real estate related activity 8,819 -- 8,819 Income from an information technology services agreement with Metro, Inc. 13,672 -- 13,672 -------------- ------------- --------------- Loss from operations $ (19,653) $ -- $ (19,653) ============== ============= =============== Loss on sale of Canadian operations $ (890) $ -- $ (890) Interest expense (50,167) -- (50,167) Interest and dividend income 7,977 -- 7,977 Equity in earnings of Metro, Inc. -- 30,840 30,840 -------------- ------------- --------------- (Loss) income from continuing operations before income taxes $ (62,733) $ 30,840 $ (31,893) ============== ============= =============== Depreciation and amortization by segment $ 113,314 $ -- $ 113,314 ============== ============= --------------- Depreciation and amortization for discontinued operations 22,461 --------------- Total Company $ 135,775 =============== Capital expenditures by segment $ 169,985 $ -- $ 169,985 ============== ============= --------------- Capital expenditures for discontinued operations 14,032 --------------- Total Company $ 184,017 ===============
At February 24, 2007 -------------------------------------------------- Northeast Metro, Inc. Total --------------- -------------- --------------- Total assets by segment $ 1,464,989 $ 368,871 $ 1,833,860 =============== ============== --------------- Total assets for discontinued operations 277,763 --------------- Total Company $ 2,111,623 ===============
13. INDEBTEDNESS At December 1, 2007 and February 24, 2007, there were $137.6 million and $138.3 million, respectively, in letters of credit outstanding under our Letter of Credit Agreement. Our Company also has a $250 million Revolving Credit Agreement ("Revolver") with four lenders enabling us to borrow funds on a revolving basis for working capital loans and letters of credit. At December 1, 2007 and February 24, 2007, there were no letters of credit outstanding under this agreement; however, there were $11.3 million and $70.0 million, respectively, in outstanding borrowings under our Revolver. 43 In March 2007, our Letter of Credit Agreement and Revolver were amended to allow for the sale of Metro, Inc. shares provided that the net proceeds from such sales are deposited in a restricted cash account. Refer to Note 4 - Investment in Metro, Inc. for further discussion regarding the sale of these Metro, Inc. shares. During the 12 weeks ended December 1, 2007, on October 14, 2007, our Letter of Credit Agreement was amended to extend the expiration date of the facility from October 14, 2007 to April 14, 2008. During the 40 weeks ended December 1, 2007, the outstanding principal amount of our 7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in full. In connection with the acquisition of Pathmark Stores, Inc., on December 3, 2007, we terminated our existing Revolver and entered into a new $675 million Credit Agreement enabling us to borrow funds on a revolving basis for working capital loans and letters of credit and a $370 million Senior Secured Bridge Credit Agreement. In addition, on December 18, 2007, we completed our public offering and issued $165 million 5.125% convertible senior notes due 2011 and $255 million 6.75% convertible senior notes due 2012. The net proceeds from these offerings were used to repay the $370 million Senior Secured Bridge Credit Agreement. Refer to Note 15 - Subsequent Events for further discussion. 14. COMMITMENTS AND CONTINGENCIES LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc ("Defendants"). On June 24, 2004, a class action complaint was filed in the Supreme Court of the State of New York against The Great Atlantic & Pacific Tea Company, Inc., d/b/a A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime provisions of the New York Labor Law. Three named plaintiffs, Benedetto Lamarca, Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our Company failed to pay overtime wages to full-time hourly employees who were either required or permitted to work more than 40 hours per week. In April 2006, the plaintiffs filed a motion for class certification. In July 2007, the Court granted the plaintiffs' motion and certified the class as follows: All full-time hourly employees of Defendants who were employed in Defendants' supermarket stores located in the State of New York, for any of the period from June 24, 1998 through the date of the commencement of the action, whom Defendants required or permitted to perform work in excess of 40 hours per week without being paid overtime wages. The Court also ruled that the issue of whether to include an "opt-in" or "opt-out" provision is premature and can be decided after discovery has been had. As class certification was granted only recently, and as discovery on the prospective plaintiffs comprising the class has yet to be conducted, neither the number of class participants nor the sufficiency of their respective claims can be determined at this time. Other We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. We are also subject to certain environmental claims. While the outcome of these claims cannot be predicted with certainty, Management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated results of operations, financial position or cash flows. 44 15. SUBSEQUENT EVENTS On December 3, 2007, we completed our acquisition of 100% of Pathmark Stores, Inc. for $1.4 billion in cash, stock, assumed or retired debt, warrants and options, in a transaction accounted for under SFAS No. 141 "Business Combinations" ("SFAS 141"). Pathmark is a regional supermarket chain with supermarkets in the New York, New Jersey and Philadelphia metropolitan areas. The terms of the consent agreement, as discussed in Note 3 - Definitive Merger Agreement with Pathmark Stores, Inc., require the divestiture of six stores located in the state of New York. We have entered into definitive agreements to sell all six stores and have received FTC approval on these divestitures. Included in the Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006 are the sales and operating results of the 5 A&P stores that will be closed. The remaining store to be closed was a Pathmark location as of December 1, 2007 and accordingly the results of operations of that store were not included in our results of operations. The results of these operations are as follows:
12 Weeks Ended 40 Weeks Ended ------------------------- ------------------------- December 1, December 2, December 1, December 2, 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Sales $ 25,696 $ 24,916 $ 85,055 $ 83,038 =========== =========== =========== =========== Income from operations $ 228 $ 73 $ 704 $ 33 =========== =========== =========== ===========
This acquisition creates value based on the strengths of each company and the combined company's ability to better serve customers in the New York, New Jersey and Philadelphia metro areas. Under the merger agreement, each share of Pathmark common stock outstanding was converted into 0.12963 shares of A&P common stock (together with cash in lieu of fractional shares) and $9.00 in cash. We issued 6,781,067 shares of A&P common stock and paid $470.8 million to Pathmark common stockholders based on the number of shares of unrestricted Pathmark common stock outstanding, less shares of restricted stock and shares held in treasury on November 30, 2007, of 52,310,959. We issued 1,107,156 roll-over stock options in exchange for Pathmark options granted prior to June 9, 2005 that have exercise prices greater than or equal to $12.90, the quoted market price of Pathmark common stock on November 30, 2007, the last trading day before the closing date of the merger on December 3, 2007. The underlying stock price at the closing date of the merger was calculated using a ratio of the quoted closing market price for the Pathmark common stock on the merger closing date. In determining the purchase price, the options are valued using a Black-Scholes valuation model and a market price of $12.92, the average quoted closing market price of Pathmark common stock for the two trading days prior to the closing date and the closing date. We also assumed 5,294,118 of outstanding Pathmark 2000 warrants. Upon exercise at the price of $22.31, each warrant will entitle the holder to receive 0.12963 shares of A&P common stock and $9.00 in cash. In determining the purchase price, the 2000 warrants are valued using a Black-Scholes valuation model using the price of A&P common stock of $32.08 per common share, the average quoted market price of A&P common stock for two trading days before and two trading days after the merger was announced. Additionally, we issued 11,623,236 roll-over stock warrants in exchange for Pathmark's 2005 Series A and Series B warrants under the Yucaipa Warrant Agreement to the Yucaipa Companies LLC ("Yucaipa") 45 investors. The number of warrants issued was computed based on the number of Pathmark warrants outstanding on November 30, 2007 totaling 25,106,350 using the conversion factor of 0.46296. The Series A warrants are exercisable at $18.36 and the Series B warrants are exercisable at $32.40. The 2005 Series A and Series B warrants are valued using the price of A&P common stock of $30.05 per common share, the quoted market price of A&P stock on November 30, 2007. These instruments will be accounted for as a liability and will be marked to market at each balance sheet date. The purchase price paid for the acquisition of Pathmark is as follows: Equity issued to Pathmark common stock holders $ 203.8 Issuance to Pathmark option holders 11.2 Issuance to Pathmark 2005 warrant holders 177.0 Issuance to Pathmark 2000 warrant holders 1.1 ------------ Total equity considerations $ 393.1 Cash paid to redeem Pathmark debt 466.0 Cash paid to Pathmark common stockholders at $9 per share 470.8 Cash paid to Pathmark option, restricted stock and restricted stock unit holders 23.3 Cash paid to date for transaction fees, excluding financing fees 51.9 ------------ Total cash consideration $ 1,012.0 ------------ Total consideration $ 1,405.1 ============
The acquisition of Pathmark was funded by restricted cash on hand, temporary bridge financing arrangements and the issuance of equity securities. On December 3, 2007, we entered into a new $675 million Credit Agreement (the "ABL Facility") with Bank of America, N.A., and a $370 million Senior Secured Bridge Credit Agreement (the "Bridge Loan Facility") with Banc of America Securities LLC, Bank of America, N.A. and Bank of America Bridge LLC, Lehman Brothers Commercial Bank, Lehman Brothers Inc. and Lehman Commercial Paper Inc. The ABL Facility provides for a five-year term loan of $82.9 million and a five-year revolving credit facility of $592.1 million. The Bridge Loan Facility, which was subsequently refinanced, provided for a term loan of $370 million that initially matures on December 3, 2008, after which time, subject to the satisfaction of certain conditions, the loans then outstanding will either continue as term loans or be exchanged for exchange notes, in each case having a maturity of December 3, 2015. In connection with the new financing, we paid $10.7 million and $20.6 million in financing fees for the ABL Facility and the Bridge Loan Facility, respectively. We used our restricted cash on hand and borrowings under the ABL Facility and the Bridge Loan Facility to fund the acquisition, terminate our existing Revolver which had outstanding borrowings of $11.3 million, terminate Pathmark's obligation under their revolver and term loan of $114.0 million and to fund $375.5 million for the payment of Pathmark's Senior Subordinated Notes with a face value of $350 million due 2012. At the close of business on December 3, 2007, we had $200.0 million in outstanding borrowings under the ABL Facility. To pay down our temporary financing as discussed above, on December 18, 2007, we completed a public offering and issued $165 million 5.125% convertible senior notes due 2011 and $255 million 6.75% convertible senior notes due 2012. The 2011 notes are not redeemable at our option at any time. The 2012 46 notes are redeemable at our option on or after December 15, 2010, at a redemption price of 102.70% and on or after December 15, 2011, at a redemption price of 101.35%. The initial conversion price of the 2011 notes is $36.40 representing a 30.0% premium to the offering price of $28.00 and the initial conversion price of the 2012 notes is $37.80 representing a 35.0% premium to the offering price of $28.00. The principal amount of these notes are convertible into shares of our stock, cash, or a combination of stock and cash at our option. In connection with this offering, we entered into convertible note hedge and warrant transactions with financial institutions that are affiliates of the underwriters of the notes to increase the effective conversion price of the notes. We also entered into share lending agreements with affiliates of the underwriters to lend such affiliates up to 11,278,988 shares of our common stock. Pursuant to these agreements, we loaned 8,134,002 shares of our stock to these entities who then sold 6,300,752 shares to the public in a public offering, which was consummated on December 18, 2007. We did not receive any proceeds from the sale of these shares other than a nominal lending fee. On December 27, 2007, in order to facilitate the syndication of the ABL Facility under current market conditions, we entered into an Amended and Restated Credit Agreement (the "Credit Agreement"). Part of the revolving commitments were restructured as a $50 million term loan collateralized by certain real estate assets and the applicable margin on credit extensions was increased. The application of purchase accounting under SFAS 141 requires that the purchase price paid is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the transaction date. The allocation of the purchase price and its impact on the Consolidated Statements of Operations may differ depending on the final fair values assigned to amortizing assets and liabilities and their related actual remaining useful lives, including the following categories of intangible assets and liabilities: - Favorable/unfavorable leases - Favorable/unfavorable contracts - Benefit plan obligations - Pharmacy scripts - Customer relationships The allocation of the purchase price to assets which will not be amortized may also impact classification on the balance sheet depending on the final fair values assigned, including the following categories of intangible assets: - Trade name - Goodwill 47 Under the purchase method of accounting, the assets and liabilities of Pathmark were recorded at their respective fair values at the date of acquisition, December 3, 2007. Simultaneously, we recorded a preliminary amount to goodwill of approximately $570 million. We have determined that the Pathmark trade name has an infinite life, and accordingly, is not subject to amortization. We have evaluated the preliminary third-party valuations of property, net, intangible assets, and certain other assets and liabilities. Because this transaction was completed subsequent to our quarter end, the values of certain assets and liabilities are based on preliminary valuations and are subject to adjustment as additional information is obtained. Such additional information includes, but is not limited to: valuations and physical counts of property and inventory and the involuntary termination of employees. Changes to the valuation of property may result in adjustments to the fair value of certain identifiable intangible assets acquired, and when finalized, material adjustments to goodwill may result. The following table summarizes the preliminary estimated fair values of the Pathmark assets acquired and liabilities assumed at the date of acquisition: Current assets $ 355.4 Property, net 1,071.5 Other assets 300.9 -------------- Total assets acquired $ 1,727.8 Current liabilities (306.6) Long-term debt (1.0) Long-term obligations under capital leases (163.7) Other non-current liabilities (419.6) -------------- Total liabilities assumed $ (890.9) -------------- Net assets acquired $ 836.9 ==============
The preliminary amount of goodwill of approximately $570 million resulting from the Pathmark acquisition is assigned to our Northeast segment. The purchased goodwill is not deductible for tax purposes. On August 14, 2007, Pathmark entered into a leasehold assignment contract for the sale of its leasehold interests in one of its stores with CPS Operating Company LLC, a Delaware limited liability company ("CPS"). Pursuant to the terms of the agreement, Pathmark was to receive $87 million for sale of the lease and was to have assigned and transferred to CPS all of Pathmark's interest in the lease and CPS was to have assumed all of the duties and obligations of Pathmark under the lease. CPS deposited $6 million in escrow as a deposit against the purchase price for the lease, which is non-refundable to CPS, except as otherwise expressly provided in the agreement. The sale of the lease was scheduled to close on December 28, 2007. On December 27, 2007, CPS issued a notice to Pathmark terminating the agreement for reason of Pathmark's purported breach of the agreement, which, if proven, would require the return of the escrow. Pathmark is disputing the validity of CPS's notice of termination as Pathmark believes the CPS's position is without merit. Because Pathmark is challenging the validity of CPS's December 27, 2007 notice of termination, Pathmark issued its own notice to CPS on December 31, 2007, asserting CPS's breach of the agreement as a result of their failure to close on December 28, 2007. CPS's breach, if proven, would entitle Pathmark to keep the escrow. Both parties have taken legal action to obtain the $6 million deposit held in escrow. 48 On November 5, 2007, the Superior Court of the State of New Jersey, Middlesex County, approved the negotiated settlement of the two putative class action complaints that were filed in New Jersey State court on March 6, 2007, and March 12, 2007, and subsequently consolidated on June 15, 2007 and amended on July 16, 2007 (Superior Court of the State of New Jersey, Middlesex County, Civil Action No. C-111-07), alleging, inter alia, that the preliminary joint prospectus/proxy statement regarding the transaction between A&P and Pathmark included insufficient disclosures, breach of fiduciary duty by the directors of Pathmark, and aiding and abetting the breach of that duty by Pathmark and A&P. Pursuant to the negotiated settlement, the litigation was dismissed, releases were exchanged, Pathmark and A&P made certain disclosures in the definitive joint proxy statement/prospectus regarding the transaction between A&P and Pathmark and, in connection with the acquisition of Pathmark subsequent to our third quarter end, we agreed to pay plaintiffs' attorneys' fees and expenses in the aggregate amount of $1.3 million. As discussed in Note 10 - Stock Based Compensation, upon closing of the Pathmark transaction and the achievement of other terms as described under the Integration Program, approximately $10.1 million of additional unrecognized fair value compensation expense relating to the performance restricted stock units granted on June 15, 2007 and August 7, 2007 is expected to be recognized over the vesting period through 2010. ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION The following Management's Discussion and Analysis is intended to help the reader understand the financial position, operating results, and cash flows of The Great Atlantic and Pacific Tea Company, Inc. It should be read in conjunction with our financial statements and the accompanying notes ("Notes"). It discusses matters that Management considers relevant to understanding the business environment, financial position, results of operations and our Company's liquidity and capital resources. These items are presented as follows: - - Basis of Presentation - a discussion of our Company's results during the 12 and 40 weeks ended December 1, 2007 and December 2, 2006. - - Overview - a general description of our business; the value drivers of our business; measurements; opportunities; challenges and risks; and initiatives. - - Outlook - a discussion of certain trends or business initiatives for the remainder of fiscal 2007 that Management wishes to share with the reader to assist in understanding the business. - - Review of Continuing Operations and Liquidity and Capital Resources--a discussion of results for the 12 weeks ended December 1, 2007 compared to the 12 weeks ended December 2, 2006; results for the 40 weeks ended December 1, 2007 compared to the 40 weeks ended December 2, 2006; current and expected future liquidity; and the impact of various market risks on our Company. - - Critical Accounting Estimates--a discussion of significant estimates made by Management. - - Impact of New Accounting Pronouncements - a discussion of authoritative pronouncements that have been or will be adopted by our Company. - - Market Risk - a discussion of the impact of market changes on our consolidated financial statements. 49 BASIS OF PRESENTATION The accompanying consolidated financial statements of The Great Atlantic & Pacific Tea Company, Inc. for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary for a fair statement of financial position and results of operations for such periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our revised Fiscal 2006 Annual Report on Form 8-K dated October 24, 2007. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of our Company and all subsidiaries. OVERVIEW The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey, operates conventional supermarkets, combination food and drug stores and discount food stores in 8 U.S. states and the District of Columbia. Our Company's business consists strictly of our retail operations, which totaled 322 stores as of December 1, 2007. For the 12 and 40 weeks ended December 1, 2007, we operated in two reportable segments: the Northeast and our investment in Metro, Inc. Our Northeast segment is comprised of retail supermarkets and all corporate related charges. Our investment in Metro, Inc. represents our economic interest in Metro, Inc. The criteria necessary to classify the Midwest and Greater New Orleans area as discontinued have been satisfied and as such, these operations have been reclassified in our Consolidated Statements of Operations for the 12 and 40 weeks ended December 1, 2007 and December 2, 2006. RECENT ANNOUNCEMENTS On March 5, 2007, our Company announced that we have reached a definitive merger agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores, Inc., ("Pathmark") for $1.4 billion in cash, stock, and debt assumption or retirement. On November 27, 2007, our Company announced that the Federal Trade Commission ("FTC") had accepted a proposed consent agreement relating to our acquisition of Pathmark. Further, on December 3, 2007, we completed our acquisition of Pathmark. Pathmark is a regional supermarket chain with supermarkets in the New York, New Jersey and Philadelphia metropolitan areas. The terms of the consent agreement, as discussed in Note 15 - Subsequent Events, requires us to divest six stores located in the state of New York. We have entered into definitive agreements to sell all of the stores included in the consent agreement and have received FTC approval on these divestitures. Under the merger agreement, each share of Pathmark common stock outstanding was converted into 0.12963 shares of A&P common stock (together with cash in lieu of fractional shares) and $9.00 in cash. We issued 6,781,067 shares of A&P common stock and paid $470.8 million to Pathmark common stockholders based on the number of shares of unrestricted Pathmark common stock outstanding, less shares of restricted stock and shares held in treasury on November 30, 2007, of 52,310,959. We issued 1,107,156 roll-over stock options in exchange for Pathmark options granted prior to June 9, 2005 that have exercise prices greater than or equal to $12.90, the quoted market price of Pathmark common stock on November 30, 2007, the last trading day before the closing date of the merger on December 3, 2007. The underlying stock price at the closing date of the merger was calculated using a ratio of the quoted 50 closing market price for the Pathmark common stock on the merger closing date. In determining the purchase price, the options are valued using a Black-Scholes valuation model and a market price of $12.92, the average quoted closing market price of Pathmark common stock for the two trading days prior to the closing date and the closing date. We also assumed 5,294,118 of outstanding Pathmark 2000 warrants. Upon exercise at the price of $22.31, each warrant will entitle the holder to receive 0.12963 shares of A&P common stock and $9.00 in cash. In determining the purchase price, the 2000 warrants are valued using a Black-Scholes valuation model using the price of A&P common stock of $32.08 per common share, the average quoted market price of A&P common stock for two trading days before and two trading days after the merger was announced. Additionally, we issued 11,623,236 roll-over stock warrants in exchange for Pathmark's 2005 Series A and Series B warrants under the Yucaipa Warrant Agreement to the Yucaipa Companies LLC ("Yucaipa") investors. The number of warrants issued was computed based on the number of Pathmark warrants outstanding on November 30, 2007 totaling 25,106,350 using the conversion factor of 0.46296. The Series A warrants are exercisable at $18.36 and the Series B warrants are exercisable at $32.40. The 2005 Series A and Series B warrants are valued using the price of A&P common stock of $30.05 per common share, the quoted market price of A&P stock on November 30, 2007. These instruments will be accounted for as a liability and will be marked to market at each balance sheet date. The purchase price paid for the acquisition of Pathmark is as follows: Equity issued to Pathmark common stock holders $ 203.8 Issuance to Pathmark option holders 11.2 Issuance to Pathmark 2005 warrant holders 177.0 Issuance to Pathmark 2000 warrant holders 1.1 ------------ Total equity considerations $ 393.1 Cash paid to redeem Pathmark debt 466.0 Cash paid to Pathmark common stockholders at $9 per share 470.8 Cash paid to Pathmark option, restricted stock and restricted stock unit holders 23.3 Cash paid to date for transaction fees, excluding financing fees 51.9 ------------ Total cash consideration $ 1,012.0 ------------ Total consideration $ 1,405.1 ============
The acquisition of Pathmark was funded by restricted cash on hand, temporary bridge financing arrangements and the issuance of equity securities. On April 24, 2007, based upon unsatisfactory operating trends and the need to devote resources to our expanding Northeast core business, our Company announced negotiations for the sale of our non-core stores within our Midwest operations, including inventory related to these stores. Sale transactions for these stores have been completed. Further, our Company has ceased sales operations in all stores as of July 7, 2007. In connection with the shutdown of these operations, we recorded net occupancy costs of $1.8 million and $60.7 million during the 12 and 40 weeks ended December 1, 2007, respectively, for closed stores and warehouses not sold. As we continue to negotiate lease terminations as well as sublease some of these locations, these estimates may require adjustment in future periods. 51 On May 30, 2007, our Company announced advanced negotiations for the sale of our non-core stores located within the Greater New Orleans area, including inventory related to these stores. Sale transactions for these stores have been completed. Further, our Company has ceased sales operations in all stores as of November 1, 2007. In connection with the shutdown of these operations, we recorded net occupancy costs of $1.6 million during the 12 and 40 weeks ended December 1, 2007. OPERATING RESULTS A&P's transformation and operating improvement moved forward in the third quarter of fiscal 2007, behind ongoing strategic, operating, merchandising, store development and cost control initiatives. Our Company completed its strategic divestiture of non-core operations, which resulted in the concentration of operations and future development plans in our Northeast markets. Having closed and/or sold all Midwest operations in the second quarter, we moved on to complete the divestiture of stores in the Greater New Orleans area early in the third quarter. The resolution of those initiatives and the completion of our acquisition of Pathmark Stores Inc. early in the fourth quarter, effectively completed our Company's strategic transformation initiative, which began in 2005 with the sale of A&P Canada and subsequent executive management changes. With the addition of the Pathmark operations, A&P is positioned to achieve sustainable profitability when the integration of Pathmark's business is completed. With divestiture of non-core operations and acquisition of Pathmark completed, A&P now has: - - Decisive market share leadership in metropolitan New York and New Jersey, and greater share in our Superfresh markets. - - A clearly defined and demographically targeted store format strategy. - - A comprehensive plan in place to achieve all identified synergy savings through consolidation of the Pathmark business. - - The right cost model and solid financial and investment platform. - - Experienced management team, enhanced by the addition of approximately 125 key management personnel from the Pathmark organization. Alongside the conclusion of the strategic transformation, we maintained the ongoing improvement of operating and merchandising execution, which combined with the growing impact of our new Fresh stores and remodels to drive continued, strong year-over-year sales improvement in our Company's Northeast operations in the third quarter. Accordingly, ongoing improvement from core operations was driven by the continued sales improvement in those markets, more consistent operating discipline and cost controls; margin improvement associated with our ongoing fresh store development and positive results in our discount Food Basics operations. We continued the conversion of suitable conventional locations to the successful fresh format, completing two projects during the third quarter. In addition to increased volume and customer traffic, the emphasis on 52 fresh category distribution in those stores continues to improve margins, underlining its top and bottom line growth potential. The discount Food Basics operations again returned sound results, as they provided customers in certain markets with an excellent value alternative. In combination with the mainstream Fresh stores and gourmet Fine Food concept that continued to evolve in New York, this development stream continues to advance the multi-tier marketing strategy initiated in 2005. The innovation of A&P's marketing profile moved forward with our agreement with Starbucks to add licensed cafes in our stores, with five locations opening in the third quarter, and eventual plans to open approximately 100 in-store Starbucks units. In addition, we completed the acquisition of Best Cellars, a New York-based wine retailer with six locations, whose unique wine-selling concepts will be used to enhance A&P's freestanding and in-store wine, beer and liquor business. In summary, strategic accomplishments for the third quarter included the following: - - Completed strategic restructuring, with divestiture of non-core businesses and acquisition of Pathmark Stores. - - Continued strong sales trends in core Northeast operating markets. - - Earnings momentum in Northeast operations. - - Two conversions to the Fresh store concept, generating volume and margin improvement. - - Improved contribution from discount Food Basics and Food Emporium operations. - - Preparation of comprehensive Pathmark integration strategy. OUTLOOK Management's objectives for the fourth quarter of fiscal 2007 are to progress further toward operating profitability in the existing core Northeast business, by: continuing operating and merchandising improvements behind established strategies; maintaining cost control and reduction disciplines throughout the business; and ensuring the continuity of Pathmark store operations, with emphasis on customer communication and retention, as the overall integration of that business proceeds. Chief among the pre-existing corporate and retail strategies in place are the ongoing improvement of merchandising and operating performance, the execution of capital improvement projects for maximum return, and general adherence to cost control disciplines. Key elements are: - - Continued development of merchandising, promotion and pricing strategies to drive profitable sales growth. 53 - - Execute core market capital plan for conversion of conventional locations to fresh or discount formats, fine-tune and monitor gourmet format development. - - Ongoing disposition of closed store leaseholds. The comprehensive plan for the integration of Pathmark operations is designed to achieve: - - Continuity of all retail operations during integration process. - - Efficient consolidation of headquarters personnel and support functions at present A&P headquarters in Montvale. - - Timely achievement of significant synergies identified as result of merging the two businesses. - - Communication to both organizations regarding process and timetable for integration and related changes. - - Consumer communication regarding the continuation of both the A&P-operated and Pathmark banners and store formats, and related marketing and promotional efforts. Overall, the balance of fiscal 2007 will continue to reflect both continuity and change, as management focuses on sustaining the improvement of our A&P, Waldbaum's, Superfresh, Food Basics and Food Emporium operations - and executing a seamless transition of Pathmark operations into the Company, to maintain retail continuity and ensure the capture of all identified financial synergies as scheduled over the next 18 to 24 months. Various risk factors could cause us to fail to achieve these goals. These include, among others, the following: - - Our retail food business and the grocery retailing industry continues to experience fierce competition from mass merchandisers, warehouse clubs, drug stores, convenience stores, discount merchandisers, dollar stores, restaurants, other retail chains, nontraditional competitors and emerging alternative formats in the markets where we have retail operations. Competition with these outlets is based on price, store location, advertising and promotion, product mix, quality and service. Some of these competitors may have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do, and we may be unable to compete successfully in the future. An overall lack of inflation in food prices and increasingly competitive markets have made it difficult generally for grocery store operators to achieve comparable store sales gains. Because sales growth has been difficult to attain, our competitors have attempted to maintain market share through increased levels of promotional activities and discount pricing, creating a more difficult environment in which to consistently increase year-over-year sales. Price-based competition has also, from time to time, adversely affected our operating margins. Our continued success is dependent upon our ability to effectively compete in this industry and to reduce operating expenses, including managing health care and pension costs contained in our collective bargaining agreements. The competitive practices and pricing in the food industry generally and particularly in our principal markets may cause us to reduce our prices in order to gain or maintain our market share of sales, thus reducing margins. 54 - - Our in-store pharmacy business is also subject to intense competition. In particular, an adverse trend for drug retailing has been significant growth in mail-order and internet-based prescription processors. Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products. In addition, the conversion of various prescription drugs to over-the-counter medications, the withdrawal of certain drugs from the market and changes in third party reimbursement levels for prescription drugs, including changes in Medicare Part D or state Medicaid programs, may have a material adverse effect on our business. Failure to properly adhere to certain government regulations, local registrations, applicable Medicare and Medicaid regulations and prohibitions against paid referrals of patients could result in the imposition of civil as well as criminal penalties. - - The retail food and food distribution industries, and the operation of our businesses, specifically in the New York -- New Jersey and Philadelphia regions, are sensitive to a number of economic conditions and other factors such as (i.) food price deflation or inflation, (ii.) softness in local and national economies, (iii.) increases in commodity prices, (iv.) the availability of favorable credit and trade terms, (v.) changes in business plans, operations, results and prospects, (vi.) potential delays in the development, construction or start-up of planned projects, and (vii.) other economic conditions that may affect consumer buying habits. Any one or more of these economic conditions can affect our retail sales, the demand for products we distribute to our retail customers, our operating costs and other aspects of our business. - - Acts of war, threats of terror, acts of terror or other criminal activity directed at the grocery or drug store industry, the transportation industry, or computer or communications systems, could increase security costs, adversely affect our operations, or impact consumer behavior and spending as well as customer orders. Other events that give rise to actual or potential food contamination, drug contamination, or food-borne illness could have an adverse effect on our operating results. - - We could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain. Adverse publicity about these types of concerns, whether or not valid, could discourage consumers from buying products in our stores. The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations. - - Our operations subject us to various laws and regulations relating to the protection of the environment, including those governing the management and disposal of hazardous materials and the cleanup of contaminated sites. Under some environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, also known as CERCLA or the Superfund law, and similar state statues, responsibility for the entire cost of cleanup of a contaminated site can be imposed upon any current or former site owners or operators, or upon any party who sent waste to the site, regardless of the lawfulness of the original activities that led to the contamination. From time to time we have been named as one of many potentially responsible parties at Superfund sites, although our share of liability has typically been de minimis. Although we believe that we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, new laws or discoveries of unknown conditions may require expenditures that may have a material adverse effect on our business and financial condition. 55 - - Our capital expenditures could differ from our estimate if development and remodel costs vary from those budgeted, or if performance varies significantly from expectations or if we are unsuccessful in acquiring suitable sites for new stores. - - Our ability to achieve our profit goals will be affected by (i.) our success in executing category management and purchasing programs that we have underway, which are designed to improve our gross margins and reduce product costs while making our product selection more attractive to consumers, (ii.) our ability to achieve productivity improvements and reduce shrink in our stores, (iii.) our success in generating efficiencies in our supporting activities, and (iv.) our ability to eliminate or maintain a minimum level of supply and/or quality control problems with our vendors. - - The vast majority of our employees are members of labor unions. While we believe that our relationships with union leaderships and our employees are satisfactory, we operate under collective bargaining agreements which periodically must be renegotiated. In the coming year, we have several contracts expiring and under negotiation. In each of these negotiations, rising health care and pension costs will be an important issue, as will the nature and structure of work rules. We are hopeful, but cannot be certain, that we can reach satisfactory agreements without work stoppages in these markets. However, the actual terms of the renegotiated collective bargaining agreements, our future relationships with our employees and/or a prolonged work stoppage affecting a substantial number of stores could have a material effect on our results. - - The amount of contributions made to our pension and multi-employer plans will be affected by the performance of investments made by the plans and the extent to which trustees of the plans reduce the costs of future service benefits. - - Our Company is currently required to acquire a significant amount of our saleable inventory from one supplier, C&S Wholesale Grocers, Inc. Although there are a limited number of distributors that can supply our stores, we believe that other suppliers could provide similar product on reasonable terms. However, a change in suppliers could cause a delay in distribution and a possible loss of sales, which would affect operating results adversely. - - We have estimated our exposure to claims, administrative proceedings and litigation and believe we have made adequate provisions for them, where appropriate. Unexpected outcomes in both the costs and effects of these matters could result in an adverse effect on our earnings. - - The integration of Pathmark's operations will require implementation of appropriate operations, management and financial reporting systems and controls. We may experience difficulties in effectively implementing these and other systems and integrating Pathmark's systems and operations. The integration of Pathmark will require the focused attention of A&P's management team, including a significant commitment of their time and resources. The need for both A&P's and Pathmark's management to focus on integration matters could have a material and adverse impact on the revenues and operating results of the combined company. The success of the merger will depend, in part, on the combined company's ability to realize the anticipated benefits from combining the businesses of A&P and Pathmark, including, anticipated annual integration synergies within two years, through cost reductions in overhead, greater efficiencies, increased utilization of support facilities and the adoption of mutual best practices between the two companies. It is possible that the integration process could result in the loss of key employees, as well as the disruption of each company's ongoing businesses or inconsistencies in standards, controls, procedures and 56 policies, any or all of which could adversely affect our ability to maintain relationships with customers and employees after the merger or to achieve the anticipated benefits of the merger. These integration matters could have a material adverse effect on our business. - - We have assumed all of Pathmark's liabilities, including contingent liabilities, in connection with the merger. If there are unknown Pathmark obligations, our business could be materially and adversely affected. We may learn additional information about Pathmark's business that adversely affects us, such as unknown liabilities, issues relating to internal controls over financial reporting, issues that could affect our ability to comply with the Sarbanes-Oxley Act or issues that could affect our ability to comply with other applicable laws. As a result, we cannot assure you that the acquisition of Pathmark will be successful or will not, in fact, harm our business. Among other things, if Pathmark liabilities are greater than expected, or if there are obligations of which we were not aware of at the time of completion of the acquisition, our business could be materially and adversely affected. - - Following the closing of the acquisition of Pathmark, Tengelmann, A&P's former majority shareholder, owned beneficially and of record a substantial percentage of our common stock on a fully diluted basis. As a result of this equity ownership and our stockholder agreement with Tengelmann, Tengelmann has the power to significantly influence the results of shareholder votes and the election of our board of directors, as well as transactions involving a potential change of control of our Company. Tengelmann may support strategies and directions for our Company which are in its best interests but which are opposed to shareholder interests. - - Our substantial indebtedness could impair our financial condition and our ability to fulfill our debt obligations, including our obligations under the notes. Our indebtedness could make it more difficult for us to satisfy our obligations with respect to the notes and our other indebtedness, which could in turn result in an event of default on the notes or such other indebtedness, require us to dedicate a substantial portion of our cash flow from operations to debt service payments, thereby reducing the availability of cash for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, diminish our ability to withstand a downturn in our business, the industry in which we operate or the economy generally, limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, and place us at a competitive disadvantage compared to certain competitors that have proportionately less debt. Our ABL facility contains restrictive covenants customary for facilities of that type which limit our ability to incur additional debt, pay dividends, grant additional liens, make investments and take other actions. These restrictions may limit flexibility to undertake future financings and take other actions. If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all. In addition, our ABL facility bears interest at a variable rate. If market interest rates increase, such variable-rate debt will have higher debt service requirements, which could adversely affect our cash flow. While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk. - - Fluctuating fuel costs may adversely affect our operating costs since we incur the cost of fuel in connection with the transportation of goods from our warehouse and distribution facilities to our stores. In addition, operations at our stores are sensitive to rising utility fuel costs due to the amount 57 of electricity and gas required to operate our stores. We may not be able to recover these rising utility and fuel costs through increased prices charged to our customers. Our profitability is particularly sensitive to the cost of oil. Oil prices directly affect our product transportation costs and fuel costs due to the amount of electricity and gas required to operate our stores as well as our utility and petroleum-based supply costs; including plastic bags for example. - - We are subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, work place safety, public health, community right-to-know, beer and wine sales, pharmaceutical sales and gasoline station operations. A number of states and local jurisdictions regulate the licensing of supermarkets, including beer and wine license grants. In addition, under certain local regulations, we are prohibited from selling beer and wine in certain of our stores. Employers are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions, disabled access and work permit requirements. Compliance with these laws could reduce the revenue and profitability of our supermarkets and could otherwise adversely affect our business, financial condition or results of operations. In addition, any changes in these law or regulations could significantly increase our compliance costs and adversely affect our results of operations, financial condition and liquidity. - - We have large, complex information technology systems that are important to business operations. We could encounter difficulties developing new systems and encounter difficulties maintaining, upgrading or securing our existing systems. Such difficulties could lead to significant expenses or losses due to disruption in our business operations. - - Our articles of incorporation permit our board of directors to issue preferred shares without first obtaining shareholder approval. If we issued preferred shares, these additional securities may have dividend or liquidation preferences senior to our common stock. If we issue convertible preferred shares, a subsequent conversion may dilute the current common shareholders' interest. Issuance of such preferred stock could adversely affect the price of our common stock. Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in or contemplated or implied by forward-looking statements made by us or our representatives. 58 RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES Our consolidated financial information presents the results related to our operations of discontinued businesses separate from the results of our continuing operations. The discussion and analysis that follows focus on continuing operations. All amounts are in millions, except share and per share amounts. 12 WEEKS ENDED DECEMBER 1, 2007 COMPARED TO THE 12 WEEKS ENDED DECEMBER 2, 2006 OVERALL Sales for the third quarter of fiscal 2007 were $1,251.1 million compared to $1,213.5 million for the third quarter of fiscal 2006; comparable store sales, which include stores that have been in operation for two full fiscal years and replacement stores, increased 3.1%. Income from continuing operations increased from $32.3 million for the third quarter of fiscal 2006 to $73.1 million for the third quarter of fiscal 2007, due primarily to the gain on disposition of Metro, Inc. of $106.1 million. Income from discontinued operations of $8.5 million for the third quarter of fiscal 2006 decreased to a loss from discontinued operations of $15.8 million for the third quarter of fiscal 2007 due to the sale and closure of stores in the Midwest and the sale of our stores in the Greater New Orleans area. Net income per share - basic and diluted for the third quarter of fiscal 2007 was $1.36 and $1.35, respectively, compared to net income per share - basic and diluted of $0.98 and $0.97, respectively, for the third quarter of fiscal 2006.
12 Weeks 12 Weeks Ended Ended Favorable / Dec. 1, 2007 Dec. 2, 2006 (Unfavorable) % Change ------------ ------------ ------------- -------- Sales $ 1,251.1 $ 1,213.5 $ 37.6 3.1% Increase (decrease) in comparable store sales 3.1% (0.2%) NA NA Income from continuing operations 73.1 32.3 40.8 >100.0% (Loss) income from discontinued operations (15.8) 8.5 (24.3) >100.0% Net income 57.3 40.7 16.6 40.8% Net income per share - basic 1.36 0.98 0.38 38.8% Net income per share - diluted 1.35 0.97 0.38 39.2%
SALES Sales in the Northeast for the third quarter of fiscal 2007 of $1,251.1 million increased $37.6 million or 3.1% from sales of $1,213.5 million for third quarter of fiscal 2006. The following details the dollar impact of several items affecting the increase (decrease) in sales by reportable operating segment from the third quarter of fiscal 2006 to the third quarter of fiscal 2007:
Impact of Impact of Comparable New Closed Store Stores Stores Sales Other Total --------- --------- ---------- ----- ----- Northeast $ 18.6 $ (14.1) $ 37.2 $(4.1) $37.6
The increase in the Northeast sales was primarily attributable to the opening or re-opening of 19 new stores since the beginning of the third quarter of fiscal 2006, of which 10 were opened or re-opened in fiscal 2007, increasing sales by $18.6 million and the increase in comparable store sales for the third quarter of fiscal 2007 of $37.2 million or 3.1% as compared with the third quarter of fiscal 2006. This increase was partially 59 offset by the closing of 11 stores since the beginning of the third quarter of fiscal 2006, of which 5 were closed in fiscal 2007, decreasing sales by $14.1 million along with the decrease in sales relating to the expiration of an information technology services agreement with Metro, Inc. of $4.1 million. Included in the 19 stores opened since the beginning of the third quarter of fiscal 2006 were 6 Best Cellars stores purchased during the third quarter of fiscal 2007 and 6 Clemens Markets stores purchased from C&S Wholesale Grocers, Inc. during the third quarter of fiscal 2006. Average weekly sales per supermarket in the Northeast were approximately $348,800 for the third quarter of fiscal 2007 versus $336,100 for the corresponding period of the prior year, an increase of 3.8% primarily due to positive comparable store sales. GROSS MARGIN Gross margin in the Northeast of $381.7 million decreased 45 basis points as a percentage of sales to 30.51% for the third quarter of fiscal 2007 from gross margin of $375.7 million or 30.96% for the third quarter of fiscal 2006 primarily due to the decrease in sales relating to the expiration of an information technology services agreement with Metro, Inc. of $4.1 million (34 basis points). We believe the impact on margin for changes in costs and special reductions was not significant. The following table details the dollar impact of several items affecting the gross margin dollar increase (decrease) from the third quarter of fiscal 2006 to the third quarter of fiscal 2007:
Sales Volume Gross Margin Rate Total ------------ ----------------- ----- Northeast $ 11.7 $ (5.7) $ 6.0
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE Store operating, general and administrative expense ("SG&A") in the Northeast was $402.8 million or 32.20% as a percentage of sales for the third quarter of fiscal 2007 compared to $381.4 million or 31.43% as a percentage of sales for the third quarter of fiscal 2006. Included in SG&A for the third quarter of fiscal 2007 were certain charges as follows: - - costs relating to the closing of our owned warehouses in Edison, New Jersey and Bronx, New York of $0.3 million (2 basis points) that were not sold as part of the sale of our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers, Inc. as discussed in Note 8 - Asset Disposition Initiatives; - - net real estate activity of $4.4 million (35 basis points); and - - Pathmark acquisition related costs of $4.4 million (35 basis points). SG&A for the third quarter of fiscal 2006 included certain charges as follows: - - costs relating to the closing of our owned warehouses in Edison, New Jersey and Bronx, New York of $0.7 million (6 basis points) that were not sold as part of the sale of our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers, Inc. as discussed in Note 8 - Asset Disposition Initiatives; - - costs relating to the consolidation of our operating offices in line with our smaller operations in the Northeast of $0.2 million (2 basis points); - - costs relating to a voluntary labor buyout program in the South Region of $0.2 million (2 basis points). 60 Partially offset by: - - reversal of occupancy related costs of $3.7 million (31 basis points) due to changes in our estimates of future costs for stores closed as part of our asset disposition initiatives as discussed in Note 8 - Asset Disposition Initiatives; and - - net real estate activity of $4.5 million (36 basis points) during the third quarter of fiscal 2006. Excluding the items listed above, SG&A for our Northeast increased $5.2 million or decreased 54 basis points as a percentage of sales during the third quarter of fiscal 2007 as compared to the third quarter of fiscal 2006 primarily due to a decrease in labor costs as a percentage of sales of 27 basis points, a decrease in store operating costs of 11 basis points and a decrease in corporate and banner administrative expenses of 26 basis points offset by an increase in occupancy costs of 12 basis points. During the 12 weeks ended December 1, 2007 and December 2, 2006, we recorded impairment losses on long-lived assets due to closure or conversion in the normal course of business of $2.5 million and $1.0 million, respectively. The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. If current operating levels do not continue to improve, there may be additional future impairments on long-lived assets, including the potential for impairment of assets that are held and used. GAIN ON DISPOSITION OF METRO, INC. During the 12 weeks ended December 1, 2007, we sold the remaining shares of our holdings in Metro, Inc. resulting in a gain of $106.1 million. There were no such gains during the 12 weeks ended December 2, 2006. INTEREST EXPENSE Interest expense of $14.5 million for the third quarter of 2007 decreased from the prior year amount of $15.3 million primarily due to (i.) a decrease in interest expense of $0.6 million as our 7.75% Notes due April 15, 2007 matured and were paid in full during the first quarter of fiscal 2007 and (ii.) a decrease in interest expense of $1.6 million due to decreased borrowings on our revolving lines of credit partially offset by (ii.) additional landlord allowances received that are considered debt financing resulting in an increase in interest expense of $1.1 million. EQUITY IN EARNINGS OF METRO, INC. We used the equity method of accounting to account for our investment in Metro, Inc. through March 13, 2007, on the basis that we exerted significant influence over substantive operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its committees and through an information technology services agreement with Metro, Inc. During the 12 weeks ended December 1, 2007 and December 2, 2006, we recorded nil and $11.0 million, respectively, in equity earnings relating to our equity investment in Metro, Inc. Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of Metro, Inc., our Company recorded our investment in Metro, Inc. under SFAS 115 as a cost investment for the 12 weeks ended December 1, 61 2007 on the basis that we no longer exert significant influence over substantive operating decisions made by Metro, Inc. In accordance with SFAS 115, we recorded dividend income of $1.4 million based on Metro, Inc.'s dividend declaration on September 25, 2007 and included this amount in "Interest and dividend income" on our Consolidated Statements of Operations for the third quarter ended December 1, 2007. On November 26, 2007, in connection with our agreement to acquire Pathmark Stores, Inc., our Company sold the remaining 11,726,645 shares of our holdings in Metro, Inc. After these sales, our Company no longer holds Class A subordinate shares of Metro, Inc. as of the balance sheet date. INCOME TAXES The provision for income taxes from continuing operations for the third quarter of fiscal 2007 was $1.8 million compared to a benefit from income taxes of $41.2 million for the third quarter of fiscal 2006. Consistent with the prior year, we continue to record a valuation allowance in an amount that appropriately reduces our net deferred tax asset to reflect our assessment of its realizability. The effective tax rate on continuing operations of 2.3% for the 12 weeks ended December 1, 2007 varied from the statutory rate of 35% primarily due to state and local income taxes and a decrease to our valuation allowance as a result of the utilization of loss carryforwards that were not previously tax benefited. The effective tax rate on continuing operations of 461.6% for the 12 weeks ended December 2, 2006 varied from the statutory rate of 35% primarily due to a reduction in our valuation allowance and taxes not being provided on undistributed earnings of Metro, Inc. DISCONTINUED OPERATIONS Beginning in the fourth quarter of fiscal year 2002 and in the early part of the first quarter of fiscal 2003, we decided to sell our operations located in Northern New England and Wisconsin. These asset sales are now complete. However, our Company continues to pay occupancy costs for operating leases on closed locations. On April 24, 2007, based upon unsatisfactory operating trends and the need to devote resources to our expanding Northeast core business, our Company announced negotiations for the sale of our non-core stores within our Midwest operations, including inventory related to these stores. Sale transactions for these stores have been completed. Further, our Company has ceased sales operations in all stores as of July 7, 2007. In connection with the shutdown of these operations, we recorded net occupancy costs of $1.8 million during the 12 weeks ended December 1, 2007 for closed stores and warehouses not sold. As we continue to negotiate lease terminations as well as sublease some of these locations, these estimates may require adjustment in future periods. On May 30, 2007, our Company announced advanced negotiations for the sale of our non-core stores located within the Greater New Orleans area, including inventory related to these stores. Sale transactions for these stores have been completed. Further, our Company has ceased sales operations in all stores as of November 1, 2007. In connection with the shutdown of these operations, we recorded net occupancy costs of $1.6 million during the 12 weeks ended December 1, 2007. The loss from operations of discontinued businesses, net of tax, for the third quarter of fiscal 2007 of $13.5 million decreased from income from operations of discontinued businesses, net of tax, of $0.7 million for the third quarter of fiscal 2006 primarily due to (i.) a decrease in income from operations for the Midwest and the Greater New Orleans for the third quarter of fiscal 2006 to the third quarter fiscal 2007, and (ii.) additional 62 vacancy costs that were recorded in the third quarter of fiscal 2007 due to the closure of stores in the Greater New Orleans area. Loss on disposal of discontinued operations of $2.2 million decreased from gain on disposal of discontinued operations from the prior year amount of $7.8 million primarily due to the absence of the gain on sale of an owned warehouse in the Greater New Orleans area during the third quarter of fiscal 2006. 40 WEEKS ENDED DECEMBER 1, 2007 COMPARED TO THE 40 WEEKS ENDED DECEMBER 2, 2006 OVERALL Sales for the 40 weeks ended December 1, 2007 were $4,204.6 million compared to $4,103.4 million for the 40 weeks ended December 2, 2006; comparable store sales, which includes stores that have been in operation for two full fiscal years and replacement stores, increased 2.3%. Income from continuing operations of $131.5 million for the 40 weeks ended December 1, 2007 increased from $23.7 million for the 40 weeks ended December 2, 2006 primarily due to the gain on disposition of Metro, Inc. Income from discontinued operations of $10.3 million for the 40 weeks ended December 2, 2006 decreased to loss from discontinued operations of $230.7 million for the 40 weeks ended December 1, 2007 due to the sale and closure of stores in the Midwest and the sale of our stores in the Greater New Orleans area. Net loss per share - basic for the 40 weeks ended December 1, 2007 was $2.37 compared to a net income per share - basic of $0.82 for the 40 weeks ended December 2, 2006. Net loss per share - diluted for the 40 weeks ended December 1, 2007 was $2.34 compared to a net income per share - diluted of $0.81 for the 40 weeks ended December 2, 2006.
40 weeks 40 weeks Ended Ended Favorable / Dec. 1, 2007 Dec. 2, 2006 (Unfavorable) % Change ------------ ------------ ------------- -------- Sales $ 4,204.6 $ 4,103.4 $ 101.2 2.5% Increase in comparable store sales 2.3% 0.5% NA NA Income from continuing operations 131.5 23.7 107.8 >100.0% (Loss) income from discontinued operations (230.7) 10.3 (241.0) >100.0% Net (loss) income (99.2) 34.1 (133.3) >100.0% Net (loss) income per share - basic (2.37) 0.82 (3.19) >100.0% Net (loss) income per share - diluted (2.34) 0.81 (3.15) >100.0%
SALES Sales in the Northeast for the 40 weeks ended December 1, 2007 of $4,204.6 million increased $101.2 million or 2.5% from sales of $4,103.4 million for 40 weeks ended December 2, 2006. The following details the dollar impact of several items affecting the increase (decrease) in sales by reportable operating segment from the 40 weeks ended December 2, 2006 to the 40 weeks ended December 1, 2007:
Impact of Impact of Comparable New Closed Store Stores Stores Sales Other Total --------- --------- ---------- ----- ------- Northeast $ 63.5 $ (50.4) $ 96.0 $(7.9) $ 101.2
The increase in Northeast sales was primarily attributable to the opening or re-opening of 20 new stores since the beginning of fiscal 2006, of which 10 were opened or re-opened in fiscal 2007, increasing sales by $63.5 million and the increase in comparable store sales for the 40 weeks ended December 1, 2007 of $96.0 million or 2.3% as compared with the 40 weeks ended December 2, 2006. This increase was partially offset by to the closing of 13 stores since the beginning of fiscal 2006, of which 5 were closed in fiscal 2007, 63 decreasing sales by $50.4 million and the decrease in sales relating to the expiration of an information technology services agreement with Metro, Inc. of $7.9 million. Included in the 20 stores opened since the beginning of fiscal 2006 were 6 Best Cellars stores purchased during the third quarter of fiscal 2007 and 6 Clemens Markets stores purchased from C&S Wholesale Grocers, Inc. during the third quarter of fiscal 2006. Average weekly sales per supermarket for the Northeast were approximately $350,200 for the 40 weeks ended December 1, 2007 versus $341,900 for the corresponding period of the prior year, an increase of 2.4% primarily due to the impact of closing smaller stores and positive comparable store sales. GROSS MARGIN Gross margin in the Northeast of $1,303.3 million decreased 7 basis points to 31.00% as a percentage of sales for the 40 weeks ended December 1, 2007 from $1,274.8 million or 31.07% as a percentage of sales for the 40 weeks ended December 2, 2006 primarily due to the decrease in sales relating to the expiration of an information technology services agreement with Metro, Inc. of $7.9 million (20 basis points). We believe the impact on margin for changes in costs and special reductions was not significant. The following table details the dollar impact of several items affecting the gross margin dollar increase (decrease) from the 40 weeks ended December 2, 2006 to the 40 weeks ended December 1, 2007:
Sales Volume Gross Margin Rate Total ------------ ----------------- ------- Northeast $ 31.4 $ (2.9) $ 28.5
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE SG&A expense in the Northeast was $1,323.4 million or 31.48% as a percentage of sales for the 40 weeks ended December 1, 2007 as compared to $1,294.5 million or 31.55% as a percentage of sales for the 40 weeks ended December 2, 2006. Included in SG&A for the 40 weeks ended December 1, 2007 were certain charges as follows: - - costs relating to a voluntary retirement buyout program of $0.5 million (1 basis point); - - net real estate activity of $7.3 million (17 basis points); and - - Pathmark acquisition related costs of $6.8 million (16 basis points). Partially offset by: - - reversal of costs relating to the consolidation of our operating offices in line with our smaller operations of $0.9 million (2 basis points); - - gain on the sale of our owned warehouse in Edison, New Jersey of $13.2 million (31 basis points) that was closed and not sold as part of the sale of our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers, Inc. as discussed in Note 8 - Asset Disposition Initiatives; and - - reversal of occupancy related costs of $1.4 million (3 basis points) due to changes in our estimates of future costs for stores closed as part of our asset disposition initiatives as discussed in Note 8 - Asset Disposition Initiatives. 64 Included in SG&A for the 40 weeks ended December 2, 2006 were certain charges as follows: - - costs relating to the closing of our owned warehouses in Edison, New Jersey and Bronx, New York of $5.5 million (13 basis points) that were not sold as part of the sale of our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers, Inc. as discussed in Note 8 - Asset Disposition Initiatives; - - costs relating to the consolidation of our operating offices in line with our smaller operations of $3.8 million (9 basis points); and - - costs relating to a voluntary labor buyout program in the South Region of $4.5 million (11 basis points). Partially offset by: - - net real estate activity of $13.1 million (32 basis points) during the 40 weeks ended December 2, 2006; and - - reversal of occupancy related costs of $1.0 million (3 basis points) due to changes in our estimates of future costs for stores closed as part of our asset disposition initiatives as discussed in Note 8 - Asset Disposition Initiatives. Excluding the items listed above, SG&A for our Northeast operations as a percentage of sales decreased 5 basis points during the 40 weeks ended December 1, 2007 as compared to the 40 weeks ended December 2, 2006 primarily due to a decrease in advertising costs as a percentage of sales of 5 basis points. During the 40 weeks ended December 1, 2007 and December 2, 2006, we recorded impairment losses on long-lived assets of $3.6 million and $4.6 million, respectively, as follows:
40 weeks ended 40 weeks ended December 1, 2007 December 2, 2006 ---------------- ---------------- Impairments due to closure or conversion in the normal course of business $ 3.6 $ 3.6 Impairments related to our asset disposition initiatives (1) -- 1.0 ---------------- ---------------- Total impairments $ 3.6 $ 4.6 ================ ================
(1) Refer to Note 8 - Asset Disposition Initiatives The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. If current operating levels do not continue to improve, there may be additional future impairments on long-lived assets, including the potential for impairment of assets that are held and used. GAIN ON DISPOSITION OF METRO, INC. During the 40 weeks ended December 1, 2007, we sold all shares of our holdings in Metro, Inc. resulting in a gain of $184.5 million. There were no such gains during the 40 weeks ended December 2, 2006. INTEREST EXPENSE 65 Interest expense of $48.8 million for the 40 weeks ended December 1, 2007 decreased from the prior year amount of $50.2 million primarily due to (i.) a decrease in interest expense of $1.6 million as our 7.75% Notes due April 15, 2007 matured and were paid in full during the first quarter of fiscal 2007 and (ii.) a decrease in interest expense of $2.3 million due to our decreased borrowings on our revolving lines of credit partially offset by (iii.) additional landlord allowances received that are considered debt financing resulting in an increase in interest expense of $2.3 million. EQUITY IN EARNINGS OF METRO, INC. We used the equity method of accounting to account for our investment in Metro, Inc. through March 13, 2007, on the basis that we exerted significant influence over substantive operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its committees and through an information technology services agreement with Metro, Inc. During the 40 weeks ended December 1, 2007 and December 2, 2006, we recorded $7.9 million and $30.8 million, respectively, in equity earnings relating to our equity investment in Metro, Inc. Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of Metro, Inc., our Company recorded our investment in Metro, Inc. under SFAS 115 as a cost investment for the 40 weeks ended December 1, 2007 on the basis that we no longer exert significant influence over substantive operating decisions made by Metro, Inc. In accordance with SFAS 115, we recorded dividend income of $3.9 million based on Metro, Inc.'s dividend declaration on April 17, 2007, August 8, 2007 and September 25, 2007 and included this amount in "Interest and dividend income" on our Consolidated Statements of Operations for the 40 weeks ended December 1, 2007. On November 26, 2007, in connection with our agreement to acquire Pathmark Stores, Inc., our Company sold the remaining 11,726,645 shares of our holdings in Metro, Inc. After these sales, our Company no longer holds Class A subordinate shares of Metro, Inc. as of the balance sheet date. INCOME TAXES The provision for income taxes from continuing operations for the 40 weeks ended December 1, 2007 was $4.3 million compared to the benefit from income taxes from continuing operations for the 40 weeks ended December 2, 2006 of $55.6 million. Consistent with prior year, we continue to record a valuation allowance against our net deferred tax assets. The effective tax rate on continuing operations of 3.2% for the 40 weeks ended December 1, 2007 varied from the statutory rate of 35% primarily due to state and local income taxes and a decrease to our valuation allowance as a result of the utilization of loss carryforwards that were not previously tax benefited. The effective tax rate on continuing operations of 174.4% for the 40 weeks ended December 2, 2006 varied from the statutory rate of 35% primarily due to a reduction in our valuation allowance and taxes not being provided on undistributed earnings of Metro, Inc. DISCONTINUED OPERATIONS Beginning in the fourth quarter of fiscal year 2002 and in the early part of the first quarter of fiscal 2003, we decided to sell our operations located in Northern New England and Wisconsin. These asset sales are now complete. However, our Company continues to pay occupancy costs for operating leases on closed locations. On April 24, 2007, based upon unsatisfactory operating trends and the need to devote resources to our expanding Northeast core business, our Company announced negotiations for the sale of our non-core stores 66 within our Midwest operations, including inventory related to these stores. Sale transactions for these stores have been completed. Further, our Company has ceased sales operations in all stores as of July 7, 2007. In connection with the shutdown of these operations, we recorded net occupancy costs of $60.7 million during the 40 weeks ended December 1, 2007, respectively, for closed stores and warehouses not sold. As we continue to negotiate lease terminations as well as sublease some of these locations, these estimates may require adjustment in future periods. On May 30, 2007, our Company announced advanced negotiations for the sale of our non-core stores located within the Greater New Orleans area, including inventory related to these stores. Sale transactions for these stores have been completed. Further, our Company has ceased sales operations in all stores as of November 1, 2007. In connection with the shutdown of these operations, we recorded net occupancy costs of $1.6 million during the 40 weeks ended December 1, 2007. The loss from operations of discontinued businesses, net of tax, for the 40 weeks ended December 1, 2007 of $179.7 million decreased from income from operations of discontinued businesses, net of tax, of $2.8 million for the 40 weeks ended December 2, 2006 primarily due to (i.) a decrease in income from operations for the Greater New Orleans area and the Midwest and (ii.) additional vacancy costs that were recorded during the 40 weeks ended December 1, 2007 due to the closure of stores in the Midwest and the Greater New Orleans area. The loss on disposal of discontinued operations of $51.0 million decreased from gain on disposal of discontinued operations of $7.6 million for the 40 weeks ended December 2, 2006 primarily due to impairment losses recorded on the property, plant and equipment in the Greater New Orleans area and Midwest as we recorded the assets' fair market value based upon proceeds received less costs to sell. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The following table presents excerpts from our Consolidated Statements of Cash Flows:
40 weeks Ended --------------------------- Dec. 1, 2007 Dec. 2, 2006 ------------ ------------ Net cash used in operating activities $ (22,807) $ (42,864) ------------ ------------ Net cash provided by investing activities $ 84,059 $ 52,858 ------------ ------------ Net cash used in financing activities $ (78,056) $ (146,915) ------------ ------------
Net cash used in operating activities of $22.8 million for the 40 weeks ended December 1, 2007 primarily reflected our net loss of $99.2 million, adjusted for non-cash charges for (i.) depreciation and amortization of $122.6 million, (ii.) asset disposition initiatives of $120.4 million, (iii.) losses on the disposal of owned property of $2.5 million, (iv.) loss on disposal of discontinued operations of $51.0 million, (v.) other property impairments of $3.5 million, (vi.) other share based awards of $7.3 million, offset by (vii.) our equity in earnings of Metro, Inc. of $7.9 million, and (viii.) the gain on disposition of Metro, Inc. of $184.5 million. Further, cash was provided by a decrease in accounts receivable of $31.9 million, a decrease in inventories of $72.7 million primarily due to the sale of our Midwest and the Greater New Orleans area operations offset by an increase in prepaid expenses and other current assets of $14.2 million, an increase in other assets of $3.1 million, a decrease in accrued salaries, wages, benefits and taxes of $56.4 million, a decrease in other non- 67 current liabilities of $42.6 million and a decrease in accounts payable of $27.3 million mainly due to the timing of payments. Refer to Working Capital below for discussion of changes in working capital items. Net cash flow used in operating activities of $42.9 million for the 40 weeks ended December 2, 2006 primarily reflected our net income of $34.1 million, adjusted for non-cash charges for (i.) depreciation and amortization of $135.8 million, (ii.) asset disposition initiatives of $3.7 million, partially offset by (iii.) gains on the disposal of owned property of $17.8 million, (iv.) gain on disposal of discontinued operations of $7.6 million, (v.) income tax benefit of $61.5 million, and (vi.) our equity in earnings of Metro, Inc. of $30.8 million. Further cash was used in operations by a decrease in accounts receivables of $49.8 million offset by an increase in inventory of $32.4 million, a decrease in accounts payable of $10.2 million, a decrease in accrued salaries, wages and benefits of $30.5 million, a decrease in other accruals of $57.1 million primarily due to timing and a decrease in non-current liabilities of $20.4 million due to the utilization of closed store accruals. Net cash provided by investing activities of $84.1 million for the 40 weeks ended December 1, 2007 primarily reflected proceeds from the sale of assets of $121.6 million ($23.7 million in the Northeast, $53.3 million in the Midwest and $44.6 million in the Greater New Orleans area), cash received from the sale of shares of Metro, Inc. of $551.2 million, and net sales of marketable securities of $20.4 million partially offset by acquisition related expenditures for the purchase of Pathmark Stores, Inc. of $18.7 million, an increase in restricted cash of $490.9 million and property expenditures totaling $98.4 million, which included 4 new supermarkets, 9 major remodels and 2 minor remodels. For the remainder of fiscal 2007, we have planned capital expenditures of approximately $48 million, which includes enlarging one supermarket under the Fresh format and remodeling up to 3 supermarkets to the Fresh format. We currently expect to close 6 stores during the remainder of fiscal 2007 per our agreement with the Federal Trade Commission in connection with our acquisition of Pathmark Stores, Inc. Net cash flow provided by investing activities of $52.9 million for the 40 weeks ended December 2, 2006 primarily reflected proceeds received from the sale of certain of our assets of $37.5 million, a decrease in restricted cash of $142.7 million, and net proceeds from maturities of marketable securities of $82.2 million partially offset by the purchase of 6 Clemens Markets stores from C&S Wholesale Grocers, Inc. of $24.7 million, and property expenditures totaling $184.0 million, which included 3 new supermarkets, 26 major remodels and 33 minor remodels. Net cash used in financing activities of $78.1 million for the 40 weeks ended December 1, 2007 primarily reflected principal payments on long-term borrowings of $32.0 million and net principal payments on revolving lines of credit of $58.7 million offset by net proceeds from long term real estate liabilities of $6.4 million and proceeds from the exercise of stock options of $6.2 million. Net cash flow used in financing activities of $146.9 million for the 40 weeks ended December 2, 2006 primarily reflected principal payments on capital leases of $4.1 million and dividends paid of $299.1 million partially offset by net proceeds from revolving lines of credit of $128.5 million, proceeds from the exercise of stock options of $5.0 million and an increase in book overdrafts of $19.7 million. We operate under an annual operating plan which is reviewed and approved by our Board of Directors and incorporates the specific operating initiatives we expect to pursue and the anticipated financial results of our Company. Our plan for fiscal 2007 has been approved and we believe that our present cash resources, including invested cash on hand and available borrowings from our Revolver and other sources, are sufficient to meet our needs for the next twelve months. Profitability, cash flow, asset sale proceeds and timing can be impacted by certain external factors such as unfavorable economic conditions, competition, labor relations and fuel and utility costs which could have a significant impact on cash generation. If our profitability and cash flow do not improve in line with our plans or if the taxing authorities do not affirm the adequacy of our Company's Domestic Reinvestment 68 Plan, we anticipate that we would be able to modify the operating plan in order to ensure that we have appropriate resources. On March 5, 2007, our Company announced that we have reached a definitive merger agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores, Inc., ("Pathmark") for $1.4 billion in cash, stock, and debt assumption or retirement. On November 27, 2007, our Company announced that the Federal Trade Commission ("FTC") has accepted a proposed consent agreement relating to our acquisition of Pathmark. Further, on December 3, 2007, we completed our acquisition of Pathmark. Pathmark is a regional supermarket chain with supermarkets in the New York, New Jersey and Philadelphia metropolitan areas. The terms of the consent agreement, as discussed in Note 15 - Subsequent Events, requires us to divest six stores located in the state of New York. We have entered into definitive agreements to sell all of the stores included in the consent agreement and have received FTC approval on these divestitures. WORKING CAPITAL We had working capital of $649.5 million at December 1, 2007 compared to working capital of $190.5 million at February 24, 2007. We had cash and cash equivalents aggregating $69.4 million at December 1, 2007 compared to $86.2 million at February 24, 2007. The increase in working capital was attributable primarily to an increase in restricted cash as a result of the liquidation of our holdings in Metro, Inc. as discussed in Note 4 - Investment in Metro, Inc. partially offset by a decrease in cash and cash equivalents as detailed in the Consolidated Statements of Cash Flows and a decrease in marketable securities due to their maturity. At December 1, 2007, we had $542.1 million of restricted cash which was used to fund our acquisition of Pathmark on December 3, 2007. LETTER OF CREDIT AGREEMENT Our Company has a $250 million Revolving Credit Agreement ("Revolver") with four lenders enabling us to borrow funds on a revolving basis for working capital loans and letters of credit. In March 2007, our Letter of Credit Agreement and Revolver were amended to allow for the sale of Metro, Inc. shares provided that the net proceeds from such sales are deposited in a restricted cash account. Refer to Note 4 - Investment in Metro, Inc. for further discussion regarding the sale of these Metro, Inc. shares. Also, on October 14, 2007, our Letter of Credit Agreement was amended to extend the expiration date of the facility from October 14, 2007 to April 14, 2008. At December 1, 2007 and February 24, 2007, there were $137.6 million and $138.3 million, respectively, in letters of credit outstanding under this agreement. REVOLVING CREDIT AGREEMENT During fiscal 2005, we secured a $150 million Revolver with four lenders enabling us to borrow funds on a revolving basis for working capital loans and letters of credit. The Revolver includes a $100 million accordion feature which gives us the ability to increase commitments from $150 million to $250 million. Effective April 4, 2006, we exercised the accordion option and increased our commitments to $250 million. 69 Under the terms of this agreement, should availability fall below $25.0 million and should cash on hand fall below $50.0 million, a borrowing block will be implemented which provides that no additional loans be made unless we are able to maintain a minimum consolidated EBITDA covenant on a trailing twelve month basis. In the event that availability falls below $25.0 million, cash on hand falls below $50.0 million, and we do not maintain the required minimum EBITDA covenant, unless otherwise waived or amended, the lenders may, at their discretion, declare, in whole or in part, all outstanding obligations immediately due and payable. The Revolver is collateralized by inventory, certain accounts receivable and pharmacy scripts. Borrowings under the Revolver bear interest based on LIBOR or Prime interest rate pricing. This agreement expires in November 2010. At December 1, 2007 and February 24, 2007, there were no letters of credit outstanding under this agreement; however, there were $11.3 million and $70.0 million, respectively, in outstanding borrowings under the Revolver. As of December 1, 2007, after reducing availability for our estimated borrowing base requirements, we had $214.6 million available under the Revolver. Combined with cash we held in short-term investments of $2.4 million, we had total cash availability of $217.0 million at December 1, 2007. Under the Revolver, we are permitted to pay cumulative cash dividends on common shares as well as make bond repurchases. On December 3, 2007, we entered into a new $675 million Credit Agreement (the "ABL Facility") with Bank of America, N.A., and a $370 million Senior Secured Bridge Credit Agreement (the "Bridge Loan Facility") with Banc of America Securities LLC, Bank of America, N.A. and Bank of America Bridge LLC, Lehman Brothers Commercial Bank, Lehman Brothers Inc. and Lehman Commercial Paper Inc. The ABL Facility provides for a five-year term loan of $82.9 million and a five-year revolving credit facility of $592.1 million enabling us to borrow funds on a revolving basis for working capital loans and letters of credit. The ABL Facility includes a $100 million accordion feature which gives us the ability to increase commitments from $675 million to $775 million. The ABL Facility is collateralized by all assets of the company, including, but not limited to, inventory, certain accounts receivable, pharmacy scripts, owned real estate and certain Pathmark leaseholds. Borrowings under the ABL Facility bear interest based on LIBOR or Prime interest rate pricing. At December 3, 2007, there were $200.0 million of loans and $224.3 million in letters of credit outstanding under this agreement. As of December 3, 2007, after reducing availability for our borrowing base requirements, we had $250.7 million available under the ABL Facility. On December 27, 2007, in order to facilitate the syndication of the ABL Facility under current market conditions, we entered into an Amended and Restated Credit Agreement (the "Credit Agreement"). Part of the revolving commitments were restructured as a $50 million term loan collateralized by certain real estate assets and the applicable margin on credit extensions was increased. 70 The Bridge Loan Facility, which was subsequently refinanced, provided for a term loan of $370 million that initially matures on December 3, 2008, after which time, subject to the satisfaction of certain conditions, the loans then outstanding will either continue as term loans or be exchanged for exchange notes, in each case having a maturity of December 3, 2015. In connection with the new financing, we paid $10.7 million and $20.6 million in financing fees for the ABL Facility and the Bridge Loan Facility, respectively. We used our restricted cash on hand and borrowings under the ABL Facility and the Bridge Loan Facility to fund the acquisition, terminate our existing Revolver which had outstanding borrowings of $11.3 million, terminate Pathmark's obligation under their revolver and term loan of $114.0 million and to fund $375.5 million for the payment of Pathmark's Senior Subordinated Notes with a face value of $350 million due 2012. At the close of business on December 3, 2007, we had $200.0 million in outstanding borrowings under the ABL Facility. PUBLIC DEBT OBLIGATIONS Outstanding notes totaling $212.8 million at December 1, 2007 consisted of $12.8 million of 9.125% Senior Notes due December 15, 2011 and $200.0 million of 9.375% Notes due August 1, 2039. Interest is payable quarterly on the 9.375% Notes and semi-annually on the 9.125% Notes. The 9.375% Notes are now callable at par ($25 per bond) and the 9.125% Notes are now callable at a premium to par (104.563%). The 9.375% Notes are unsecured obligations and were issued under the terms of our senior debt securities indenture, which contains among other provisions, covenants restricting the incurrence of secured debt. The 9.375% Notes are effectively subordinate to the Revolver and do not contain cross default provisions. All covenants and restrictions for the 9.125% Senior Notes have been eliminated in connection with the cash tender offer in fiscal 2005. Our notes are not guaranteed by any of our subsidiaries. During the first quarter of fiscal 2007, the outstanding principal amount of our 7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in full. To pay down our temporary financing as discussed above, on December 18, 2007, we completed a public offering and issued $165 million 5.125% convertible senior notes due 2011 and $255 million 6.75% convertible senior notes due 2012. The 2011 notes are not redeemable at our option at any time. The 2012 notes are redeemable at our option on or after December 15, 2010, at a redemption price of 102.70% and on or after December 15, 2011, at a redemption price of 101.35%. The initial conversion price of the 2011 notes is $36.40 representing a 30.0% premium to the offering price of $28.00 and the initial conversion price of the 2012 notes is $37.80 representing a 35.0% premium to the offering price of $28.00. The principal amount of these notes are convertible into shares of our stock, cash, or a combination of stock and cash at our option. In connection with this offering, we entered into convertible note hedge and warrant transactions with financial institutions that are affiliates of the underwriters of the notes to increase the effective conversion price of the notes. We also entered into share lending agreements with affiliates of the underwriters to lend such affiliates up to 11,278,988 shares of our common stock. Pursuant to these agreements, we loaned 8,134,002 shares of our stock to these entities who then sold 6,300,752 shares to the public in a public offering, which was consummated on December 18, 2007. We did not receive any proceeds from the sale of these shares other than a nominal lending fee. OTHER 71 We currently have an active shelf Registration Statement that was automatically effective upon filing on December 7, 2007, allowing us to offer debt and/or equity securities in amounts as we shall subsequently determine and at terms contingent upon market conditions at the time of sale. We also currently have an active shelf Registration Statement that was declared effective on June 21, 1999, allowing us to offer up to $75 million of debt and/or equity securities at terms contingent upon market conditions at the time of sale. We are the guarantor of a loan of $1.4 million related to a shopping center, which will expire in 2011. In the normal course of business, we have assigned to third parties various leases related to former operating stores (the "Assigned Leases"). At the time the leases were assigned, we generally remained secondarily liable with respect to these lease obligations. As such, if any of the assignees were unable to continue making payments under the Assigned Leases, we could be required to assume the lease obligation. As of December 1, 2007, 135 Assigned Leases remain in place. Assuming that each respective assignee was unable to make payments under an Assigned Lease, an event we believe to be remote, we estimate our maximum potential obligation with respect to the Assigned Leases to be approximately $508.6 million, which could be partially or totally offset by reassigning or subletting these leases. Our existing senior debt rating was Caa1 with negative outlook with Moody's Investors Service ("Moody's") and B- with positive outlook with Standard & Poor's Ratings Group ("S&P") as of December 1, 2007. On December 10, 2007, subsequent to our quarter end, S&P changed our rating to B and removed all of the ratings from CreditWatch. At the same time S&P assigned B- ratings to our $370 million senior secured bridge credit facility, our $165 million 5.125% convertible senior notes due 2011 and our $255 million 6.75% convertible senior notes due 2012. On December 11, 2007, subsequent to our quarter end, Moody's assigned a B2 rating to our senior secured bridge credit facility and a Caa1 rating to our $165 million 5.125% convertible senior notes due 2011 and our $255 million 6.75% convertible senior notes due 2012. Our liquidity rating was SGL3 with Moody's as of December 1, 2007. Our recovery rating was 1 with S&P as of December 1, 2007 indicating a high expectation of 100% recovery of our senior debt to our lenders. Future rating changes could affect the availability and cost of financing to our Company. CRITICAL ACCOUNTING ESTIMATES Critical accounting estimates are those accounting estimates that we believe are important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Self-Insurance Reserves Our Consolidated Balance Sheets include liabilities for self-insured workers' compensation and general liability claims. We estimate the required liability of these claims on a discounted basis, utilizing an actuarial method, which is based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll, legal costs and other data. 72 Legal expenses incurred in connection with workers' compensation and general liability claims are charged to the specific claim to which costs pertain. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). Long-Lived Assets We review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. This review is based upon groups of assets and the undiscounted estimated future cash flows from these assets to determine if the carrying value of these assets is recoverable from their respective cash flows. If this review indicates an impairment exists, we measure this impairment on a discounted basis using a probability weighted approach and a 7 year U.S. Treasury risk free rate. We also review assets in stores planned for closure or conversion for impairment upon determination that these assets will not be used for their intended useful life. During the 12 and 40 weeks ended December 1, 2007, we recorded impairment losses on long-lived assets due to the closure or conversion in the normal course of business of $2.5 million and $3.6 million, respectively. The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. If current operating levels do not continue to improve, there may be future impairments on long-lived assets, including the potential for impairment of assets that are held and used. Closed Store and Closed Warehouse Reserves For closed stores and warehouses that are under long-term leases, we record a discounted liability using a risk free rate for the future minimum lease payments and related costs, such as utilities and taxes, from the date of closure to the end of the remaining lease term, net of estimated probable recoveries from projected sublease rentals. If estimated cost recoveries exceed our liability for future minimum lease payments, the excess is recognized as income over the term of the sublease. We estimate future net cash flows based on our experience in and our knowledge of the market in which the closed store and warehouse is located. However, these estimates project net cash flow several years into the future and are affected by variable factors such as inflation, real estate markets and economic conditions. Variation in these factors could cause changes to our estimates. As of December 1, 2007, we had recorded liabilities for estimated probable obligations of $198 million. Of this amount, $12 million relates to stores closed in the normal course of business, $30 million relates to stores and warehouses closed as part of the asset disposition initiatives (see Note 8 of our Consolidated Financial Statements), and $156 million relates to stores closed as part of our discontinued operations (see Note 7 of our Consolidated Financial Statements). Employee Benefit Plans The determination of our obligation and expense for pension and other postretirement benefits is dependent, in part, on our selection of certain assumptions used by our actuaries in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and health care costs. In accordance with U.S. GAAP, actual results that differ from our Company's assumptions are accumulated and amortized over future periods and, therefore, affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other post-retirement obligations and our future expense. 73 Inventories We evaluate inventory shrinkage throughout the year based on actual physical counts and record reserves based on the results of these counts to provide for estimated shrinkage between the store's last inventory and the balance sheet date. Income Taxes As discussed in Note 11 of the Consolidated Financial Statements, our Company recorded a valuation allowance for the entire net deferred tax asset since, in accordance with SFAS 109, it was more likely than not that the net deferred tax asset would not be utilized based on historical cumulative losses. Under SFAS 109, this valuation allowance could be reversed in future periods if we experience improvement in our operations. We adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement 109 ("FIN 48") as of February 25, 2007. The cumulative effect of the adoption of the recognition and measurement provisions of FIN 48 resulted in a $24.4 million increase to the February 25, 2007 balance of retained earnings. Results of prior periods have not been restated. Our policy for interest and penalties under FIN 48 related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN 48. Therefore, we continue to recognize interest and penalties as incurred within "Benefit from (provision for) income taxes" in our Consolidated Statements of Operations. Refer to Note 11 - Income Taxes for further discussion. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement 109 ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we determine whether the benefits of our tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is more likely than not of being sustained in our Consolidated Financial Statements. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in our Consolidated Financial Statements. The provisions of FIN 48 also provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. We adopted these requirements as of February 25, 2007. The cumulative effect of the adoption of the recognition and measurement provisions of FIN 48 resulted in a $24.4 million increase to the February 25, 2007 balance of retained earnings. Results of prior periods have not been restated. Our policy for interest and penalties under FIN 48 related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN 48. Therefore, we continue to recognize interest and penalties as incurred within "(Provision for) benefit from income taxes" in our Consolidated Statements of Operations. Refer to Note 11 - Income Taxes for further discussion. In October 2004, the government passed the Homeland Investment Act which allows companies to repatriate cash balances from their controlled foreign subsidiaries at a reduced rate. This was achieved by permitting a one time 85% dividends received deduction. Our Company completed the sale of our 74 Canadian subsidiary to Metro, Inc. during fiscal 2005. As a result of this transaction, our Company repatriated $949.0 million from our foreign subsidiaries, of which $500.0 million is intended to qualify for the 85% dividends received deduction. Until such time as the taxing authorities have affirmed the adequacy of our Company's Domestic Reinvestment Plan, the balance sheet is and will be grossed-up to reflect liabilities for uncertain tax positions and deferred tax assets for net operating losses in accordance with FIN 48. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007 (our year ending February 28, 2009). Our Company is currently evaluating the impact, if any, of the provisions of SFAS 157. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 was issued to improve the overall financial statement presentation of pension and other postretirement plans and does not impact the determination of net periodic benefit cost or the measurement of plan assets or obligations. This standard requires companies to recognize the funded status of their defined benefit pension and other postretirement benefit plans as a net liability or asset on their balance sheets and requires any unrecognized prior service costs and actuarial gains or losses to be recognized as a component of accumulated other comprehensive income or loss. We adopted these requirements as of February 24, 2007. Additionally, SFAS 158 no longer allows companies to measure their plans as of any date other than the end of their fiscal year; however, this provision is not effective for companies until fiscal years ending after December 15, 2008 (our year ending February 28, 2009). We have chosen to early adopt this requirement in fiscal 2007. We used the second approach as described in paragraph 19 of SFAS 158 to transition our measurement date from December 31, 2006 to February 24, 2007. Under this approach, we have recorded an adjustment to opening retained earnings in the amount of $0.6 million to decrease the February 25, 2007 balance of retained earnings. Refer to Note 9 - Retirement Plans and Benefits for further discussion. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007 (our year ending February 28, 2009). Our Company is currently evaluating the impact, if any, of the provisions of SFAS 159. In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, the goodwill acquired, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable the evaluation of the nature and financial effect of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 (our year ended February 27, 2010). Our Company is currently evaluating the impact, if any of the provisions of SFAS 141R. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends ARB 51 to establish 75 accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 (our year ended February 27, 2010). We have evaluated the provisions of SFAS 160 and the guidance will not have an impact on our Company's financial condition or results of operations. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK Market risk represents the risk of loss from adverse market changes that may impact our consolidated financial position, results of operations or cash flows. Among other possible market risks, we are exposed to such risk in the areas of interest rates and foreign currency exchange rates. From time to time, we may enter hedging agreements in order to manage risks incurred in the normal course of business including forward exchange contracts to manage our exposure to fluctuations in foreign exchange rates. INTEREST RATES Our exposure to market risk for changes in interest rates relates primarily to our debt obligations. We do not have cash flow exposure due to rate changes on $214.2 million of our total indebtedness as of December 1, 2007 because they are at fixed interest rates. However, we do have cash flow exposure on our committed bank lines of credit due to our variable floating rate pricing. Accordingly, during the 12 and 40 weeks ended December 1, 2007, a presumed 1% change in the variable floating rate would have impacted interest expense by $0.06 million and $0.15 million, respectively. During the 12 and 40 weeks ended December 2, 2006, a presumed 1% change in the variable floating rate would have impacted interest expense by $0.3 million and $0.6 million, respectively. FOREIGN EXCHANGE RISK We are exposed to foreign exchange risk to the extent of adverse fluctuations in the Canadian dollar. A change in the Canadian currency of 10% would have resulted in a fluctuation in our investment in Metro, Inc. of nil and $30.2 million at December 1, 2007 and February 24, 2007, respectively. On November 6, 2007, we entered into a currency exchange forward contract to purchase $380 million United States dollars to hedge the value of our shares in Metro, Inc. against adverse movements in exchange rates. Our Company measures ineffectiveness based upon the change in forward exchange rates. In the third quarter of fiscal 2007 and upon completion of the sale of our shares of Metro, Inc., this forward contract was settled. We do not believe that a change in the Canadian currency of 10% will have a material effect on our Consolidated Statements of Operations or Cash Flows. ITEM 4 - CONTROLS AND PROCEDURES 76 We have established and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our Company's management, including our President and Chief Executive Officer and Senior Vice President, Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our Company's management, including our Company's President and Chief Executive Officer along with our Company's Senior Vice President, Chief Financial Officer, of the effectiveness of the design and operation of our Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, our Company's President and Chief Executive Officer along with our Company's Senior Vice President, Chief Financial Officer, concluded that our Company's disclosure controls and procedures were effective as of the period covered by this report. There have been no changes during our Company's fiscal quarter ended December 1, 2007 in our Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our Company's internal control over financial reporting. CAUTIONARY NOTE This presentation may contain forward-looking statements about the future performance of our Company, and is based on our assumptions and beliefs in light of information currently available. We assume no obligation to update this information. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements including but not limited to: competitive practices and pricing in the food industry generally and particularly in our principal markets; our relationships with our employees; the terms of future collective bargaining agreements; the costs and other effects of lawsuits and administrative proceedings; the nature and extent of continued consolidation in the food industry; changes in the financial markets which may affect our cost of capital or the ability to access capital; supply or quality control problems with our vendors; and changes in economic conditions, which may affect the buying patterns of our customers. 77 PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc. ("Defendants") On June 24, 2004, a class action complaint was filed in the Supreme Court of the State of New York against The Great Atlantic & Pacific Tea Company, Inc., d/b/a A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime provisions of the New York Labor Law. Three named plaintiffs, Benedetto Lamarca, Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our Company failed to pay overtime wages to full-time hourly employees who were either required or permitted to work more than 40 hours per week. In April 2006, the plaintiffs filed a motion for class certification. In July 2007, the Court granted the plaintiffs' motion and certified the class as follows: All full-time hourly employees of Defendants who were employed in Defendants' supermarket stores located in the State of New York, for any of the period from June 24, 1998 through the date of the commencement of the action, whom Defendants required or permitted to perform work in excess of 40 hours per week without being paid overtime wages. The Court also ruled that the issue of whether to include an "opt-in" or "opt-out" provision is premature and can be decided after discovery has been had. As class certification was granted only recently, and as discovery on the prospective plaintiffs comprising the class has yet to be conducted, neither the number of class participants nor the sufficiency of their respective claims can be determined at this time. ITEM 1A - RISK FACTORS Set forth below is a summary of the material risks to an investment in our securities. - - Our retail food business and the grocery retailing industry continues to experience fierce competition from mass merchandisers, warehouse clubs, drug stores, convenience stores, discount merchandisers, dollar stores, restaurants, other retail chains, nontraditional competitors and emerging alternative formats in the markets where we have retail operations. Competition with these outlets is based on price, store location, advertising and promotion, product mix, quality and service. Some of these competitors may have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do, and we may be unable to compete successfully in the future. An overall lack of inflation in food prices and increasingly competitive markets have made it difficult generally for grocery store operators to achieve comparable store sales gains. Because sales growth has been difficult to attain, our competitors have attempted to maintain market share through increased levels of promotional activities and discount pricing, creating a more difficult environment in which to consistently increase year-over-year sales. Price-based competition has also, from time to time, adversely affected our operating margins. Our continued success is dependent upon our ability to effectively compete in this industry and to reduce operating expenses, including managing health care and pension costs contained in our collective bargaining agreements. The competitive practices and pricing in the food industry generally and particularly in our principal markets may cause us to reduce our prices in order to gain or maintain our market share of sales, thus reducing margins. 78 - - Our in-store pharmacy business is also subject to intense competition. In particular, an adverse trend for drug retailing has been significant growth in mail-order and internet-based prescription processors. Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products. In addition, the conversion of various prescription drugs to over-the-counter medications, the withdrawal of certain drugs from the market and changes in third party reimbursement levels for prescription drugs, including changes in Medicare Part D or state Medicaid programs, may have a material adverse effect on our business. Failure to properly adhere to certain government regulations, local registrations, applicable Medicare and Medicaid regulations and prohibitions against paid referrals of patients could result in the imposition of civil as well as criminal penalties. - - The retail food and food distribution industries, and the operation of our businesses, specifically in the New York -- New Jersey and Philadelphia regions, are sensitive to a number of economic conditions and other factors such as (i.) food price deflation or inflation, (ii.) softness in local and national economies, (iii.) increases in commodity prices, (iv.) the availability of favorable credit and trade terms, (v.) changes in business plans, operations, results and prospects, (vi.) potential delays in the development, construction or start-up of planned projects, and (vii.) other economic conditions that may affect consumer buying habits. Any one or more of these economic conditions can affect our retail sales, the demand for products we distribute to our retail customers, our operating costs and other aspects of our business. - - Acts of war, threats of terror, acts of terror or other criminal activity directed at the grocery or drug store industry, the transportation industry, or computer or communications systems, could increase security costs, adversely affect our operations, or impact consumer behavior and spending as well as customer orders. Other events that give rise to actual or potential food contamination, drug contamination, or food-borne illness could have an adverse effect on our operating results. - - We could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain. Adverse publicity about these types of concerns, whether or not valid, could discourage consumers from buying products in our stores. The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations. - - Our operations subject us to various laws and regulations relating to the protection of the environment, including those governing the management and disposal of hazardous materials and the cleanup of contaminated sites. Under some environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, also known as CERCLA or the Superfund law, and similar state statues, responsibility for the entire cost of cleanup of a contaminated site can be imposed upon any current or former site owners or operators, or upon any party who sent waste to the site, regardless of the lawfulness of the original activities that led to the contamination. From time to time we have been named as one of many potentially responsible parties at Superfund sites, although our share of liability has typically been de minimis. Although we believe that we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, new laws or discoveries of unknown conditions may require expenditures that may have a material adverse effect on our business and financial condition. 79 - - Our capital expenditures could differ from our estimate if development and remodel costs vary from those budgeted, or if performance varies significantly from expectations or if we are unsuccessful in acquiring suitable sites for new stores. - - Our ability to achieve our profit goals will be affected by (i.) our success in executing category management and purchasing programs that we have underway, which are designed to improve our gross margins and reduce product costs while making our product selection more attractive to consumers, (ii.) our ability to achieve productivity improvements and reduce shrink in our stores, (iii.) our success in generating efficiencies in our supporting activities, and (iv.) our ability to eliminate or maintain a minimum level of supply and/or quality control problems with our vendors. - - The vast majority of our employees are members of labor unions. While we believe that our relationships with union leaderships and our employees are satisfactory, we operate under collective bargaining agreements which periodically must be renegotiated. In the coming year, we have several contracts expiring and under negotiation. In each of these negotiations, rising health care and pension costs will be an important issue, as will the nature and structure of work rules. We are hopeful, but cannot be certain, that we can reach satisfactory agreements without work stoppages in these markets. However, the actual terms of the renegotiated collective bargaining agreements, our future relationships with our employees and/or a prolonged work stoppage affecting a substantial number of stores could have a material effect on our results. - - The amount of contributions made to our pension and multi-employer plans will be affected by the performance of investments made by the plans and the extent to which trustees of the plans reduce the costs of future service benefits. - - Our Company is currently required to acquire a significant amount of our saleable inventory from one supplier, C&S Wholesale Grocers, Inc. Although there are a limited number of distributors that can supply our stores, we believe that other suppliers could provide similar product on reasonable terms. However, a change in suppliers could cause a delay in distribution and a possible loss of sales, which would affect operating results adversely. - - We have estimated our exposure to claims, administrative proceedings and litigation and believe we have made adequate provisions for them, where appropriate. Unexpected outcomes in both the costs and effects of these matters could result in an adverse effect on our earnings. - - The integration of Pathmark's operations will require implementation of appropriate operations, management and financial reporting systems and controls. We may experience difficulties in effectively implementing these and other systems and integrating Pathmark's systems and operations. The integration of Pathmark will require the focused attention of A&P's management team, including a significant commitment of their time and resources. The need for both A&P's and Pathmark's management to focus on integration matters could have a material and adverse impact on the revenues and operating results of the combined company. The success of the merger will depend, in part, on the combined company's ability to realize the anticipated benefits from combining the businesses of A&P and Pathmark, including, anticipated annual integration synergies within two years, through cost reductions in overhead, greater efficiencies, increased utilization of support facilities and the adoption of mutual best practices between the two companies. It is possible that the integration process could result in the loss of key employees, as well as the disruption of each company's ongoing businesses or inconsistencies in standards, controls, procedures and 80 policies, any or all of which could adversely affect our ability to maintain relationships with customers and employees after the merger or to achieve the anticipated benefits of the merger. These integration matters could have a material adverse effect on our business. - - We have assumed all of Pathmark's liabilities, including contingent liabilities, in connection with the merger. If there are unknown Pathmark obligations, our business could be materially and adversely affected. We may learn additional information about Pathmark's business that adversely affects us, such as unknown liabilities, issues relating to internal controls over financial reporting, issues that could affect our ability to comply with the Sarbanes-Oxley Act or issues that could affect our ability to comply with other applicable laws. As a result, we cannot assure you that the acquisition of Pathmark will be successful or will not, in fact, harm our business. Among other things, if Pathmark liabilities are greater than expected, or if there are obligations of which we were not aware of at the time of completion of the acquisition, our business could be materially and adversely affected. - - Following the closing of the acquisition of Pathmark, Tengelmann, A&P's former majority shareholder, owned beneficially and of record a substantial percentage of our common stock on a fully diluted basis. As a result of this equity ownership and our stockholder agreement with Tengelmann, Tengelmann has the power to significantly influence the results of shareholder votes and the election of our board of directors, as well as transactions involving a potential change of control of our Company. Tengelmann may support strategies and directions for our Company which are in its best interests but which are opposed to shareholder interests. - - Our substantial indebtedness could impair our financial condition and our ability to fulfill our debt obligations, including our obligations under the notes. Our indebtedness could make it more difficult for us to satisfy our obligations with respect to the notes and our other indebtedness, which could in turn result in an event of default on the notes or such other indebtedness, require us to dedicate a substantial portion of our cash flow from operations to debt service payments, thereby reducing the availability of cash for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, diminish our ability to withstand a downturn in our business, the industry in which we operate or the economy generally, limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, and place us at a competitive disadvantage compared to certain competitors that have proportionately less debt. Our ABL facility contains restrictive covenants customary for facilities of that type which limit our ability to incur additional debt, pay dividends, grant additional liens, make investments and take other actions. These restrictions may limit flexibility to undertake future financings and take other actions. If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all. In addition, our ABL facility bears interest at a variable rate. If market interest rates increase, such variable-rate debt will have higher debt service requirements, which could adversely affect our cash flow. While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk. - - Fluctuating fuel costs may adversely affect our operating costs since we incur the cost of fuel in connection with the transportation of goods from our warehouse and distribution facilities to our stores. In addition, operations at our stores are sensitive to rising utility fuel costs due to the amount 81 of electricity and gas required to operate our stores. We may not be able to recover these rising utility and fuel costs through increased prices charged to our customers. Our profitability is particularly sensitive to the cost of oil. Oil prices directly affect our product transportation costs and fuel costs due to the amount of electricity and gas required to operate our stores as well as our utility and petroleum-based supply costs; including plastic bags for example. - - We are subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, work place safety, public health, community right-to-know, beer and wine sales, pharmaceutical sales and gasoline station operations. A number of states and local jurisdictions regulate the licensing of supermarkets, including beer and wine license grants. In addition, under certain local regulations, we are prohibited from selling beer and wine in certain of our stores. Employers are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions, disabled access and work permit requirements. Compliance with these laws could reduce the revenue and profitability of our supermarkets and could otherwise adversely affect our business, financial condition or results of operations. In addition, any changes in these law or regulations could significantly increase our compliance costs and adversely affect our results of operations, financial condition and liquidity. - - We have large, complex information technology systems that are important to business operations. We could encounter difficulties developing new systems and encounter difficulties maintaining, upgrading or securing our existing systems. Such difficulties could lead to significant expenses or losses due to disruption in our business operations. - - Our articles of incorporation permit our board of directors to issue preferred shares without first obtaining shareholder approval. If we issued preferred shares, these additional securities may have dividend or liquidation preferences senior to our common stock. If we issue convertible preferred shares, a subsequent conversion may dilute the current common shareholders' interest. Issuance of such preferred stock could adversely affect the price of our common stock. Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in or contemplated or implied by forward-looking statements made by us or our representatives. ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our special meeting of shareholders, held November 8, 2007, there were 31,639,999 shares or 75.40% of the 41,960,817 shares outstanding and entitled to vote represented either in person or by proxy. 82 Of the total shares cast, 75.36% voted to approve the issuance of shares of A&P common stock in connection with the merger of A&P's wholly owned subsidiary, Sand Merger Corp., and Pathmark. Upon consummation of the merger, Pathmark's shareholders were entitled to receive $9.00 in cash and 0.12963 shares of A&P common stock for each share of Pathmark stock they owned. ITEM 5 - OTHER INFORMATION None ITEM 6 - EXHIBITS (a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION - ---------- ----------- 2.1 Stock Purchase Agreement, dated as of July 19, 2005, by and among the Company, A&P Luxembourg S.a.r.l., Metro Inc. and 4296711 Canada Inc. (incorporated herein by reference to Exhibit 2.1 to Form 8-K filed on July 22, 2005) 3.1 Articles of Incorporation of The Great Atlantic & Pacific Tea Company, Inc., as amended through July 1987 (incorporated herein by reference to Exhibit 3(a) to Form 10-K filed on May 27, 1988) 3.2 By-Laws of The Great Atlantic & Pacific Tea Company, Inc., as amended and restated through October 6, 2005 (incorporated herein by reference to Exhibit 3.1 to Form 8-K filed on October 11, 2005) 4.1 Indenture, dated as of January 1, 1991 between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank as successor by merger to Manufacturers Hanover Trust Company), as trustee (the "Indenture") (incorporated herein by reference to Exhibit 4.1 to Form 8-K)
83 4.2 First Supplemental Indenture, dated as of December 4, 2001, to the Indenture, dated as of January 1, 1991 between our Company and JPMorgan Chase Bank, relating to the 7.70% Senior Notes due 2004 (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on December 4, 2001) 4.3 Second Supplemental Indenture, dated as of December 20, 2001, to the Indenture between our Company and JPMorgan Chase Bank, relating to the 9 1/8% Senior Notes due 2011 (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on December 20, 2001) 4.4 Successor Bond Trustee (incorporated herein by reference to Exhibit 4.4 to Form 10-K filed on May 9, 2003) 4.5 Third Supplemental Indenture, dated as of August 23, 2005, to the Indenture between the Company and Wilmington Trust Company (as successor to JPMorgan Chase Bank) (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on August 23, 2005) 4.6 Fourth Supplemental Indenture, dated as of August 23, 2005, to the Indenture between the Company and Wilmington Trust Company (as successor to JPMorgan Chase Bank) (incorporated herein by reference to Exhibit 4.2 to Form 8-K filed on August 23, 2005) 4.7 Indenture, dated as of December 18, 2007, among The Great Atlantic & Pacific Tea Company, Inc. and Wilmington Trust Company, as Trustee (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on December 17, 2007) 4.8 First Supplemental Indenture, dated as of December 18, 2007, among The Great Atlantic & Pacific Tea Company, Inc. and Wilmington Trust Company, as Trustee, relating to the 5.125% Senior Convertible Notes due 2011 (incorporated herein by reference to Exhibit 4.2 to Form 8-K filed on December 17, 2007) 4.9 Second Supplemental Indenture, dated as of December 18, 2007, among The Great Atlantic & Pacific Tea Company, Inc. and Wilmington Trust Company, as Trustee, relating to the 6.75% Senior Convertible Notes due 2011 (incorporated herein by reference to Exhibit 4.4 to Form 8-K filed on December 17, 2007) 4.10 Form of Global 5.125% Senior Convertible Note due 2011 (incorporated herein by reference to Exhibit 4.3 to Form 8-K filed on December 17, 2007) 4.11 Form of Global 6.75% Senior Convertible Note due 2012 (incorporated herein by reference to Exhibit 4.5 to Form 8-K filed on December 17, 2007) 4.12 Credit Agreement dated as of November 15, 2005 between the Company and Bank of America, N.A. as Administrative Agent and Collateral Agent, JPMorgan Chase Bank, N.A. as Syndication Agent, Wachovia Bank, National Association as Documentation Agent and Banc of America Securities LLC as Lead Arranger
84 ("Credit Agreement") (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on November 18, 2005 and Item 8.01 to Form 8-K filed April 10, 2006) 4.13 First amendment to Credit Agreement dated March 13, 2006 (incorporated herein by reference to Exhibit 4.8 to Form 10-K filed on April 25, 2007) 4.14 Second amendment to Credit Agreement dated November 10, 2006 (incorporated herein by reference to Exhibit 4.9 to Form 10-K filed on April 25, 2007) 4.15 Third amendment to Credit Agreement dated March 9, 2007(incorporated herein by reference to Exhibit 4.10 to Form 10-Q filed on October 17, 2007) 10.1 Executive Employment Agreement, made and entered into as of the 15th day of August, 2005, by and between the Company and Mr. Eric Claus (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on September 9, 2005) and a technical amendment (incorporated herein by reference to Exhibit 10.1 to Form 10-K filed on May 9, 2006) 10.2 Employment Agreement, made and entered into as of the 1st day of November, 2000, by and between the Company and William P. Costantini ("Costantini Agreement") (incorporated herein by reference to Exhibit 10 to Form 10-Q filed on January 16, 2001) 10.3 Amendment to Costantini Agreement dated April 30, 2002 (incorporated herein by reference to Exhibit 10.7 to Form 10-K filed on July 5, 2002) 10.4 Confidential Separation and Release Agreement by and between William P. Costantini and The Great Atlantic & Pacific Tea Company, Inc. dated November 4, 2004 (incorporated herein by reference to Exhibit 10.4 to Form 10-Q filed on January 7, 2005) 10.5 Employment Agreement, made and entered into as of the 16th day of June, 2003, by and between our Company and Brenda Galgano (incorporated herein by reference to Exhibit 10.9 to Form 10-Q filed on October 17, 2003) 10.6 Employment Agreement, made and entered into as of the 24th day of February, 2002, by and between our Company and Mitchell P. Goldstein (incorporated herein by reference to Exhibit 10.8 to Form 10-K filed on July 5, 2002)
85 10.7 Letter Agreement dated September 6, 2005, between Mitchell P. Goldstein and our Company (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on September 9, 2005) 10.8 Employment Agreement, made and entered into as of the 2nd day of October, 2002, by and between our Company and Peter Jueptner ("Jueptner Agreement") (incorporated herein by reference to Exhibit 10.26 to Form 10-Q filed on October 22, 2002) 10.9 Amendment to Jueptner Agreement dated November 10, 2004 (incorporated herein by reference to Exhibit 10.8 to Form 10-K filed on May 10, 2005) 10.10 Offer Letter dated the 18th day of September 2002, by and between our Company and Peter Jueptner (incorporated herein by reference to Exhibit 10.10 to Form 10-Q filed on January 10, 2003) 10.11 Employment Agreement, made and entered into as of the 14th day of May, 2001, by and between our Company and John E. Metzger, as amended February 14, 2002 ("Metzger Agreement") (incorporated herein by reference to Exhibit 10.13 to Form 10-K filed on July 5, 2002) 10.12 Amendment to John E. Metzger Agreement dated October 25, 2004 (incorporated herein by reference to Exhibit 10.12 to Form 10-K filed on May 10, 2005) 10.13 Employment Agreement, made and entered into as of the 25th day of January, 2006, by and between our Company and Jennifer MacLeod (incorporated herein by reference to Exhibit 10.13 to Form 10-K filed on May 9, 2006) 10.14 Employment Agreement, made and entered into as of the 1st day of March 2005, by and between our Company and William J. Moss (incorporated herein by reference to Exhibit 10.13 to Form 10-K filed on May 10, 2005) 10.15 Employment Agreement, made and entered into as of the 11th day of December, 2006, by and between our Company and Rebecca Philbert, and Offer Letter dated the 11th day of December, 2006 (incorporated herein by reference to Exhibit 10.15 to Form 10-K filed on April 25, 2007) 10.16 Employment Agreement, made and entered into as of the 28th day of October, 2002, by and between our Company and Brian Piwek, and Offer Letter dated the 23rd day of October, 2002 ("Piwek Agreement") (incorporated herein by reference to Exhibit 10.14 to Form 10-Q filed on January 10, 2003) 10.17 Amendment to Brian Piwek Agreement dated February 4, 2005 (incorporated herein by reference to Exhibit 10.15 to Form 10-K filed on May 10, 2005) 10.18 Employment Agreement, made and entered into as of the 4th day of January 2006, by and between our Company and Melissa E. Sungela (incorporated herein by reference to Exhibit 10.17 to Form 10-Q filed on January 6, 2006)
86 10.19 Employment Agreement, made and entered into as of the 12th day of September 2005, by and between our Company and Paul Wiseman (incorporated herein by reference to Exhibit 10.17 to Form 10-Q filed on October 18, 2005) 10.20 Employment Agreement, made and entered into as of the 2nd day of December 2004, by and between our Company and Allan Richards (incorporated herein by reference to Exhibit 10.18 to Form 10-Q filed on October 18, 2005) 10.21 Employment Agreement, made and entered into as of the 2nd day of December 2004, by and between our Company and Stephen Slade (incorporated herein by reference to Exhibit 10.19 to Form 10-Q filed on October 18, 2005) 10.22 Supplemental Executive Retirement Plan effective as of September 1, 1997 (incorporated herein by reference to Exhibit 10.B to Form 10-K filed on May 27, 1998) 10.23 Supplemental Retirement and Benefit Restoration Plan effective as of January 1, 2001 (incorporated herein by reference to Exhibit 10(j) to Form 10-K filed on May 23, 2001) 10.24 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10(e) to Form 10-K filed on May 24, 1995) 10.25 1998 Long Term Incentive and Share Award Plan (incorporated herein by reference to Exhibit 10(k) to Form 10-K filed on May 19, 1999, to Appendix B to the Proxy Statement dated May 27, 2005 and to Appendix B to the Proxy Statement dated May 25, 2006) 10.26 Form of Stock Option Grant (incorporated herein by reference to Exhibit 10.20 to Form 10-K filed on May 10, 2005) 10.27 Description of 2005 Turnaround Incentive Compensation Program (incorporated herein by reference to Exhibit 10.21 to Form 10-K filed on May 10, 2005) 10.28 Form of Restricted Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.22 to Form 10-K filed on May 10, 2005) 10.29 Description of 2006 Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.28 to Form 10-Q filed on July 21, 2006) 10.30 Form of 2006 Restricted Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.29 to Form 10-Q filed on July 21, 2006) 10.31 1994 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10(f) to Form 10-K filed on May 24, 1995)
87 10.32 2004 Non-Employee Director Compensation effective as of July 14, 2004 (incorporated herein by reference to Exhibit 10.15 to Form 10-Q filed on July 29, 2004 and to Appendix C to the Proxy Statement dated May 25, 2006) 10.33 Description of Management Incentive Plan (incorporated herein by reference to Exhibit 10.30 to Form 10-K filed on May 9, 2006) 10.34 Asset Purchase Agreement, dated as of June 27, 2005, by and between the Company, Ocean Logistics LLC and C&S Wholesale Grocers, Inc. (incorporated herein by reference to Exhibit 10.38 to Form 10-Q/A filed on June 25, 2007) 10.35 Supply Agreement, dated as of June 27, 2005, by and between the Company and C&S Wholesale Grocers, Inc. (incorporated herein by reference to Exhibit 10.39 to Form 10-Q/A filed on June 25, 2007) 10.36 Information Technology Transition Services Agreement by and between The Great Atlantic and Pacific Tea Company, Limited ("A&P Canada") and Metro, Inc. entered into on August 15, 2005 (incorporated herein by reference to Exhibit 10.40 to Form 10-Q filed on October 18, 2005) 10.37 Investor Agreement by and between A&P Luxembourg S.a.r.l., a wholly owned subsidiary of the Company, and Metro, Inc. entered into on August 15, 2005 (incorporated herein by reference to Exhibit 10.41 to Form 10-Q filed on October 18, 2005) 10.38 Letter of Credit Agreement, dated as of October 14, 2005 between the Company and Bank of America, N.A., as Issuing Bank, ("Letter of Credit Agreement") (incorporated herein by reference to Exhibit 10.42 to Form 10-Q filed on October 18, 2005) 10.39 First amendment to Letter of Credit Agreement, dated October 13, 2006 (incorporated herein by reference to Exhibit 10.39 to Form 10-K filed on April 25, 2007) 10.40 Second amendment to Letter of Credit Agreement, dated November 10, 2006 (incorporated herein by reference to Exhibit 10.40 to Form 10-K filed on April 25, 2007) 10.41 Third amendment to Letter of Credit Agreement, dated October 14, 2007, (incorporated herein by reference to Exhibit 10.41 to Form 10-Q filed on October 17, 2007) 10.42 Entry into a Material Definitive Agreement dated as of March 4, 2007, by and between the Company and Pathmark Stores, Inc. (incorporated herein by reference to Form 8-K and the accompanying exhibits filed on March 6, 2007)
88 10.43 Employment Agreement, made and entered into as of the 1st day of May 2007, by and between our Company and Andreas Guldin (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on May 7, 2007) 10.44 Credit Agreement dated as of December 3, 2007 among The Great Atlantic & Pacific Tea Company, Inc., and the other Borrowers party thereto, as Borrowers and the Lenders party thereto, and Bank of America, N.A., as Administrative Agent and Collateral Agent and Banc of America Securities LLC as Lead Arranger (incorporated herein by reference to Exhibit 10.1 to Form 8-K/A Amendment No. 2 filed on December 3, 2007) 10.45* Amended and Restated Credit Agreement dated as of December 27, 2007 among The Great Atlantic & Pacific Tea Company, Inc., and the other Borrowers party thereto, as Borrowers and the Lenders party thereto, and Bank of America, N.A., as Administrative Agent and Collateral Agent and Banc of America Securities LLC as Lead Arranger, as filed herein 10.46 Senior Secured Bridge Credit Agreement dated as of December 3, 2007 among The Great Atlantic & Pacific Tea Company, Inc., The Lenders from time to time party thereto, Bank of America, N.A., as Administrative Agent, and Lehman Commercial Paper Inc., as Syndication Agent. (incorporated herein by reference to Exhibit 10.2 to Form 8-K/A Amendment No. 2 filed on December 3, 2007) 10.47 Confirmation of Issuer Warrant Transaction for 2011 Notes, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on December 12, 2007) 10.48 Amendment to Confirmation of Issuer Warrant Transaction (2011), dated as of December 17, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.3 to Form 8-K filed on December 17, 2007) 10.49 Confirmation of Issuer Warrant Transaction for 2012 Notes, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on December 12, 2007) 10.50 Amendment to Confirmation of Issuer Warrant Transaction (2012), dated as of December 17, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.4 to Form 8-K filed on December 17, 2007) 10.51 Confirmation of Issuer Warrant Transaction for 2011 Notes, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc. (incorporated herein by reference to Exhibit 10.3 to Form 8-K filed on December 12, 2007) 10.52 Amendment to Confirmation of Issuer Warrant Transaction (2011), dated as of December 17, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc. (incorporated herein by reference to Exhibit 10.5 to Form 8-K filed on December 17, 2007)
89 10.53 Confirmation of Issuer Warrant Transaction for 2012 Notes, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc. (incorporated herein by reference to Exhibit 10.4 to Form 8-K filed on December 12, 2007) 10.54 Amendment to Confirmation of Issuer Warrant Transaction (2012), dated as of December 17, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc. (incorporated herein by reference to Exhibit 10.6 to Form 8-K filed on December 17, 2007) 10.55 Confirmation of Convertible Bond Hedge Transaction for 2011 Notes, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.5 to Form 8-K filed on December 12, 2007) 10.56 Confirmation of Convertible Bond Hedge Transaction for 2012 Notes, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.6 to Form 8-K filed on December 12, 2007) 10.57 Confirmation of Convertible Bond Hedge Transaction for 2011 Notes, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc. (incorporated herein by reference to Exhibit 10.7 to Form 8-K filed on December 12, 2007) 10.58 Confirmation of Convertible Bond Hedge Transaction for 2012 Notes, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Lehman Brothers OTC Derivatives Inc. (incorporated herein by reference to Exhibit 10.8 to Form 8-K filed on December 12, 2007) 10.59 Share Lending Agreement, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.9 to Form 8-K filed on December 12, 2007) 10.60 Amendment No. 1 to Share Lending Agreement dated as of December 18, 2007, between The Great Atlantic & Pacific Tea Company, Inc. and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on December 17, 2007) 10.61 Share Lending Agreement, dated December 12, 2007, by and between The Great Atlantic & Pacific Tea Company, Inc., Lehman Brothers International (Europe) Limited and Lehman Brothers Inc. (incorporated herein by reference to Exhibit 10.10 to Form 8-K filed on December 12, 2007) 10.62 Amendment No. 1 to Share Lending Agreement dated as of December 18, 2007, among The Great Atlantic & Pacific Tea Company, Inc. and Lehman Brothers International (Europe) Limited, as borrower, and Lehman Brothers Inc., as
90 borrowing agent (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on December 17, 2007) 16 Letter on Change in Certifying Accountant (incorporated herein by reference to Forms 8-K filed on September 18, 2002 and September 24, 2002, and Form 8-K/A filed on September 24, 2002) 18 Preferability Letter Issued by PricewaterhouseCoopers LLP (incorporated herein by reference to Exhibit 18 to Form 10-Q filed on July 29, 2004) 23 Consent of Independent Registered Public Accounting Firm (incorporated herein by reference to Exhibit 23.1 to Form 10-K filed on April 25, 2007) 23.1 Consent of Independent Auditors from Ernst & Young LLP (incorporated herein by reference to Exhibit 23.2 to Form 10-K filed on April 25, 2007) 23.2 Consent of Independent Registered Public Accounting Firm (incorporated herein by reference to Exhibit 23.1 to Form 10-K filed on August 24, 2007) 23.3 Consent of Independent Auditors from Ernst & Young LLP (incorporated herein by reference to Exhibit 23.2 to Form 10-K filed on August 24, 2007) 23.4 Consent of Independent Registered Public Accounting Firm (incorporated herein by reference to Exhibit 23.1 to Form 10-K filed on October 24, 2007) 23.5 Consent of Independent Auditors from Ernst & Young LLP (incorporated herein by reference to Exhibit 23.2 to Form 10-K filed on October 24, 2007) 31.1* Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Revised February 24, 2007 Consolidated Financial Statements (incorporated herein by reference to Exhibit 99.1 to Form 8-K filed on August 24, 2007) 99.2 Revised February 24, 2007 Consolidated Financial Statements (incorporated herein by reference to Exhibit 99.1 to Form 8-K filed on October 24, 2007)
91 99.3 Metro, Inc. September 30, 2006 Consolidated Financial Statements (incorporated herein by reference to Exhibit 99.2 to Form 10-K filed on April 25, 2007)
* Filed with this 10-Q 92 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. SIGNATURES Pursuant to the requirements 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. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. Dated: January 8, 2008 By: /s/ Melissa E. Sungela ----------------------------------------------- Melissa E. Sungela, Vice President, Corporate Controller (Chief Accounting Officer) 93 Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER SECTION 302 CERTIFICATION I, Eric Claus, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic & Pacific Tea Company, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Eric Claus Date: January 8, 2008 - ----------------------- Eric Claus President and Chief Executive Officer 94 Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER SECTION 302 CERTIFICATION I, Brenda M. Galgano, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic & Pacific Tea Company, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Brenda M. Galgano Date: January 8, 2008 - ----------------------- Brenda M. Galgano Senior Vice President, Chief Financial Officer 95 Exhibit 32 CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SS. 1350) The undersigned, Eric Claus, President and Chief Executive Officer of The Great Atlantic & Pacific Tea Company, Inc. ("Company"), and Brenda M. Galgano, Senior Vice President, Chief Financial Officer of the Company, each hereby certifies that (1) the Quarterly Report of the Company on Form 10-Q for the period ended December 1, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Dated: January 8, 2008 /s/ Eric Claus ------------------------ Eric Claus President and Chief Executive Officer Dated: January 8, 2008 /s/ Brenda M. Galgano ------------------------ Brenda M. Galgano Senior Vice President, Chief Financial Officer 96 EX-10 2 creditagreement.txt EXHIBIT 10.45 - CREDIT AGREEMENT ================================================================================ Exhibit 10.45 AMENDED AND RESTATED CREDIT AGREEMENT dated as of December 27, 2007 among THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., and The Other Borrowers Party Hereto, as Borrowers and The Lenders Party Hereto, and BANK OF AMERICA, N.A., as Administrative Agent and Collateral Agent and JPMORGAN CHASE BANK, N.A. WELLS FARGO RETAIL FINANCE LLC As Co-Syndication Agents and THE CIT GROUP/BUSINESS CREDIT, INC. as Documentation Agent and BANC OF AMERICA SECURITIES LLC JPMORGAN CHASE BANK, N.A. as Co-Lead Arrangers ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I Definitions.........................................................6 SECTION 1.01 Defined Terms.................................................6 SECTION 1.02 Classification of Loans and Borrowings.......................48 SECTION 1.03 Terms Generally..............................................48 SECTION 1.04 Accounting Terms; GAAP.......................................49 SECTION 1.05 Borrowing Base Adjustments...................................49 SECTION 1.06 Letter of Credit Amounts.....................................50 ARTICLE II The Credits.......................................................50 SECTION 2.01 Loans; Mandatory Advances of Tranche A-1 Loans ..............50 SECTION 2.02 Increase in Tranche A Commitments............................51 SECTION 2.03 Loans and Borrowings.........................................53 SECTION 2.04 Requests for Borrowings......................................54 SECTION 2.05 Swingline Loans..............................................55 SECTION 2.06 Letters of Credit............................................55 SECTION 2.07 Funding of Borrowings........................................60 SECTION 2.08 Interest Elections...........................................61 SECTION 2.09 Termination or Reduction of Commitments......................62 SECTION 2.10 Repayment of Loans; Evidence of Debt.........................64 SECTION 2.11 Prepayment of Loans..........................................65 SECTION 2.12 Fees ........................................................69 SECTION 2.13 Interest.....................................................70 SECTION 2.14 Alternate Rate of Interest...................................71 SECTION 2.15 Increased Costs..............................................71 SECTION 2.16 Break Funding Payments.......................................72 SECTION 2.17 Taxes........................................................73 SECTION 2.18 Payments Generally; Pro Rata Treatment; Sharing of Setoffs...75 SECTION 2.19 Mitigation Obligations; Replacement of Lenders...............76 SECTION 2.20 Designation of Company as each Borrowers' Agent..............77 ARTICLE III Representations and Warranties...................................78 SECTION 3.01 Organization; Powers.........................................78 SECTION 3.02 Authorization; Enforceability................................78 SECTION 3.03 Governmental Approvals; No Conflicts.........................78 SECTION 3.04 Financial Condition; No Material Adverse Change..............78 SECTION 3.05 Properties...................................................79 SECTION 3.06 Litigation and Environmental Matters.........................80 SECTION 3.07 Compliance with Laws and Agreements..........................80 SECTION 3.08 Investment Company Status....................................80 SECTION 3.09 Taxes .......................................................80 SECTION 3.10 Employee Benefit Plans.......................................81 SECTION 3.11 Disclosure...................................................81
i SECTION 3.12 Subsidiaries..................................................81 SECTION 3.13 Insurance.....................................................81 SECTION 3.14 Labor Matters.................................................81 SECTION 3.15 Security Documents............................................81 SECTION 3.16 Federal Reserve Regulations...................................83 ARTICLE IV Conditions........................................................83 SECTION 4.01 Restatement Effective Date....................................83 SECTION 4.02 Each Credit Event.............................................84 ARTICLE V Affirmative Covenants..............................................85 SECTION 5.01 Financial Statements and Other Information....................85 SECTION 5.02 Notices of Material Events....................................88 SECTION 5.03 Information Regarding Collateral..............................89 SECTION 5.04 Existence; Conduct of Business................................89 SECTION 5.05 Payment of Obligations........................................90 SECTION 5.06 Maintenance of Properties.....................................90 SECTION 5.07 Insurance.....................................................90 SECTION 5.08 Casualty and Condemnation.....................................91 SECTION 5.09 Books and Records; Inspection and Audit Rights................91 SECTION 5.10 Compliance with Laws..........................................92 SECTION 5.11 Use of Proceeds and Letters of Credit.........................92 SECTION 5.12 Additional Subsidiaries.......................................93 SECTION 5.13 Further Assurances............................................93 SECTION 5.14 Cash Management...............................................94 SECTION 5.15 Priority of Claims Waivers....................................97 SECTION 5.16 Benefit Plans Payments........................................97 ARTICLE VI Negative Covenants................................................97 SECTION 6.01 Indebtedness; Certain Equity Securities.......................97 SECTION 6.02 Liens ........................................................99 SECTION 6.03 Fundamental Changes..........................................100 SECTION 6.04 Investments, Loans, Advances, Guarantees and Acquisitions....101 SECTION 6.05 Asset Sales..................................................102 SECTION 6.06 Sale and Leaseback Transactions..............................103 SECTION 6.07 Hedging Agreements...........................................103 SECTION 6.08 Restricted Payments; Certain Payments of Indebtedness........103 SECTION 6.09 Transactions with Affiliates.................................105 SECTION 6.10 Restrictive Agreements.......................................105 SECTION 6.11 Amendment of Material Documents..............................105 SECTION 6.12 Minimum Excess Availability..................................105 SECTION 6.13 Limitation on Change in Fiscal Year..........................105 ARTICLE VII Events of Default...............................................106 SECTION 7.01 Events of Default............................................106 SECTION 7.02 Remedies Upon Event of Default...............................108 SECTION 7.03 Application of Funds.........................................109
ii ARTICLE VIII The Agents.....................................................111 SECTION 8.01 Appointment and Administration by Administrative Agent.......111 SECTION 8.02 Appointment of Collateral Agent..............................112 SECTION 8.03 Agreement of Applicable Lenders..............................112 SECTION 8.04 Liability of Agents..........................................112 SECTION 8.05 Notice of Default............................................113 SECTION 8.06 Credit Decisions.............................................114 SECTION 8.07 Reimbursement and Indemnification............................114 SECTION 8.08 Rights of Agents.............................................114 SECTION 8.09 Notice of Transfer...........................................115 SECTION 8.10 Successor Agents.............................................115 SECTION 8.11 Relation Among the Lenders...................................115 SECTION 8.12 Reports and Financial Statements.............................115 SECTION 8.13 Agency for Perfection........................................116 SECTION 8.14 Delinquent Lender............................................117 SECTION 8.15 Collateral and Guaranty Matters..............................117 SECTION 8.16 Syndication Agent; Documentation Agent and Lead Arranger.....118 ARTICLE IX Miscellaneous....................................................118 SECTION 9.01 Notices .....................................................118 SECTION 9.02 Waivers; Amendments..........................................120 SECTION 9.03 Expenses; Indemnity; Damage Waiver...........................122 SECTION 9.04 Successors and Assigns.......................................123 SECTION 9.05 Survival.....................................................128 SECTION 9.06 Counterparts; Integration; Effectiveness.....................128 SECTION 9.07 Severability.................................................128 SECTION 9.08 Right of Setoff..............................................129 SECTION 9.09 GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS...129 SECTION 9.10 WAIVER OF JURY TRIAL.........................................130 SECTION 9.11 Headings.....................................................130 SECTION 9.12 Confidentiality..............................................130 SECTION 9.13 Interest Rate Limitation.....................................131 SECTION 9.14 Patriot Act..................................................131 SECTION 9.15 Foreign Asset Control Regulations............................131 SECTION 9.16 Additional Waivers...........................................132 SECTION 9.17 No Advisory or Fiduciary Responsibility......................133 SECTION 9.18 Press Releases...............................................134 SECTION 9.19 Existing Credit Agreement Amended and Restated...............134
iii SCHEDULES: Schedule A -- Priming Jurisdictions Schedule B -- Distribution Centers Schedule C -- Financial and Collateral Reports Schedule 1.01(A) -- Existing Letters of Credit Schedule 1.01(B) -- Title Policy Endorsements Schedule 1.01(C) Principal Properties Schedule 1.01(D) Immaterial Subsidiaries Schedule 2.01 -- Lenders and Commitments Schedule 3.01 Subsidiaries not in Good Standing Schedule 3.06 -- Disclosed Matters Schedule 3.12 -- Subsidiaries Schedule 3.13 -- Insurance Schedule 3.15(b) -- UCC Filings Schedule 3.15(c) -- Intellectual Property Filings Schedule 5.01 Internet Addresses Schedule 5.14(a) -- DDA Accounts Schedule 5.14(b) -- Credit Card Arrangements Schedule 5.14(c) -- Third Party Insurance Payors Schedule 5.14(d)(iii) -- Blocked Accounts Schedule 5.14(i) -- Disbursement Accounts Schedule 6.01 -- Existing Indebtedness Schedule 6.02 -- Existing Liens Schedule 6.04 -- Existing Investments Schedule 6.10 -- Existing Restrictions
EXHIBITS: Exhibit A -- Form of Assignment and Acceptance Exhibit B -- Form of Borrowing Base Certificate Exhibit C -- Form of Guaranty Exhibit D -- Form of Indemnity, Subrogation and Contribution Agreement Exhibit E -- Form of Perfection Certificate Exhibit F -- Form of Pledge Agreement Exhibit G -- Form of Security Agreement Exhibit H -- Form of Additional Commitment Lender Joinder Agreement Exhibit I -- Form of Opinion General Counsel of the Loan Parties Exhibit J -- Form of Opinion of Cahill Gordon & Reindel LLP Exhibit K -- Form of Credit Card Notification Exhibit L -- Form of Insurance Provider Notification Exhibit M -- Form of Blocked Account Agreement Exhibit N -- Form of Coinstar Notification Exhibit O -- Form of DDA Notification Exhibit P-1 -- Form of Priority of Claims Waiver (Landlord) Exhibit P-2 Form of Priority Claims Waiver (Bailee) Exhibit Q-1 Form of Mortgage
iv Exhibit Q-2 Form of Mortgage (Principal Properties) Exhibit R Form of New Borrower Joinder Agreement
v AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") dated as of December 27, 2007, among THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., a Maryland corporation; the other BORROWERS party hereto, the LENDERS party hereto, and BANK OF AMERICA, N.A., a national banking association, as Administrative Agent and Collateral Agent. W I T N E S S E T H WHEREAS, the Borrowers have entered into a Credit Agreement dated as of December 3, 2007 with Bank of America, N.A., as Administrative Agent and Collateral Agent for the Lenders party thereto and such Lenders (as amended and in effect, the "EXISTING CREDIT AGREEMENT"); and WHEREAS, the Borrowers, the Agent and the Lenders desire to amend and restate the Existing Credit Agreement as set forth herein. NOW, THEREFORE, the parties hereto agree that the Existing Credit Agreement shall be amended and restated in its entirety to read as follows: ARTICLE I Definitions SECTION 1.01 Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Act" has the meaning set forth in Section 9.14. "Additional Availability Amount" shall mean the sum of (a) the product of (i) 15% (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (ii) the Appraised Value of all Eligible Real Estate (other than Eligible Real Estate consisting of the Principal Properties), plus (b) the product of (i) 15% (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (ii) the Appraised Value of all Principal Properties; plus (c) during the period commencing on the Restatement Effective Date and ending on and including November 30, 2009, the lesser of 6 (x) the Term A-2 Leasehold Cap and (y) the product of (i) the Leasehold Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (ii) the Appraised Value of all Eligible Leaseholds. "Additional Commitment Lender" has the meaning set forth in Section 2.02(a). "Adjusted LIBO Rate" means, for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Agent" means Bank of America, N.A., in its capacity as administrative agent for the Lenders hereunder, together with its successors and assigns. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affected LIBOR Loans" has the meaning set forth in Section 2.11(k). "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Agent" means each of the Administrative Agent and the Collateral Agent. "Agent's Account" has the meaning set forth in Section 5.14(f). "Agreement" has the meaning set forth in the preamble hereto. "Aggregate Commitments" means the sum of the Aggregate Tranche A Commitments of all the Tranche A Lenders, the Aggregate Tranche A-1 Commitments of all the Tranche A-1 Lenders, the Aggregate Term Outstandings of all Term Lenders, and the Aggregate Term A-2 Outstandings of all Term A-2 Lenders. As of the Restatement Effective Date, the Aggregate Commitments are $675,000,000. "Aggregate Revolving Commitments" means, collectively, the Aggregate Tranche A Commitments and the Aggregate Tranche A-1 Commitments. "Aggregate Term A-2 Outstandings" means, at any time, the aggregate outstanding principal balance of the Term A-2 Loans of all Term A-2 Lenders at such time. As of the Restatement Effective Date, the Aggregate Term A-2 Outstandings are $50,000,000. "Aggregate Term Outstandings" means, at any time, the aggregate outstanding principal balance of the Term Loans of all Term Lenders at such time. As of the Restatement Effective Date, the Aggregate Term Outstandings are $82,900,000. 7 "Aggregate Tranche A Commitments" means, at any time, the sum of the Tranche A Commitments at such time. As of the Restatement Effective Date, the Aggregate Tranche A Commitments are $502,100,000. "Aggregate Tranche A-1 Commitments" means, at any time, the sum of the Tranche A-1 Commitments at such time. As of the Restatement Effective Date, the Aggregate Tranche A-1 Commitments are $40,000,000. "Alternate Base Rate" means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus one-half of one percent (0.50%). Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Law" means as to any Person, all statutes, rules, regulations, orders, or other requirements having the force of law and applicable to such Person, and all court orders and injunctions, and/or similar rulings and applicable to such Person, in each case of or by any Governmental Authority, or court, or tribunal which has jurisdiction over such Person, or any property of such Person. "Applicable Margin" means, for any Interest Payment Date with respect to a particular Type of Loan, (a) from and after the Restatement Effective Date through March 31, 2008, the percentages set forth in Level 3 of the applicable pricing grid below; and (b) thereafter, the applicable rate per annum set forth in the applicable pricing grid below based upon the Average Daily Excess Availability during the immediately preceding fiscal quarter: (a) If Eligible Leaseholds are included in the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base:
ABR Applicable Applicable LIBOR Margin Margin ABR Applicable Applicable ABR (Tranche (Tranche Applicable LIBOR LIBOR Applicable Tranche Tranche Average A and A and Margin Margin Margin Margin A A-1 Daily Excess Term Term (Tranche (Tranche (Term A-2 (Term A-2 Unused Unused Level Availability Loan) Loan) A-1) A-1) Loan) Loan) Fee Fee - ------ ------------- ---------- ---------- ---------- ---------- ---------- ---------- ------- ------- 1 Greater than or equal to $400,000,000 0.75% 2.00% 1.75% 3.25% 5.25% 3.75% 0.25% 0.50% 2 Greater than or equal to $200,000,000 but less than $400,000,000 0.75% 2.25% 2.00% 3.50% 5.25% 3.75% 0.25% 0.50% 3 Less than $200,000,000 1.00% 2.50% 2.25% 3.75% 5.25% 3.75% 0.25% 0.375%
8 (b) If Eligible Leaseholds are not included in the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base:
ABR Applicable Applicable LIBOR Margin Margin ABR Applicable Applicable ABR (Tranche (Tranche Applicable LIBOR LIBOR Applicable Tranche Tranche Average A and A and Margin Margin Margin Margin A A-1 Daily Excess Term Term (Tranche (Tranche (Term A-2 (Term A-2 Unused Unused Level Availability Loan) Loan) A-1) A-1) Loan) Loan) Fee Fee - ------ ------------- ---------- ---------- ---------- ---------- ---------- ---------- ------- ------- 1 Greater than or equal to $400,000,000 0.50% 1.75% 1.75% 3.25% 5.25% 3.75% 0.25% 0.50% 2 Greater than or equal to $200,000,000 but less than $400,000,000 0.50% 2.00% 2.00% 3.50% 5.25% 3.75% 0.25% 0.50% 3 Less than $200,000,000 0.75% 2.25% 2.25% 3.75% 5.25% 3.75% 0.25% 0.375%
Except as provided in the following sentence, the Applicable Margin shall be adjusted quarterly as of the first day of each fiscal quarter of the Company commencing April 1, 2008, based upon the Average Daily Excess Availability for the immediately preceding fiscal quarter. Upon the occurrence and during the continuance of an Event of Default, at the election of the Required Lenders, interest shall be determined in the manner set forth in Section 2.13(c). "Applicable Percentage" means (a) with respect to each Credit Extension under the Tranche A Commitments, the Tranche A Applicable Percentage, (b) with respect to each Credit Extension under the Tranche A-1 Commitments, the Tranche A-1 Applicable Percentage, (c) with respect to the Term Loan, the Term Applicable Percentage (d) with respect to the Term A-2 Loan, the Term A-2 Applicable Percentage and (e) with respect to each Lender, that percentage of the Aggregate Commitments of all Lenders hereunder to make Credit Extensions to the Borrowers, in each case as the context provides. If any of the Tranche A Commitments or Tranche A-1 Commitments have terminated or expired, the Applicable Percentage with respect to such Commitments shall be determined based upon such Commitments as most recently in effect. "Appraised Value" means (a) with respect to the Borrowers' Eligible Inventory, the net appraised orderly liquidation value (which is expressed as a percentage of Cost) of the Borrowers' Eligible Inventory as set forth in the Borrowers' inventory stock ledger or (b) with respect to the Borrowers' Scripts, the orderly liquidation value of the Borrowers' Scripts as set forth in the most recent appraisal of the Borrowers' Scripts conducted by an 9 independent appraiser reasonably satisfactory to the Administrative Agent or (c) with respect to the Borrowers' Eligible Real Estate, the fair market value of the Borrowers' Eligible Real Estate as set forth in the most recent appraisal of the Borrowers' Eligible Real Estate conducted by an independent appraiser reasonably satisfactory to the Administrative Agent, which appraisal shall assume, among other things, a marketing time of not greater than twelve (12) months or less than three (3) months or (d) with respect to the Borrowers' Eligible Leaseholds, the forced liquidation value of the Borrowers' Eligible Leaseholds as set forth in the most recent appraisal of the Borrowers' Eligible Leaseholds conducted by an independent appraiser reasonably satisfactory to the Administrative Agent, which appraisal shall assume, among other things, a marketing time of not greater than twelve (12) months or less than three (3) months; provided that the Appraised Value of Eligible Real Estate and Eligible Leaseholds shall in no event exceed the maximum amount of the Obligations at any time specified to be secured by a Mortgage thereon. "Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. "Asset Swap" means any transaction or series of related transactions pursuant to which the Borrowers or one or more of the Subsidiaries shall exchange, with a Person not a Subsidiary, one or more stores or facilities owned by them for one or more stores or facilities owned by third parties where no more than 10% of the aggregate consideration delivered by the Borrowers and the Subsidiaries shall consist of consideration other than the stores and facilities being so exchanged. "Assignee Group" means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "Availability Period" means the period from and including the Effective Date to the earliest of (a) the Maturity Date, (b) the date of termination of the Aggregate Revolving Commitments pursuant to Section 7.02, and (c) the date of termination of the Aggregate Revolving Commitments pursuant to Section 2.09. "Availability Reserves" means such reserves as the Administrative Agent from time to time determines in the Administrative Agent's reasonable credit judgment as being appropriate (a) to reflect the impediments to the Agents' ability to realize upon the Collateral or (b) to reflect costs, expenses and other amounts that the Agents may incur or be required to pay to realize upon the Collateral. Availability Reserves may include (but are not limited to) reserves based on (i) the aggregate dollar amount represented by gift certificates then outstanding and entitling the holder thereof to use all or a portion thereof to pay all or a portion of the purchase price for any Inventory as of such day, (ii) the Reserve for Leasehold Obligations, (iii) the PACA/PASA Liability Reserve (to the extent Inventory subject to PACA or PASA is included in the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base), (iv) the maximum aggregate amount (giving effect to any netting agreements) that the Company and its Subsidiaries would be required to pay under any Hedging Agreements secured by the Security Documents the obligations under which constitute Obligations if such Hedging Agreements were terminated, 10 determined as of the most recent date for which financial statements have been delivered pursuant to Section 5.01(a), (b) or (c), (v) outstanding Taxes and other governmental charges, including, ad valorem, real estate, personal property, sales, and other Taxes (in each case to the extent such Taxes or other governmental charges are due and payable (except if being contested in good faith in appropriate proceedings and for which adequate reserves have been taken) and entitle any Person to a Lien on any Collateral that has priority over, or is otherwise superior in right to, the Lien in such Collateral Agent for the benefit of the Secured Parties), (vi) Cash Management Reserves, (vii) Bank Products Reserves, and (viii) Realty Reserves. Provided no Default or Event of Default has occurred and is continuing, the Administrative Agent shall give the Borrowers ten (10) days prior notice of the imposition of any Availability Reserve not described in clauses (i) through (viii) above. "Average Daily Excess Availability" means, for any period, the average daily Excess Availability for such period. "Bank of America" means Bank of America, N.A. and its successors. "Bank Products" means any services or facilities provided to any Loan Party by any Lender or any of its Affiliates (but excluding Cash Management Services) on account of, without limitation, (a) Hedging Agreements, (b) purchase cards, and (c) leasing. "Bank Product Reserves" means such reserves as the Administrative Agent from time to time determine in its discretion as being appropriate to reflect the liabilities and obligations of the Loan Parties with respect to Bank Products then provided or outstanding. "Blocked Account Agreement" means with respect to an account established by a Loan Party, an agreement, in form and substance satisfactory to the Collateral Agent, establishing Control (as defined in the Security Agreement) of such account by the Collateral Agent and whereby the bank maintaining such account agrees, upon the occurrence and during the continuance of a Triggering Event, to comply only with the instructions originated by the Collateral Agent without the further consent of any Loan Party. "Blocked Accounts" has the meaning set forth in Section 5.14(d). "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrowers" means the Company, Compass Foods, Inc., Shopwell, Inc., Waldbaum, Inc., Super Fresh Food Markets, Inc., Super Market Service Corp., Super Fresh/Sav-A-Center, Inc., Hopelawn Property I, Inc., Lo-Lo Discount Stores, Inc., Food Basics, Inc., Tradewell Foods of Conn., Inc., Pathmark Stores, Inc., APW Supermarkets, Inc., McLean Avenue Plaza Corp., Superplus Food Warehouse, Inc., Bridge Stuart Inc., East Brunswick Stuart LLC, Plainbridge LLC, Upper Darby Stuart, LLC, Bergen Street Pathmark, Inc., Lancaster Pike Stuart, LLC, AAL Realty Corp., and MacDade Boulevard Stuart, LLC. "Borrowing" means (i) a group of Loans of the same Type, made, converted or continued on the same date and, in the case of LIBOR Loans, as to which a single Interest Period is in effect or (ii) a Swingline Loan. 11 "Borrowing Base Certificate" means a certificate substantially in the form of Exhibit B hereto (with such changes therein as may be required by the Administrative Agent to reflect the components of and reserves against the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base as provided for hereunder from time to time), executed and certified as accurate and complete by a Financial Officer of the Company which shall include appropriate exhibits, schedules, supporting documentation, and additional reports (i) as outlined in Schedule 1 to Exhibit B and (ii) as reasonably requested by the Administrative Agent. "Borrowing Request" means a request by a Borrower for a Borrowing in accordance with Section 2.04. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in Boston, Massachusetts or New York, New York are authorized or required by law to remain closed; provided that, when used in connection with a LIBOR Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as liabilities on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Cash and Cash Equivalents" means: (a) Dollars; (b) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality of the United States of America (provided that the full faith and credit of the United States of America is pledged in support of those securities) having maturities of not more than one year from the date of acquisition; (c) obligations issued or fully guaranteed by any state of the United States of America or any political subdivision of any such state or province or any instrumentality thereof maturing within one year from the date of acquisition and having a rating of either "A" or better from S&P, A2 or better from Moody's; (d) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, banker's acceptances with maturities not exceeding one year and overnight bank deposits, in each case, with any Lender or with any United States commercial bank having capital and surplus in excess of $300,000,000; (e) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2), (3), and (4) above entered into with any financial institution meeting the qualifications specified in clause (4) above; (f) commercial paper rated at least "P-2" by Moody's, at least "A-2" by S&P and in each case maturing within one year after the date of acquisition; and 12 (g) money market funds that are SEC.270.2a-7 compliant or enhanced cash funds having a weighted average maturity of not greater than 120 days. "Cash Receipts" has the meaning set forth in Section 5.14(f). "Cash Management Reserves" means such reserves as the Administrative Agent, from time to time, determines in its discretion as being appropriate to reflect the reasonably anticipated liabilities and obligations of the Loan Parties with respect to Cash Management Services then provided or outstanding. "Cash Management Services" means any one or more of the following types or services or facilities provided to any Loan Party by any Lender or any of its Affiliates (a) ACH transactions, (b) cash management services, including, without limitation, controlled disbursement services, treasury, depository, overdraft, and electronic funds transfer services, (c) foreign exchange facilities, and (d) credit or debit cards. "Change in Control" means, at any time, (a) the board of directors of the Company shall cease to consist of a majority of the Continuing Directors, or (b) any person or group (within the meaning of Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934, as amended) other than a Permitted Holder shall acquire a majority of the voting power represented by the Company's outstanding capital stock entitled to vote in the election of directors of the Company. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's or such Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Charges" has the meaning set forth in Section 9.13. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Coinstar Advance Rate" means 85%. "Coinstar Installation Agreements" means that certain Coinstar Installation Agreement, dated April 29, 2002 (as the same may be amended, supplemented and otherwise modified from time to time with the prior written consent of the Administrative Agent), between the Company and Coinstar, Inc., together with each other installation agreement between the Company (or any of its Subsidiaries) and Coinstar, Inc. in form and substance satisfactory to the Administrative Agent. "Coinstar Notification" has the meaning set forth in Section 5.14(d). "Coinstar Receivable" means each "Account" (as defined in the UCC ) together with all income, payments and proceeds thereof due and owing to the Company (or any of its Subsidiaries) by Coinstar, Inc., pursuant to any contract between the Company (or any of its 13 Subsidiaries) and Coinstar, Inc., including but not limited to the Coinstar Installation Agreements. "Collateral" means any and all "Collateral" or "Mortgaged Property", as defined in any applicable Security Document. "Collateral Agent" means Bank of America, N.A., in its capacity as collateral agent for the Secured Parties under the Security Documents. "Commercial Letter of Credit" means any letter of credit or similar instrument (including, without limitation, banker's acceptances) issued for the purpose of providing credit support in connection with the purchase of any materials, goods or services by a Borrower in the ordinary course of business of such Borrower. "Commitment" means, with respect to each Lender, its Tranche A Commitment, its Tranche A-1 Commitment, its Term Commitment and its Term A-2 Commitment. "Commitment Increase" has the meaning set forth in Section 2.02(a). "Commitment Increase Date" has the meaning set forth in Section 2.02(c). "Company" means The Great Atlantic & Pacific Tea Company, Inc., a Maryland corporation. "Continuing Directors" means directors of the Company who are in office on the Effective Date and each other director, whose nomination for election to the board of directors of the Company is recommended by a majority of the then Continuing Directors or a Permitted Holder. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Convertible Notes" means collectively, the Company's Convertible Senior Notes issued on December 18, 2007 in the aggregate principal amount of $420,000,000 to refinance the Bridge Financing Facility (as defined in the Existing Credit Agreement). The Convertible Notes shall be deemed Indebtedness under this Agreement (and not Equity Interests) unless and until such securities are converted into or exchanged for shares of capital stock of the Company. "Cost" means the cost of purchases as reported on the Borrowers' stock ledger, based upon the Borrowers' accounting practices, which practices are in effect on the Effective Date or thereafter consented to by the Administrative Agent. "Cost" does not include inventory capitalization costs or other non-purchase price charges (such as deferred freight) used in the Borrowers' calculation of cost of goods sold. "Credit Card Notification" has the meaning set forth in Section 5.14(d). 14 "Credit Card Receivables" means each "Account" (as defined in the UCC) together with all income, payments and proceeds thereof, owed by a major credit or debit card issuer (including, but not limited to, Visa, Mastercard and American Express and such other issuers approved by the Administrative Agent) to a Loan Party resulting from charges by a customer of a Loan Party on credit or debit cards issued by such issuer in connection with the sale of goods by a Loan Party, or services performed by a Loan Party, in each case in the ordinary course of its business. "Credit Extension" mean (a) a Borrowing or (b) an L/C Credit Extension. "Credit Party" or "Credit Parties" means (a) individually, (i) each Lender and its Affiliates, (ii) each Agent, (iii) the Issuing Bank, (iv) the Lead Arranger, (v) each beneficiary of each indemnification obligation undertaken by any Loan Party under any Loan Document, (vi) any other Person to whom Obligations under this Agreement and other Loan Documents are owing, and (vii) the successors and assigns of each of the foregoing, and (b) collectively, all of the foregoing. "Currency and Commodity Hedging Agreement" means any foreign currency exchange agreement, commodity price protection agreement or other currency exchange rate or commodity price hedging arrangement. "DDAs" means any checking, savings or other demand deposit account maintained by a Loan Party. "DDA Notification" has the meaning set forth in Section 5.14(d). "Declining Lender" has the meaning set forth in Section 2.11(p). "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Delinquent Lender" has the meaning set forth in Section 8.14(a). "Disbursement Accounts" has the meaning set forth in Section 5.14(i). "Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06. "Distribution Center Shrink Percentage" shall be applicable to Inventory located at the Distribution Centers and shall mean, at the end of each fiscal quarter, average shrink expressed in terms of cost value resulting from the physical inventories performed at each Distribution Center during the two (2) fiscal quarters ending on such date, expressed as a percentage of the cost value of Inventory. "Distribution Center Shrink Reserve" shall be equal to the product of (a) the excess of the Distribution Center Shrink Percentage over 1%, multiplied by (b) Inventory at the Distribution Centers as of the date of the most recent Borrowing Base Certificate. 15 "Distribution Centers" means (i) the warehouse facilities operated by the Loan Parties on the date hereof as set forth in Schedule B and (ii) any warehouse facility located in the United States and operated by Loan Parties that is designated as a Distribution Center by (a) giving 30 days prior written notice to the Administrative Agent and (b) effecting the execution, filing and recordation of such financing statements, the delivery of such Priority of Claims Waivers as required hereby and taking any and all such further actions as may be reasonably requested by the Administrative Agent. "Dollars" and the symbol "$" mean the lawful currency of the United States. "Effective Date" means December 3, 2007. "Eligible Assignee" means (a) a Lender or any Affiliate of a Lender; (b) an Approved Fund; and (c) any other Person having a combined capital and surplus in excess of $500,000,000 approved by (i) the Administrative Agent, the Issuing Bank and the Swingline Lender, and (ii) unless an Event of Default has occurred and is continuing, the Company (each such approval under clauses (i) and (ii) not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, "Eligible Assignee" shall not include a natural person or a Loan Party or any of the Loan Parties' Affiliates or Subsidiaries. "Eligible Coinstar Receivables" means, at the time of any determination thereof, each Coinstar Receivable that satisfies the following criteria at the time of creation and continues to meet the same at the time of such determination: such Coinstar Receivable (i) has been earned and represents the bona fide amounts due to the Company or another Loan Party from Coinstar, Inc. and in each case originated in the ordinary course of business of the Company or another Loan Party and (ii) is not ineligible for inclusion in the calculation of the Tranche A Borrowing Base or Tranche A-1 Borrowing Base pursuant to any of clauses (a) through (i) below. Without limiting the foregoing, to qualify as Eligible Coinstar Receivable, an Account shall indicate no Person other than the Company or another Loan Party (other than an Excluded Subsidiary) as payee or remittance party. In determining the amount to be so included, the face amount of an Account shall be reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims, credits or credits pending, promotional program allowances, price adjustments, finance charges or other allowances (including any amount that the Company or another Loan Party, as applicable, may be obligated to rebate to a customer) and (ii) the aggregate amount of all cash received in respect of such Account but not yet applied by the Company or another Loan Party to reduce the amount of such Coinstar Receivable. Any Coinstar Receivables meeting the foregoing criteria shall be deemed Eligible Coinstar Receivables but only as long as such Coinstar Receivable is not included in any material respect within any of the following categories, in which case such Coinstar Receivable shall not constitute an Eligible Conistar Receivable: (a) such Coinstar Receivable is not owned by the Company or another Loan Party, (other than an Excluded Subsidiary) and the Company or another Loan Party (other than an Excluded Subsidiary) does not have good or marketable title to such receivable free and clear of any Lien of any Person other than the Collateral Agent; 16 (b) such Coinstar Receivable does not constitute an "Account" (as defined in the UCC) or such receivables have been outstanding for more than ten (10) Business Days; (c) either the Company (or the applicable Loan Party) or Coinstar, Inc. is the subject of any bankruptcy or insolvency proceedings; (d) such Coinstar Receivable is not a valid, legally enforceable obligation of Coinstar, Inc.; (e) such Coinstar Receivable is not subject to a properly perfected first priority security interest in favor of the Collateral Agent, or is not in form and substance reasonably satisfactory to the Administrative Agent, or is subject to any Lien whatsoever (other than the Lien of the Collateral Agent); (f) such Coinstar Receivable otherwise does not conform to all representations, warranties, covenants and agreements in the Loan Documents relating to receivables; (g) Coinstar, Inc. has not received the Coinstar Notification in accordance with the provisions of Section 5.14(d); (h) such Coinstar Receivable does not meet such other usual and customary eligibility criteria for receivables as the Administrative Agent may determine from time to time in its commercially reasonable discretion; or (i) such Coinstar Receivable is evidenced by "chattel paper" or an "instrument" of any kind unless such "chattel paper" or "instrument" is in the possession of the Collateral Agent, and to the extent necessary or appropriate, endorsed to the Collateral Agent. "Eligible Credit Card Accounts Receivable" means at the time of any determination thereof, each Credit Card Receivable that satisfies the following criteria at the time of creation and continues to meet the same at the time of such determination: such Credit Card Receivable (i) has been earned and represents the bona fide amounts due to the Company or another Loan Party from a credit card payment processor and/or credit card issuer, and in each case originated in the ordinary course of business of the Company and the related Loan Party and (ii) is not ineligible for inclusion in the calculation of the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base pursuant to any of clauses (a) through (j) below. Without limiting the foregoing, to qualify as an Eligible Credit Card Accounts Receivable, an Account shall indicate no Person other than the Company or the related Loan Party (other than an Excluded Subsidiary) as payee or remittance party. In determining the amount to be so included, the face amount of an Account shall be reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims, credits or credits pending, promotional program allowances, price adjustments, finance charges or other allowances (including any amount that the Company or the related Loan Party, as applicable, may be obligated to rebate to a customer, a credit card payment processor, or credit card issuer pursuant to the terms of any agreement or understanding (written or oral)) and (ii) the aggregate amount of all cash received in respect of such Account but not yet applied by the Company or the related Loan Party to reduce the amount of such Credit Card Receivable. Any Credit Card Receivables meeting the foregoing criteria shall be deemed Eligible Credit Card Receivables but only as long as such 17 Credit Card Receivable is not included in any material respect within any of the following categories, in which case such Credit Card Receivable shall not constitute an Eligible Credit Card Receivable: (a) such Credit Card Receivable is not owned by a Loan Party (other than an Excluded Subsidiary) and such Loan Party does not have good or marketable title to such Credit Card Receivable free and clear of any Lien of any Person other than the Collateral Agent; (b) such Credit Card Receivable does not constitute an "Account" (as defined in the UCC) or such Credit Card Receivable has been outstanding for more than seven (7) business days; (c) the issuer or payment processor of the applicable credit card with respect to such Credit Card Receivable is the subject of any bankruptcy or insolvency proceedings; (d) such Credit Card Receivable is not a valid, legally enforceable obligation of the applicable issuer with respect thereto; (e) such Credit Card Receivable is not subject to a properly perfected first priority security interest in favor of the Collateral Agent, or is not in form and substance reasonably satisfactory to the Administrative Agent, or is subject to any Lien whatsoever other than Permitted Encumbrances contemplated by the credit card processor agreements and for which appropriate reserves (as determined by the Administrative Agent) have not been established or maintained by the Borrowers; (f) the Credit Card Receivable does not conform to all representations, warranties or other provisions in the Loan Documents relating to Credit Card Receivables; (g) such Credit Card Receivable is owed by a Person that has not received a Credit Card Notification in accordance with the provisions of Section 5.14(d); (h) such Credit Card Receivable is subject to risk of set-off, non-collection or not being processed due to unpaid and/or accrued credit card processor fee balances, limited to the lesser of the balance of Credit Card Receivable or unpaid credit card processor fees; (i) such Credit Card Receivable is evidenced by "chattel paper" or an "instrument" of any kind unless such "chattel paper" or "instrument" is in the possession of the Collateral Agent, and to the extent necessary or appropriate, endorsed to the Collateral Agent; or (j) such Credit Card Receivable does not meet such other usual and customary eligibility criteria for Credit Card Receivables as the Administrative Agent may determine from time to time in its commercially reasonable discretion. "Eligible Inventory" means, at the time of any determination thereof the Inventory of the Company or a Loan Party at the time of such determination that is not ineligible for inclusion in the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base pursuant to any of the clauses (a) through (o) below. Without limiting the foregoing, to qualify as Eligible Inventory no Person other than the Company or a Loan Party (other than an Excluded Subsidiary) 18 shall have any direct or indirect ownership, interest or title to such Inventory and no Person other than the Company or a Loan Party (other than an Excluded Subsidiary), shall be indicated on any purchase order or invoice with respect to such Inventory as having or purporting to have an interest therein. Any Inventory meeting the foregoing criteria shall be deemed Eligible Inventory but only as long as such Inventory is not included in any material respect within any of the following categories, in which case such Inventory shall not constitute an Eligible Inventory: (a) it is located at a reclamation center of any Distribution Center or is otherwise held at any Distribution Center for return to vendor; (b) it is supplies, packaging, selling or display materials; (c) it is produce, floral, seafood, meat, bakery, dairy, deli, or fuel (provided that fuel in an aggregate amount not to exceed $1,000,000 may be deemed eligible inventory for purposes of calculating the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base); (d) it is not owned solely by the Company or any other Loan Party or is owned by an Excluded Subsidiary; (e) it is on consignment to the Company or any other Loan Party; (f) it is not located at property that is owned or leased by the Company or any other Loan Party or is in transit from vendors to such a property; provided that (I) Inventory in third party storage facilities located in jurisdictions other than Priming Jurisdictions shall, if not otherwise excluded, be included as Eligible Inventory, minus any claims or Liens, other than Permitted Encumbrances, that vendors, landlords, public warehouse operators or any third party bailee may have against such property, from time to time, and (II) Inventory located in Priming Jurisdictions shall not be included in Eligible Inventory pursuant to this paragraph (f) unless either (A) the applicable vendor, landlord, public warehouse or any third party bailee has provided to the related Loan Party a Priority of Claims Waiver in form and substance reasonably satisfactory to the Administrative Agent, or (B)(i) the Borrowers have deposited with the Collateral Agent collateral consisting of Cash and Cash Equivalents an amount equal to the Reserve for Leasehold Obligations (as applicable) with respect to such property or (ii) the Administrative Agent has established an appropriate Reserve for Leasehold Obligations, or (C) Borrowers' obligations to such vendor, landlord, public warehouse or third party bailee are supported by a standby letter of credit issued by a Lender pursuant to this Agreement in an amount at least equal to the Reserve for Leasehold Obligations; (g) it is not located in the United States of America; (h) it is not subject to a perfected first priority Lien in favor of the Collateral Agent securing the Obligations, regardless of its location, other than Permitted Encumbrances; (i) it (i) is damaged, defective, "seconds," or otherwise unmerchantable, (ii) is to be returned to the vendor, (iii) is not in good condition, (iv) does not meet all standards imposed by any Governmental Authority having regulatory authority over it, or (v) is not currently saleable in the normal course of business of the Company and the Subsidiaries; 19 (j) it is inventory located at any Distribution Center on such date that represents over 13 weeks old inventory based on date of receipt determined at an individual product level (provided that such inventory shall be eligible for purposes of calculating the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base to the extent of fifty percent (50%) of the book value thereof); (k) it is Inventory that is accounted for in both the Company's Distribution Center and Store Inventory; (l) it includes any profits or transfer price additions charged or accrued in connection with transfers of Inventory between the Company and its Subsidiaries or Affiliates; (m) it is accounted for in the Store Shrink Reserve; (n) it is accounted for in the Distribution Center Shrink Reserve; or (o) it is accounted for in the Company's reserve which adjusts Inventory valued under the Company's historical retail method of accounting to actual cost value (product mix) or adjusts Inventory for unallocated earned allowances (net costing). "Eligible Leaseholds" means any Real Estate meeting in all material respects the following criteria: (a) A Loan Party (other than an Excluded Subsidiary) is the lessee under a Lease for such Real Estate, the terms and conditions of which are reasonably satisfactory to the Administrative Agent; (b) Without limiting the provisions of clause (a), above, the Lease may be mortgaged and collaterally assigned to the Collateral Agent without the prior consent of the lessor (or if consent is required, such consent has been obtained on terms and conditions reasonably satisfactory to the Administrative Agent); (c) Unless waived by the Administrative Agent, the Lease contains customary estoppels, cure rights, and other provisions protecting a leasehold mortgagee's interests in the Lease as the Administrative Agent may determine in its commercially reasonable discretion or if not contained therein, such provisions have been included in a landlord agreement in form and substance reasonably satisfactory to the Administrative Agent. Notwithstanding the foregoing, all Leases upon which the Collateral Agent obtains a Mortgage on the Effective Date shall be deemed to have satisfied this requirement; (d) The Loan Parties shall not be in default of the terms of the Lease and no event shall have occurred, or solely with the passage of time, giving of notice or both, would permit the lessor to terminate the Lease; (e) The Collateral Agent shall have received evidence that all actions that the Collateral Agent may reasonably deem necessary or appropriate in order to create valid first and subsisting Liens (subject only to those Liens permitted by Section 6.02 hereof which have 20 priority over the Lien of the Collateral Agent by operation of Applicable Law or otherwise reasonably acceptable to the Administrative Agent) on the leasehold interest has been taken; (f) The Administrative Agent shall have received an appraisal (based upon Appraised Value) of such leasehold interest complying with the requirements of FIRREA by a third party appraiser reasonably acceptable to the Administrative Agent and otherwise in form and substance reasonably satisfactory to the Administrative Agent; and (g) The Real Estate Eligibility Requirements have been satisfied. "Eligible Real Estate" means any Real Estate meeting in all material respects the following criteria: (a) A Loan Party (other than an Excluded Subsidiary) owns such Real Estate in fee simple absolute; (b) The Administrative Agent shall have received evidence that all actions that the Administrative Agent may reasonably deem necessary or appropriate in order to create valid first and subsisting Liens (subject only to those Liens permitted by Section 6.02 hereof which have priority over the Lien of the Collateral Agent by operation of Applicable Law or otherwise reasonably acceptable to the Administrative Agent) on the property described in the Mortgages has been taken. (c) The Administrative Agent shall have received an appraisal (based upon Appraised Value) of such Real Estate complying with the requirements of FIRREA by a third party appraiser reasonably acceptable to the Administrative Agent and otherwise in form and substance reasonably satisfactory to the Administrative Agent; and (d) The Real Estate Eligibility Requirements have been satisfied. "Eligible Third Party Insurance Provider Accounts Receivable" means, at the time of any determination thereof, each third party insurance provider "Account" (as defined in the UCC) together with all income, payments and proceeds thereof, that satisfies the following criteria at the time of creation and continues to meet the same at the time of such determination: such Account (i) has been earned and submitted for reimbursement to, and represents the bona fide amounts due to the Company or other Loan Party (other than an Excluded Subsidiary) from, a third party insurance provider, in each case originated in the ordinary course of business of the Company or the related Loan Party and (ii) is not ineligible for inclusion in the calculation of the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base pursuant to any of clauses (a) through (p) below. Without limiting the foregoing, to qualify as an Eligible Third Party Insurance Provider Accounts Receivable, a third party insurance provider account receivable shall indicate no Person other than the Company or the related Loan Party (other than an Excluded Subsidiary) as payee or remittance party. In determining the amount to be so included, the face amount of such an account shall be reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims, credits or credits pending, promotional program allowances, price adjustments, finance charges or other allowances (including any amount that the Company or the 21 related Loan Party, as applicable, may be obligated to rebate to a third party insurance provider pursuant to the terms of any agreement or understanding (written or oral)) and (ii) the aggregate amount of all cash received in respect of such Account but not yet applied by the Company or the related Loan Party to reduce the amount of such Account. All third party insurance provider accounts receivable meeting the foregoing criteria shall be deemed Eligible Third Party Insurance Provider Accounts Receivable but only as long as such third party insurance provider account receivable is not included in any material respect within any of the following categories, in which case such third party insurance provider account receivable shall not constitute an Eligible Third Party Insurance Provider Accounts Receivable: (a) an invoice (in form and substance satisfactory to the Administrative Agent) with respect to such third party insurance provider accounts receivable has not been sent to the applicable account debtor; (b) such third party insurance provider accounts receivable does not constitute an "Account" (as defined in the UCC); (c) such third party insurance provider accounts receivable are not due and payable in full, or are subject to any bill and hold arrangement, or more than 90 days have elapsed since the date of the sale of goods giving rise to such third party insurance provider accounts receivable; (d) the aggregate amount of accounts due from third party insurance providers exceeds Fifteen Million Dollars ($15,000,000) for which more than 60 days but not more than 90 days have elapsed since the date of the sale of goods or rendering of services giving rise to such third party insurance provider accounts receivable; (e) such third party insurance provider accounts receivable did not arise from the provision of goods authorized by a physician's prescription, and such goods have been performed or provided; (f) such third party insurance provider accounts receivable arose from the provision of durable medical equipment; (g) such third party insurance provider accounts receivable (i) are not owned by a Loan Party and such Loan Party does not have good or marketable title to such third party insurance provider accounts receivable or (ii) are owned by an Excluded Subsidiary; (h) such third party insurance provider accounts receivable are subject to any assignment, claim, lien, or security interest, except in favor of the Administrative Agent and the Lenders; (i) such third party insurance provider accounts receivable are not subject to a properly perfected first priority security interest in favor of the Collateral Agent, or is not in form and substance reasonably satisfactory to the Administrative Agent, or is subject to any Lien whatsoever other than Permitted Encumbrances and for which appropriate reserves (as determined by the Administrative Agent) have not been established or maintained by the Borrowers; 22 (j) such third party insurance provider accounts receivable are not valid and legally enforceable obligations of the account debtor, are with recourse, or are subject to any claim for credit, defense, offset, chargeback, counterclaim or adjustment by the account debtor (other than any discount allowed for prompt payment and reconciliations in the ordinary course of business), and the assignment or pledging thereof violates any agreement to which the account debtor is subject; (k) such third party insurance provider accounts receivable did not arise in the ordinary course of business of the Company and its Subsidiaries, or a notice of the bankruptcy, insolvency, failure, or suspension or termination of business of the account debtor has been received by the Company or the related Loan Party, or the payor thereunder shall have provided written notice to anyone of a challenge or dispute of its obligations thereunder; (l) such third party insurance provider accounts receivable do not conform to all representations, warranties or other provisions of the Loan Documents relating to such third party insurance provider accounts receivable; (m) such third party insurance provider accounts receivable are obligations payable under Medicare, Medicaid or any other governmental program or the related account debtor is any unit of government; (n) such third party insurance provider accounts receivable is owed by a Person that has not received an Insurance Provider Notification in accordance with the provisions of Section 5.14(d); (o) such third party insurance provider accounts receivable do not meet other usual and customary eligibility criteria for third party insurance provider accounts receivable, including the payors thereunder, as determined by the Administrative Agent in its commercially reasonable discretion; or (p) such third party insurance provider accounts receivable is evidenced by "chattel paper" or an "instrument" of any kind unless such "chattel paper" or "instrument" is in the possession of the Collateral Agent, and to the extent necessary or appropriate, endorsed to the Collateral Agent. "Environmental Compliance Reserve" means, with respect to Eligible Real Estate and Eligible Leaseholds, any reserve which the Agents, from time to time in their discretion establish for estimable amounts that are reasonably likely to be expended by any of the Loan Parties in order for such Loan Party and its operations and property (a) to comply with any notice from a Governmental Authority asserting non-compliance with Environmental Laws, or (b) to correct any such non-compliance with Environmental Laws or to provide for any Environmental Liability. "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the pollution or protection of the environment or the preservation or reclamation of natural resources, including those relating to 23 the management, release or threatened release of any Hazardous Material, or to employee health and safety matters. "Environmental Liability" means any liability, obligation, damage, loss, claim, action, suit, judgment, order, fine, penalty, fee, expense or cost, contingent or otherwise (including any liability for costs of environmental remediation, or natural resource damages, administrative oversight costs, and indemnities), of the Company or any Subsidiary arising under any Environmental Law resulting from or based upon (a) compliance or noncompliance with any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal or presence of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract or agreement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "Equity Interests" means, as to any Person, all of the authorized shares of capital stock of (or other ownership or profit interests in) such Person, including all classes of common and preferred capital stock, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, membership or trust interests therein), rights to receive distributions of cash and other property, and to receive allocations of items of income, gain, loss, deduction and credit and similar items from such Person, whether voting or nonvoting, whether or not such interests include rights entitling the holder thereof to exercise control over such Person, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Company, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Company or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Company or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Company or any of its ERISA Affiliates of any liability with respect to the withdrawal or 24 partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Company or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Company or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Event of Default" has the meaning set forth in Section 7.01. "Excess Amount" has the meaning set forth in Section 2.06(d). "Excess Availability" means, as of any date of determination thereof by the Administrative Agent, the result, if a positive number, of: (a) The lesser of: (i) the Tranche A-1 Borrowing Base (or if the Tranche A-1 Commitments have been terminated, the Tranche A Borrowing Base); or (ii) the Aggregate Commitments; minus (b) The aggregate of the outstanding Credit Extensions. In calculating Excess Availability at any time and for any purpose under this Agreement, the Company shall certify to the Administrative Agent that all accounts payable and Taxes are being paid on a timely basis and consistent with past practices (absent which the Administrative Agent may establish a reserve therefor). "Exchange Act Filings" means all filings made by the Company pursuant to the Securities and Exchange Act of 1934, and the rules promulgated thereunder, since and including the annual report of the Company on Form 10-K for the fiscal year ended immediately prior to the date as of which representation and warranty is made or deemed to be made hereunder. "Excluded Subsidiary" means each Subsidiary of the Company which (a) is affected by any event or circumstance referred to in any of Sections 7.01 (h), (i), (j), or (p) and (b) meets all the following conditions: (i) the Company's direct and indirect investments in and advances to the Subsidiary is less than 1% of the total assets of the Company consolidated as of the end of the most recently completed fiscal year; (ii) the Company's direct and indirect proportionate share of the total assets (after intercompany eliminations) of the Subsidiary is less than 1% of the total assets of the Company consolidated as of the end of the most recently completed fiscal year; and (iii) the Company's direct and indirect equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle of the Subsidiary is less than 1% of such income of the Company consolidated for the most recently completed fiscal year; provided that, (A) all Excluded Subsidiaries shall be considered to be a single consolidated Subsidiary for purposes of determining whether the conditions specified in clauses (i), (ii) and (iii) above are satisfied and (ii) a Subsidiary shall not be an Excluded Subsidiary if such Subsidiary holds rights under any long-term contracts for the 25 purchase of inventory accounting for more than 5% of the total inventory purchased by the Company and its Subsidiaries during the most recently completed four fiscal quarters. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender (including for this purpose the Issuing Bank) or any other recipient of any payment to be made by or on account of any obligation of any Borrower hereunder, (a) taxes imposed on (or measured by) its net income, profits or overall gross income or receipts, and franchise or similar taxes, imposed by the United States of America, by a jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, or by any other jurisdiction with which the recipient has or had any other present or former connection (other than a connection arising solely from entering into, performing its obligations under, receiving a payment under or enforcing this Agreement or the other Loan Documents), (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any jurisdiction described in clause (a) above, (c) in the case of a Non-U.S. Lender, any withholding tax that is imposed on amounts payable to such Non-U.S. Lender (A) pursuant to a Tax law in effect on the date such Non-U.S. Lender becomes a party hereto or a Participant through the purchase of a participation hereunder, the date such Non-U.S. Lender designates a new Lending Office, or, with respect to any additional position in any Obligation acquired after such Non-U.S. Lender becomes a party hereto, the date such additional position was acquired by such Non-U.S. Lender, or (B) is attributable to such Non-U.S. Lender's failure or inability (other than as a result of a Change in Law occurring after the date such Non-U.S. Lender becomes a party to this Agreement, a Participant through the purchase of a participation hereunder, or with respect to any additional position in any Obligation acquired after such Non-U.S. Lender becomes a party hereto, the date such additional position was acquired by such Non-U.S. Lender) to comply with Section 2.17(e), except, in each case described in clause (A) or (B), to the extent that such Non-U.S. Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office, assignment or acquisition of such additional position in any Obligation (as applicable), to receive additional amounts from the Borrowers with respect to such withholding tax pursuant to Section 2.17, and (d) any U.S. federal, state or local backup withholding tax. "Executive Order" has the meaning set forth in Section 9.15. "Existing Credit Agreement" has the meaning set forth in the recitals hereto. "Existing Letters of Credit" means each of the Letters of Credit issued by a Lender and outstanding on the Effective Date, as listed on Schedule 1.01(A). "Exposure" means, at any time, the aggregate principal amount, without duplication, of outstanding Loans, Swingline Exposure, and L/C Exposure at such time. The Exposure of any Lender at any time shall be the sum of, without duplication, its L/C Exposure, plus its Swingline Exposure, plus the aggregate principal amount of its outstanding Loans at such time. "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if 26 such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Financial Officer" of any corporation means the chief financial officer, principal accounting officer, treasurer, controller or any vice president-finance, vice-president-financial services or vice-president -treasury services of such corporation. "FIRREA" means the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended from time to time. "Foreign Assets Control Regulations" has the meaning set forth in Section 9.15. "Foreign Subsidiary" means any Subsidiary that is organized under the laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia. "Fund" shall mean any person that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "GAAP" means generally accepted accounting principles in the United States of America. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Guarantee by a person shall be deemed to be an amount equal to the stated amount or determinable amount of the primary obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof 27 (assuming such person is required to perform thereunder) as determined by such person in good faith. "Guaranty" means the Guaranty among the Loan Parties and the Administrative Agent dated the Effective Date, substantially in the form of Exhibit C. "Hazardous Materials" means all explosive, radioactive, hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes, and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "HBA" means health and beauty aids. "Hedging Agreement" means any Currency and Commodity Hedging Agreement or Interest Rate Hedging Agreement. "Immaterial Subsidiaries" means the Subsidiaries of the Company listed on Schedule 1.01(D), which the Company intends to dissolve, liquidate or merge into another Loan Party. "Incremental Availability" means, at any time of calculation, the additional amount available to be borrowed by the Borrowers based upon the difference between the Tranche A-1 Borrowing Base and the Tranche A Borrowing Base as reflected on the most recent Borrowing Base Certificate delivered by the Borrowers to the Administrative Agent pursuant to Section 5.01(f) hereof. "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid (excluding current accounts payable in the ordinary course of business), (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Indemnified Taxes" means Taxes, other than Excluded Taxes or Other Taxes, imposed on any payment by or on account of any obligation of the Borrowers hereunder or under any other Loan Document. 28 "Indemnitee" has the meaning set forth in Section 9.03(b). "Indemnity, Subrogation and Contribution Agreement" means the Indemnity, Subrogation and Contribution Agreement among the Loan Parties party thereto and the Collateral Agent dated as of the Effective Date, substantially in the form of Exhibit D. "Information" has the meaning set forth in Section 9.12. "Insurance Provider Notification" has the meaning set forth in Section 5.14(d). "Interest Election Request" means a request by a Borrower to convert or continue a Borrowing in accordance with Section 2.08. "Interest Payment Date" means (a) with respect to any ABR Loan (including any Swingline Loan) , the first Business Day of each calendar month and (b) with respect to any LIBOR Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a LIBOR Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period. "Interest Period" means, with respect to any LIBOR Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six (or to the extent available to all of the Lenders nine or twelve) months thereafter, as the Borrowers may elect, provided that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Interest Rate Hedging Agreement" means any interest rate protection agreement or other interest rate hedging arrangement. "Inventory" means all products available for sale by the Company and the other Loan Parties in the following categories as defined and classified by the Company and the other Loan Parties on a basis consistent with the Company's current and historical accounting practices: HBA, perishable, grocery, pharmacy, meat, seafood, produce, floral, bakery, deli, dairy, liquor, general merchandise and fuel, each valued at cost on a basis consistent with the current and historical accounting practices (without giving effect to LIFO reserves). "Inventory Advance Rate" means 90%. "Inventory Reserves" means such reserves as may be established from time to time by the Administrative Agent in its reasonable credit judgment as being appropriate to reflect changes in 29 the determination of the saleability, at retail, of the Eligible Inventory or which reflect such other factors as negatively affect the market value of the Eligible Inventory. Inventory Reserves shall not be duplicative of any factors taken into consideration in determining the Appraised Value of Inventory. "Issuing Bank" means Bank of America, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.06(i); provided, that (i) the Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate; and (ii) with the consent of the Borrowers and the Administrative Agent, the Issuing Bank may arrange for one or more Letters of Credit to be issued by a Lender other than the Issuing Bank (or an Affiliate of such other Lender), in which case the term "Issuing Bank" shall include such Lender (or Affiliate of such Lender) with respect to Letters of Credit issued by such Lender (or Affiliate of such Lender). In the event that there is more than one Issuing Bank at any time, references herein and in the other Loan Documents to the Issuing Bank shall be deemed to refer to the Issuing Bank in respect of the applicable Letter of Credit or to all Issuing Banks, as the context requires. "L/C Credit Extension" means, with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the increase of the amount thereof. "L/C Disbursement" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "L/C Exposure" means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate principal amount of all L/C Disbursements made pursuant to Letters of Credit that have not yet been reimbursed by or on behalf of a Borrower at such time. The L/C Exposure of any Lender at any time shall mean its Applicable Percentage of the aggregate L/C Exposure at such time. "Lead Arranger" means Banc of America Securities LLC. "Lease" means any agreement, whether written or oral, no matter how styled or structured, pursuant to which a Loan Party is entitled to the use or occupancy of any real property for any period of time. "Leasehold Advance Rate" means 40%. "Leasehold Differential" means the difference between $300,000,000 (or such lesser amount to which the Administrative Agent in its reasonable discretion may agree, but in no event less than an amount which would maintain a loan to value based on such Eligible Leaseholds of 25%) and the Appraised Value of the then Eligible Leaseholds. "Leasehold Obligations" means, with respect to each Loan Party, all payments made, if any, by such Loan Party with respect to rent (including fixed rent and variable rent), common area maintenance charges and other monetary obligations under any Lease (including any Distribution Center or Store) where any Inventory is stored or otherwise located. 30 "Lender" means each Person listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any Person that ceases to be a Party hereto pursuant to an Assignment and Acceptance. "Letter of Credit" means any letter of credit issued by the Issuing Bank for the account of a Borrower. Without limiting the foregoing, all Existing Letters of Credit shall be deemed to have been issued hereunder and shall for all purposes be deemed to be "Letters of Credit" hereunder. "Letter of Credit Fee " has the meaning set forth in Section 2.12(c). "Letter of Credit Sublimit" means an amount equal to $400,000,000. The Letter of Credit Sublimit is part of, and not in addition to, the Tranche A Commitments. A permanent reduction of the Aggregate Revolving Commitments or the Tranche A Commitments shall not require a corresponding pro rata reduction in the Letter of Credit Sublimit; provided, however, that if the Aggregate Revolving Commitments or the Tranche A Commitments are reduced to an amount less than the Letter of Credit Sublimit, then the Letter of Credit Sublimit shall be reduced to an amount equal to (or, at Company's option, less than) the Aggregate Revolving Commitments or the Tranche A Commitments, as applicable. "LIBOR" means, when used in reference to any Loan or Borrowing, whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "LIBO Rate" means for any Interest Period with respect to a LIBO Rate Loan, the rate per annum equal to the British Bankers Association LIBOR Rate ("BBA LIBOR"), as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period. If such rate is not available at such time for any reason, then the "LIBO Rate" for such Interest Period shall be the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the LIBO Rate Loan being made, continued or converted by Bank of America and with a term equivalent to such Interest Period would be offered by Bank of America's London Branch to major banks in the London interbank eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. 31 "Loan" means all Tranche A Loans, Tranche A-1 Loans, the Term Loan, the Term A-2 Loan. Swingline Loans, and all other advances to or for the account of the Borrowers pursuant to this Agreement. "Loan Documents" means this Agreement, the Guaranty, the Indemnity, Subrogation and Contribution Agreement, all Borrowing Base Certificates, the Blocked Account Agreements, the DDA Notifications, the Credit Card Notifications, the Security Documents, and any other instrument or agreement now or hereafter executed and delivered in connection herewith, or in connection with any transaction arising out of any Cash Management Services and Bank Products provided by the Administrative Agent or any of its Affiliates, each as amended and in effect from time to time. "Loan Parties" means each of the Company, the other Borrowers and each other Subsidiary identified as a "Loan Party" on Schedule 3.12 and each Subsidiary made a party hereto pursuant to Section 5.12. "Margin Stock" shall have the meaning assigned to such term in Regulation U. "Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole, (b) the ability of any Loan Party to perform any of its obligations under any Loan Document, (c) the rights of or benefits available to the Lenders under any Loan Document or (d) the Collateral as a whole. "Material Contract" means any agreement to which any Loan Party is a party, the termination of which would have a Material Adverse Effect, including, without limitation, as of the Effective Date, the Supply Agreement, dated as of June 27, 2005 by and between the Company and C&S Wholesale Grocers, Inc., as the same may be amended or replaced from time to time. "Material Indebtedness" means Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Hedging Agreements, of any one or more of the Company and its Subsidiaries in an aggregate principal amount exceeding $10,000,000 (or its equivalent). For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Company or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Company or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "Maturity Date" means December 3, 2012. "Maximum Rate" has the meaning set forth in Section 9.13. "Merger" means the transactions contemplated by the Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger dated as of March 4, 2007 by and among the Company, Sand Merger Corp. and Pathmark Stores, Inc., as in effect on the Effective Date. 32 "Moody's" means Moody's Investors Service, Inc. and its successors. "Mortgage(s)" means each and every fee and leasehold mortgage or deed of trust, security agreement and assignment by and between the Loan Party owning or holding the leasehold interest in the Real Estate encumbered thereby in favor of the Collateral Agent. Each Mortgage shall be substantially in the form of Exhibit Q-1 or Exhibit Q-2, as applicable, with such modifications as may be appropriate to reflect Applicable Law of the jurisdiction in which the Real Estate is located. "Mortgage Policies" has the meaning specified in the definition of Real Estate Eligibility Requirements. "Multiemployer Plan" or "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Proceeds" means, with respect to any event (a) the cash proceeds received in respect of such event including (i) any cash received in respect of any non-cash proceeds, but only as and when received, (ii) in the case of a casualty, insurance proceeds, and (iii) in the case of a condemnation or similar event, condemnation awards and similar payments, net of (b) the sum of (i) all reasonable fees and out-of-pocket expenses paid by the Company and the Subsidiaries to third parties (other than Affiliates) in connection with such event, (ii) in the case of a sale, transfer or other disposition of an asset (including pursuant to a sale and leaseback transaction or a casualty or a condemnation or similar proceeding), the amount of all payments required to be made by the Company and the Subsidiaries as a result of such event to repay Indebtedness (other than Loans) secured by a Lien superior to that of the Collateral Agent on such asset, (iii) as long as no Triggering Event then exists, the amount of all taxes paid (or reasonably estimated to be payable) by the Company and the Subsidiaries, and the amount of any reserves established by the Company and the Subsidiaries to fund contingent liabilities reasonably estimated to be payable, in each case during the year that such event occurred or the next succeeding year and that are directly attributable to such event (as determined reasonably and in good faith by the chief financial officer of the Company), (iv) all amounts deposited in trust or escrow for the benefit of any third party or to which any third party may be entitled in connection with such event, provided that any such amounts returned to the Company or any Subsidiary shall constitute Net Proceeds when received and (v) the reasonable costs and expenses of any repairs, alterations, or improvements made by the Company or any Subsidiary to the assets subject to such event to the extent such repairs, alterations or improvements were required or permitted pursuant to the terms of any Lease or this Agreement. "Noncompliance Notice " has the meaning set forth in Section 2.05(b). "Non-U.S. Lender" means a Lender or a Participant that is organized under the laws of a jurisdiction other than the United States of America, any state thereof or the District of Columbia. "Obligations" has the meaning set forth in the Security Agreement. "Other Liabilities" means any obligations on account of (a) any Cash Management Services furnished to any of the Loan Parties or any of their Subsidiaries and/or (b) any Bank 33 Product entered into with any Loan Party or any of its Subsidiaries, as each may be amended from time to time. "Other Taxes" means any and all present or future recording, stamp, documentary, excise, or similar taxes, charges or levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document; provided, however, that any such taxes imposed on any assignment of the Obligations, any Assignment and Acceptance Agreements or any sales of participations in the Obligations pursuant to Section 9.04(d), and any estate, gift or inheritance taxes shall not constitute "Other Taxes." "PACA" means the Perishable Agricultural Commodities Act of 1930, as amended. "PACA/PASA Liability Reserve" means an amount calculated on a monthly basis by the Collateral Agent to provide for vendor liabilities pursuant to PACA and PASA. "Pathmark" means Pathmark Stores, Inc., a Delaware corporation. "Participant" has the meaning set forth in Section 9.04(d). "PASA" means the Packers and Stockyard Act, 1921 and all regulations promulgated thereunder, as amended from time to time. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Perfection Certificate" means a certificate substantially in the form of Exhibit E or any other form reasonably approved by the Administrative Agent. "Permitted Divestitures" means: (a) the Federal Trade Commission divestitures as publicly disclosed by the Company on or before the Effective Date; (b) the sale of the Falcon 900 Aircraft; (c) the sale of the leasehold interests as announced on August 14, 2007 by Pathmark; and (d) the sale of SAV-A-CENTER supermarkets in the Greater New Orleans area. "Permitted Encumbrances" means: (a) liens imposed by law for Taxes, assessments and governmental charges or claims that are not yet delinquent or are being contested in compliance with Section 5.05; (b) carriers', landlord's, warehousemen's, mechanics', materialmen's and repairmen's liens, statutory liens of banks and rights of set-off and other Liens imposed by law, 34 arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.05; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations and deposits securing liability to insurance carriers under insurance arrangements; (d) deposits to secure the performance of bids, tenders, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) judgment liens in respect of judgments that do not constitute an Event of Default under Section 7.01(k); (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Company or any Subsidiary; (g) encumbrances on assets disposed or to be disposed in a Permitted Divestiture created by an agreement(s) providing for such Permitted Divestiture or encumbrances on assets disposed or to be disposed permitted by Section 6.05 created by an agreement(s) providing for such disposition; (h) any (i) interest or title of lessor or sublessor under any Lease, (ii) easement, restriction or encumbrance to which the interest or title of such lessor or sublessor may be subject to or (iii) subordination of the interest of the lessee or sublessees under such Lease to any restriction or encumbrance referred to in the preceding clause (ii); (i) Liens arising from filing Uniform Commercial Code financing statements relating solely to Leases; and (j) encumbrances referred to in Schedule B of the Mortgage Policies insuring the Mortgages; provided that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "Permitted Holder" means (i) Tengelmann Warenhandelsgesellschaft or (ii) any Affiliate of Tengelmann Warenhandelsgesellschaft. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Company or any ERISA Affiliate is (or, if such plan were 35 terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreement" means the Pledge Agreement among the Loan Parties party thereto and the Collateral Agent dated as of the Effective Date, substantially in the form of Exhibit F. "Prepayment Date" has the meaning set forth in Section 2.11(p). "Prepayment Event" means: (a) any sale, transfer or other disposition (including pursuant to a sale and leaseback transaction) of any property or asset of the Company or any Subsidiary, other than (i) dispositions described in clauses (a) and (b) of Section 6.05, and (ii) prior to the occurrence of a Triggering Event, other dispositions resulting in aggregate Net Proceeds not exceeding $20,000,000 during any fiscal year of the Company; or (b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Company or any Subsidiary, but, prior to the occurrence of a Triggering Event (i) only to the extent that the Net Proceeds therefrom have not been applied to repair, restore or replace such property or asset within 180 days after such event and (ii) only to the extent the value of such loss is in excess of $1,000,000 (or its equivalent); or (c) the incurrence by the Company or any Subsidiary of any Indebtedness, other than Indebtedness permitted by Section 6.01. "Prepayment Premium" means one percent (1%) of the principal amount of the Term A-2 Loan prepaid during the twelve month period after the Restatement Effective Date. "Prescription Advance Rate" means 85%. "Prime Rate" means the rate of interest per annum publicly announced from time to time by Bank of America, N.A. as its prime rate in effect at its principal office in Charlotte, North Carolina; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. "Priming Jurisdiction" means any jurisdiction listed on Schedule A hereto, which schedule may be revised by the Administrative Agent to reflect changes in Applicable Law. The Administrative Agent shall provide the Company with ten (10) days' prior written notice of any revisions to the jurisdictions listed on Schedule A hereto. "Principal Properties" means, (a) initially, the Real Estate described on Schedule 1.01(C), provided that such Schedule may be updated by the Company to the extent necessary to eliminate Real Estate which, after the Effective Date, is determined by the Company and the Administrative Agent to no longer to be a "Principal Property" under any agreement evidencing Material Indebtedness, and (b) any other Real Estate which is determined by the Company and the Administrative Agent after the Effective Date to have been a "Principal Property" as of the Effective Date under any agreement evidencing Material Indebtedness. 36 "Priority of Claims Waiver" means an agreement executed by (a) a bailee or other Person in possession of Collateral, including, without limitation, any warehouseman substantially in the form of Exhibit P-2 hereto with such modifications thereto as may be approved by the Collateral Agent or such other agreement reasonably satisfactory in form and substance to the Collateral Agent, or (b) a landlord of Real Estate leased by any Loan Party (including, without limitation, any warehouse or distribution center), substantially in the form of Exhibit P-1 hereto with such modifications thereto as may be approved by the Collateral Agent or such other agreement reasonably satisfactory in form and substance to the Collateral Agent pursuant to which such Person (i) acknowledges the Collateral Agent's Lien on the Collateral, (ii) releases or subordinates such Person's Liens in the Collateral held by such Person or located on such Real Estate, (iii) agrees to furnish the Collateral Agent with access to the Collateral in such Person's possession or on the Real Estate for the purposes of assembling, repossessing, selling or otherwise disposing of such Collateral and (iv) makes such other agreements with the Collateral Agent as the Collateral Agent may reasonably require. "Qualified Preferred Stock" means, with respect to any Person, any preferred capital stock or preferred equity interest that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable) or upon the happening of any event does not (a) mature or becomes mandatorily redeemable prior to the Maturity Date, pursuant to a sinking fund obligation or otherwise; (b) become convertible or exchangeable at the option of the holder thereof for Indebtedness or preferred stock that is not Qualified Preferred Stock, prior to the Maturity Date; or (c) become redeemable at the option of the holder thereof, in whole or in part, prior to the Maturity Date. "Real Estate" means all Leases and all land, together with the buildings, structures, parking areas, and other improvements thereon, now or hereafter owned by any Loan Party, including all easements, rights-of-way, and similar rights relating thereto and all leases, tenancies, and occupancies thereof. "Real Estate Advance Rate" means 50%. "Real Estate Eligibility Requirements: means collectively, each of the following: (a) The applicable Loan Party has executed and delivered to the Collateral Agent a Mortgage with respect to any Real Estate intended, by the Company or other Loan Party, to be included in Eligible Real Estate or Eligible Leaseholds; (b) Such Real Estate is used by a Loan Party (other than an Excluded Subsidiary), or is leased or subleased by a Loan Party (other than an Excluded Subsidiary) to another Person, for offices or as a store or distribution center; (c) As to any particular property, the Loan Party is in compliance in all material respects with the representations, warranties and covenants set forth in the Mortgage relating to such Real Estate; (d) The Collateral Agent shall have received fully paid American Land Title Association Lender's Extended Coverage title insurance policies or marked-up title insurance commitments having the effect of a policy of title insurance) (the "Mortgage 37 Policies") in form and substance, with the endorsements set forth on Schedule 1.01(B) hereto (to the extent available at commercially reasonable rates) and in amounts reasonably acceptable to the Collateral Agent (provided that such amounts shall not exceed the Appraised Value of the applicable Mortgaged Property), issued, coinsured and reinsured (to the extent required by the Collateral Agent) by title insurers reasonably acceptable to the Collateral Agent, insuring the Mortgages to be valid first and subsisting Liens on the property or leasehold interests described therein, free and clear of all defects (including, but not limited to, mechanics' and materialmen's Liens) and encumbrances, excepting only those Liens permitted by Section 6.02 having priority over the Lien of the Collateral Agent under Applicable Law or otherwise reasonably acceptable to the Collateral Agent; (e) With respect to any Real Estate owned by a Borrower or any other Loan Party (as opposed to interests as lessee under a Lease) which is intended by such Borrower or such other Loan Party to be included in Eligible Real Estate, within ninety (90) days after the Effective Date (or such later date, if any, as the Administrative Agent may agree in writing in its sole discretion), the Collateral Agent shall have received American Land Title Association/American Congress on Surveying and Mapping form surveys, for which all necessary fees (where applicable) have been paid, certified to the Collateral Agent and the issuer of the Mortgage Policies in a manner reasonably satisfactory to the Collateral Agent by a land surveyor duly registered and licensed in the states in which the property described in such surveys is located and reasonably acceptable to the Collateral Agent, showing all buildings and other improvements, the location of any easements, parking spaces, rights of way, building set-back lines and other dimensional regulations and the absence of encroachments, either by such improvements or on to such property, and other defects, other than encroachments and other defects reasonably acceptable to the Collateral Agent; (f) With respect to any leased Real Estate intended by any Borrower or other Loan Party to be included in Eligible Leaseholds, the Collateral Agent shall have received a consent agreement to the extent required under the terms of the applicable Lease or Title Policy relating to such leased Real Estate, in form and substance reasonably satisfactory to the Collateral Agent, executed by the lessor of the Lease, along with (1) a memorandum of lease in recordable form with respect to such leasehold interest, executed and acknowledged by the owner of the affected real property, as lessor, or (2) evidence that the applicable Lease with respect to such leasehold interest or a memorandum thereof has been recorded in all places necessary, in the Collateral Agent's reasonable judgment, to give constructive notice to third-party purchasers of such leasehold interest, or (3) if such leasehold interest was acquired or sub-leased from the holder of a recorded leasehold interest, the applicable assignment or sublease document, executed and acknowledged by such holder, in each case in form sufficient to give such constructive notice upon recordation and otherwise in form reasonably satisfactory to the Collateral Agent; (g) With respect to any Real Estate intended by any Borrower or other Loan Party to be included in Eligible Real Estate, the Collateral Agent shall have received a Phase I Environmental Site Assessment in accordance with ASTM Standard E1527-05, in 38 form and substance reasonably satisfactory to the Collateral Agent, from an environmental consulting firm reasonably acceptable to the Collateral Agent, which report shall identify recognized environmental conditions and shall to the extent possible quantify any related costs and liabilities, associated with such conditions and the Collateral Agent shall be satisfied with the nature and amount of any such matters. The Collateral Agent may, upon the receipt of a Phase I Environmental Site Assessment require the delivery of further environmental assessments or reports to the extent such further assessments or reports are recommended in the Phase I Environmental Site Assessment; and (h) The applicable Loan Party shall have delivered to the Collateral Agent evidence of flood insurance naming the Collateral Agent as mortgagee as required by the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973, as amended and in effect, which shall be reasonably satisfactory in form and substance to the Collateral Agent. "Realty Reserves" means such reserves as the Administrative Agent from time to time determines in the Administrative Agent's discretion as being appropriate to reflect the impediments to the Agents' ability to realize upon any Eligible Real Estate or Eligible Leaseholds. Without limiting the generality of the foregoing, Realty Reserves may include (but are not limited to) (i) Environmental Compliance Reserves, (ii) reserves for (A) municipal taxes and assessments, (B) repairs and (C) remediation of title defects, and (iii) reserves for Indebtedness secured by Liens having priority over the Lien of the Collateral Agent. "Receivables Advance Rate" means 90%. "Register" has the meaning set forth in Section 9.04(c). "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Required Lenders" means, at any time, Lenders having Exposure and unused Commitments representing greater than 50% of the sum of all Exposure and unused Commitments at such time; provided that until such time as a "Successful Syndication" (as defined in a certain letter agreement between, among others, the Administrative Agent and the Company) has occurred, Required Lenders shall include at least three Lenders. "Reserve for Leasehold Obligations" means, on any date, the aggregate amount of Leasehold Obligations of the Loan Parties due and owing with respect to properties of a vendor, landlord, public warehouse operator or other third party bailee located in a Priming Jurisdiction or at a distribution center at which more than $5,000,000 of Inventory is located, in each case which is not subject to a Priority of Claims Waiver in form and substance satisfactory to the Administrative Agent; for each such property the amount of Leasehold Obligations shall be the next two months' Leasehold Obligations (net of any Letter of Credit amount benefiting such landlord in respect of such Leasehold Obligations). For the avoidance of doubt, the amount of Leasehold Obligations for any property for which a satisfactory Priority of Claims Waiver is 39 delivered by a vendor, landlord, public warehouse operator or other third party bailee, shall be zero. "Restatement Effective Date" means December __, 2007 (the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02)). "Restricted Payment" means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in the Company or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Equity Interests in the Company or any option, warrant or other right to acquire any such Equity Interests in the Company. "S&P" means Standard & Poor's Ratings Service, a Division of The McGraw-Hill Companies, and its successors. "Script Advance Rate" means 85%. "Scripts" means the pharmaceutical customer list owned and controlled by each Loan Party relating to certain items and services, including, without limitation, any drug price data, drug eligibility data, clinical drug information and health information of a pharmaceutical customer that is not protected under Sections 1171 through 1179 of the Social Security Act or other Applicable Law. "Secured Parties" has the meaning set forth in the Security Agreement. "Security Agreement" means the Security Agreement among the Loan Parties party thereto and the Collateral Agent dated as of the Effective Date, substantially in the form of Exhibit G. "Security Documents" means the Security Agreement, the Pledge Agreement, the Mortgages and each other security agreement or other instrument or document executed and delivered by any Loan Party to secure any of the Obligations. "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair saleable value of the properties and assets of such Person is not less than the amount that would be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in a business or a transaction, and is not about to engage in a business or transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. The amount of all Guarantees and contingent obligations at any time shall be computed as the amount that, in light 40 of all the facts and circumstances existing at the time, can reasonably be expected to become an actual or matured liability. "Specified Default" means the occurrence and continuance of an Event of Default under Section 7.01 (a), (b), (c) (only with respect to a Borrowing Base Certificate delivered pursuant to Section 5.01(f)), (h) or (i) or Section 7.01(d) (in the case of the failure of the Loan Parties to comply with (x) Section 5.01(f) (after giving effect to a five (5) day grace period relating thereto or such longer time, if any, as the Administrative Agent may agree in writing in its sole discretion), (y) Section 5.14 (other than Section 5.14(d) to the extent the Administrative Agent has approved an extension relating to the applicable delivery requirements therein) or (z) Section 6.12). "Standby Letter of Credit" means Letter of Credit other than a Commercial Letter of Credit. "Stated Amount" means at any time the maximum amount for which a Letter of Credit may be honored. "Statutory Reserve Rate" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D of the Board. LIBOR Loans shall be deemed to constitute Eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D of the Board or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Store Shrink Percentage" shall be applicable to Inventory located at Stores and shall mean, as of any date, the amount of loss recorded in accordance with GAAP of the grocery and HBA inventories expressed as a percentage of the grocery and HBA sales for the most recently ended two (2) fiscal quarters. "Store Shrink Reserve" shall be equal to the product of (a) the excess of the Store Shrink Percentage over 1%, multiplied by (b) the Inventory of the Company and the other Loan Parties as of the date of the most recent Borrowing Base Certificate. "Stores" means all supermarket retail locations of the Company and other Loan Parties selling Inventory owned by the Loan Parties. "Subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the 41 equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Swingline Exposure" means, at any time, the aggregate amount of all outstanding Swingline Loans at such time. The Swingline Exposure of any Lender at any time shall mean its Applicable Percentage of the aggregate Swingline Exposure at such time "Swingline Lender" means Bank of America, N.A., in its capacity as Lender of Swingline Loans hereunder. "Swingline Loan" means a Loan made by the Swingline Lender to the Borrowers pursuant to Section 2.05. "Swingline Sublimit" means an amount equal to $50,000,000. The Swingline Sublimit is part of, and not in addition to, the Aggregate Tranche A Commitments. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, withholdings or similar charges imposed by any Governmental Authority. "Term Applicable Percentage" means with respect to any Term Lender at any time, the percentage (carried out to the fourth decimal place) of the outstanding principal balance of such Term Lender's Term Loan at such time to the Aggregate Term Outstandings at such time. The initial Term Applicable Percentage of each Term Lender is set forth opposite the name of such Term Lender on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Term Lender becomes a party hereto, as applicable. "Term Commitment" means, with respect to each Term Lender, the commitment of such Term Lender hereunder set forth as its Term Commitment opposite its name on Schedule 2.01 hereto. "Term Lender" means each Lender having a Term Commitment as set forth on Schedule 2.01 hereto or in the Assignment and Acceptance by which it becomes a Term Lender, or after the making of the Term Loan, each Lender holding any portion of the Term Loan. "Term Loan" means the term loan made by the Term Lenders on the Effective Date pursuant to Section 2.01(b) of the Existing Credit Agreement. "Term Prepayment Conditions" means that (a) no Default or Event of Default then exists or would arise from the prepayment of the Term Loan or Term A-2 Loan, as applicable, and (b) the Company shall deliver to the Agent either (i) an opinion as to Solvency of the Loan Parties before and after giving effect to such prepayment, which opinion shall be in form and substance acceptable to the Agent and rendered by a Person acceptable to the Agent or (ii) evidence that Excess Availability (A) on the date of any such prepayment and (B) projected on a pro forma basis for the following twelve months shall be in an amount greater than $150,000,000. 42 "Term A-2 Applicable Percentage" means with respect to any Term A-2 Lender at any time, the percentage (carried out to the fourth decimal place) of the outstanding principal balance of such Term A-2 Lender's Term A-2 Loan at such time to the Aggregate Term A-2 Outstandings at such time. The initial Term A-2 Applicable Percentage of each Term A-2 Lender is set forth opposite the name of such Term A-2 Lender on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Term A-2 Lender becomes a party hereto, as applicable. "Term A-2 Commitment" means, with respect to each Term A-2 Lender, the commitment of such Term A-2 Lender hereunder set forth as its Term A-2 Commitment opposite its name on Schedule 2.01 hereto. "Term A-2 Leasehold Cap" means, subject to the provisions of Section 5.13(b), (a) during the period commencing on the Restatement Effective Date and ending on and including August 31, 2009, $50,000,000, (b) commencing on September 1, 2009 and ending on November 30, 2009, $25,000,000, and (c) at any time after December 1, 2009, $0. "Term A-2 Lender" means each Lender having a Term A-2 Commitment as set forth on Schedule 2.01 hereto or in the Assignment and Acceptance by which it becomes a Term A-2 Lender, or after the making of the Term A-2 Loan, each Lender holding any portion of the Term A-2 Loan. "Term A-2 Loan" means the term loan to be made by the Term A-2 Lenders on the Restatement Effective Date pursuant to Section 2.01(c). "Trading With the Enemy Act" has the meaning set forth in Section 9.15. "Tranche A Applicable Percentage" means with respect to any Tranche A Lender at any time, the percentage (carried out to the fourth decimal place) of the Aggregate Tranche A Commitments represented by such Tranche A Lender's Tranche A Commitment at such time. If the commitment of each Tranche A Lender to make Tranche A Loans and the obligation of the Issuing Bank to make L/C Credit Extensions have been terminated pursuant to Section 2.09(a) or if the Aggregate Tranche A Commitments have expired, then the Tranche A Applicable Percentage of each Lender shall be determined based on the Tranche A Applicable Percentage of such Tranche A Lender most recently in effect, giving effect to any subsequent assignments. The initial Tranche A Applicable Percentage of each Tranche A Lender is set forth opposite the name of such Tranche A Lender on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Tranche A Lender becomes a party hereto, as applicable. "Tranche A Borrowing Base" means, on any date (subject to adjustment as provided in Section 1.05), the aggregate value of the assets of the Loan Parties, in an amount (calculated based on the most recent Borrowing Base Certificate delivered to the Administrative Agent in accordance with Section 5.01(f), absent any error in such Borrowing Base Certificate) that is equal to: (a) the product of (x) the Inventory Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) Appraised Value of Eligible Inventory (subject to the 43 provisions of clause (j) of the definition of Eligible Inventory) and (z) the Cost of Eligible Inventory (net of Inventory Reserves); plus (b) the product of (x) the Receivables Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the face amount of all Eligible Credit Card Accounts Receivables; plus (c) subject to the proviso hereto, the product of (x) the Script Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the Appraised Value of Scripts; plus (d) the product of (x) Coinstar Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the face amount of Eligible Coinstar Receivables; plus (e) the product of (x) Prescription Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the face amount of all Eligible Third Party Insurance Provider Accounts Receivables; plus (f) subject to the proviso hereto, the product of (x) Real Estate Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the Appraised Value of all Eligible Real Estate (other than Eligible Real Estate constituting the Principal Properties); plus (g) subject to the proviso hereto, the product of (x) Real Estate Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the Appraised Value of all Eligible Real Estate constituting the Principal Properties; plus (h) subject to the proviso hereto, during the period commencing on the Restatement Effective Date and ending on and including May 31, 2009, the lesser of (x) the Tranche A Leasehold Cap and (y) the product of (i) the Leasehold Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (ii) the Appraised Value of all Eligible Leaseholds; plus (i) the lesser of (A) the Additional Availability Amount, or (B) the aggregate outstanding principal balance of the Term A-2 Loan; minus (j) the then amount of all Availability Reserves (without duplication of any Inventory Reserves included in the calculation set forth in clause (a) above; provided, however, that in no event shall (a) the amounts advanced against Scripts exceed twenty percent (20%) of the total amount advanced or available to be advanced under the Tranche A Borrowing Base, (b) the aggregate amounts advanced against Eligible Real Estate (including the 44 Principal Properties) and Eligible Leaseholds (including amounts available against such Eligible Real Estate and Eligible Leaseholds under clause (i) above) exceed thirty-six percent (36%) of the total amount advanced or available to be advanced under Tranche A Borrowing Base, and (c) the aggregate amounts advanced against Eligible Leaseholds under clauses (h) and (i), above exceed the Leasehold Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (ii) the Appraised Value of all Eligible Leaseholds; and provided further that, the Company may at any time, without consent or approval from the Agents or the Lenders, permanently terminate its right to receive Credit Extensions under both the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base based on Eligible Leaseholds as long as (x) no Default or Event of Default then exists or would arise therefrom, and (y) no overadvance would result from the removal of Eligible Leaseholds from the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base. The Tranche A Borrowing Base shall be computed for each fiscal month as required by and subject to the proviso after Section 5.01(f), and established based upon the most recent Borrowing Base Certificate delivered to the Administrative Agent and shall remain in effect until the delivery to the Administrative Agent of a subsequent Borrowing Base Certificate. "Tranche A Commitment" means, with respect to each Tranche A Lender, the commitment of such Lender hereunder set forth as its Tranche A Commitment opposite its name on Schedule 2.01 hereto or as may subsequently be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to the terms of this Agreement. "Tranche A Leasehold Cap" means, subject to the provisions of Section 5.13(b), (a) during the period commencing on the Restatement Effective Date and ending on and including February 28, 2009, $50,000,000, (b) commencing on March 1, 2009 and ending on May 31, 2009, $25,000,000, (c) at any time after June 1, 2009, $0. "Tranche A Lender" means each Lender having a Tranche A Commitment as set forth on Schedule 2.01 hereto or in the Assignment and Acceptance by which it becomes a Tranche A Lender. "Tranche A Loans" has the meaning set forth in Section 2.01. "Tranche A Unused Fee" has the meaning set forth in Section 2.12(b). "Tranche A-1 Applicable Percentage" means with respect to any Tranche A-1 Lender at any time, the percentage (carried out to the fourth decimal place) of the Aggregate Tranche A-1 Commitments represented by such Tranche A-1 Lender's Tranche A-1 Commitment at such time. If the commitment of each Tranche A-1 Lender to make Tranche A-1 Loans and the obligation of the Issuing Bank to make L/C Credit Extensions have been terminated pursuant to Section 2.09(c) or if the Aggregate Tranche A-1 Commitments have expired, then the Tranche A-1 Applicable Percentage of each Lender shall be determined based on the Tranche A-1 Applicable Percentage of such Tranche A-1 Lender most recently in effect, giving effect to any subsequent assignments. The initial Tranche A-1 Applicable Percentage of each Tranche A-1 Lender is set forth opposite the name of such Tranche A-1 Lender on Schedule 2.01 or in the 45 Assignment and Acceptance pursuant to which such Tranche A-1 Lender becomes a party hereto, as applicable. "Tranche A-1 Borrowing Base" means, on any date (subject to adjustment as provided in Section 1.05), the aggregate value of the assets of the Loan Parties, in an amount (calculated based on the most recent Borrowing Base Certificate delivered to the Administrative Agent in accordance with Section 5.01(f), absent any error in such Borrowing Base Certificate) that is equal to: (a) the product of (x) the Tranche A-1 Inventory Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) Appraised Value of Eligible Inventory (subject to the provisions of clause (j) of the definition of Eligible Inventory) and (z) the Cost of Eligible Inventory (net of Inventory Reserves); plus (b) the product of (x) the Receivables Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the face amount of all Eligible Credit Card Accounts Receivables; plus (c) subject to the proviso hereto, the product of (x) the Script Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the Appraised Value of Scripts; plus (d) the product of (x) Coinstar Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the face amount of Eligible Coinstar Receivables; plus (e) the product of (x) Tranche A-1 Prescription Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the face amount of all Eligible Third Party Insurance Provider Accounts Receivables; plus (f) subject to the proviso hereto, the product of (x) Tranche A-1 Real Estate Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the Appraised Value of all Eligible Real Estate (other than Eligible Real Estate constituting the Principal Properties); plus (g) subject to the proviso hereto, the product of (x) Tranche A-1 Real Estate Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (y) the Appraised Value of all Eligible Real Estate constituting the Principal Properties; plus (h) subject to the proviso hereto, during the period commencing on the Restatement Effective Date and ending on and including November 30, 2009, the lesser of (x) the Tranche A Leasehold Cap and (y) the product of (i) the Leasehold Advance Rate (or such lesser rate as 46 determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (ii) the Appraised Value of all Eligible Leaseholds; plus (i) the lesser of (A) the Additional Availability Amount, or (B) the aggregate outstanding principal balance of the Term A-2 Loan; minus (j) the then amount of all Availability Reserves (without duplication of any Inventory Reserves included in the calculation set forth in clause (a) above); provided, however, that in no event shall (a) the amounts advanced against Scripts exceed twenty percent (20%) of the total amount advanced or available to be advanced under the Tranche A-1 Borrowing Base (b) the aggregate amounts advanced against Eligible Real Estate (including the Principal Properties) and Eligible Leaseholds (including amounts available against such Eligible Real Estate and Eligible Leaseholds under clause (i) above) exceed thirty-six percent (36%) of the total amount advanced or available to be advanced under the Tranche A-1 Borrowing Base, and (c) the aggregate amounts advanced against Eligible Leaseholds under clauses (h) and (i), above, exceed the Leasehold Advance Rate (or such lesser rate as determined from time to time by the Administrative Agent in its commercially reasonable discretion in accordance with Section 1.05) and (ii) the Appraised Value of all Eligible Leaseholds, and provided further that, the Company may at any time, without consent or approval from the Agents or the Lenders, permanently terminate its right to receive Credit Extensions under both the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base based on Eligible Leaseholds as long as (x) no Default or Event of Default then exists or would arise therefrom, and (y) no overadvance would result from the removal of Eligible Leaseholds from the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base. The Tranche A-1 Borrowing Base shall be computed for each fiscal month as required by and subject to the proviso after Section 5.01(f), and established based upon the most recent Borrowing Base Certificate delivered to the Administrative Agent and shall remain in effect until the delivery to the Administrative Agent of a subsequent Borrowing Base Certificate. "Tranche A-1 Commitment" shall mean, with respect to each Tranche A-1 Lender, the commitment of such Tranche A-1 Lender hereunder set forth as its Tranche A-1 Commitment opposite its name on Schedule 2.01 hereto or as may subsequently be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to this Agreement. "Tranche A-1 Inventory Advance Rate means 95%. "Tranche A-1 Lender" means each Lender having a Tranche A-1 Commitment as set forth on Schedule 2.01 hereto or in the Assignment and Acceptance by which it becomes a Tranche A-1 Lender. "Tranche A-1 Loans" has the meaning set forth in Section 2.01. "Tranche A-1 Prescription Advance Rate" means 90%. "Tranche A-1 Real Estate Advance Rate" means 60%. 47 "Tranche A-1 Unused Fee" has the meaning set forth in Section 2.12(b). "Transactions" means, collectively, the execution, delivery and performance by each Loan Party of the Loan Documents to which it is to be a party, the borrowing of Loans, the use of the proceeds thereof, and the issuance of Letters of Credit hereunder. "Triggering Event" means the notification from the Administrative Agent to the Company that either (a) any Event of Default has occurred or (b) Excess Availability at any time is less than $75,000,000. Upon the occurrence of a Triggering Event, such Triggering Event shall be deemed "continuing" until such time as the applicable Event of Default is waived or Excess Availability shall exceed $75,000,000 for thirty (30) consecutive days; provided, however, that the foregoing cure provision may only be exercised once in any six (6) month period, and provided, further, that the foregoing cure provision may only be exercised five (5) times during the term of the Loans. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "Uniform Commercial Code" or "UCC" means the Uniform Commercial Code as in effect on the date of determination in the applicable jurisdiction. "Unused Fee" has the meaning set forth in Section 2.12(b). "Waivable Prepayment" has the meaning set forth in Section 2.11(p). "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02 Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Type (e.g., an "ABR Loan" or a "LIBOR Loan"). Borrowings also may be classified and referred to by Type (e.g., an "ABR Borrowing" or a "LIBOR Borrowing"). SECTION 1.03 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and 48 Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights, and (f) unless otherwise stated herein, all provisions herein within the discretion or to the satisfaction of a party shall be deemed to include a standard of reasonableness, good faith and fair dealing. SECTION 1.04 Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Company notifies the Administrative Agent that the Company requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Company that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been affirmatively withdrawn by the Company (or, in the case of a request for an amendment under this Section by the Required Lenders, the Administrative Agent) or such provision amended in accordance herewith. SECTION 1.05 Borrowing Base Adjustments. The Administrative Agent or the Required Lenders may, in their commercially reasonable discretion (x) in reviewing the collateral components of the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base, (y) after completion of any evaluation or any appraisal contemplated by Section 5.09(a) or Section 5.09(b) or (z) upon the occurrence and during the continuation of a Default, from time to time (a) decrease the advance rates for the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base (or both), (b) establish and revise reserves reducing the amount of Eligible Coinstar Receivables, Eligible Credit Card Accounts Receivable, Eligible Third Party Insurance Provider Accounts Receivable, Eligible Inventory, Eligible Leaseholds, Eligible Real Estate or Scripts and (c) impose additional eligibility criteria to be applicable to Eligible Coinstar Receivables, Eligible Credit Card Accounts Receivable, Eligible Third Party Insurance Provider Accounts Receivable, Eligible Inventory, Eligible Leaseholds, Eligible Real Estate or Scripts; provided that any such adjustment described in clause (a), (b) or (c) above shall be made only in the event that the Administrative Agent or the Required Lenders reasonably determine (based upon an evaluation or appraisal referred to in Section 5.09(a) or Section 5.09(b) or other objectively determinable facts or circumstances) that the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base Borrowing Base, or any component thereof, or its value as Collateral, is adversely affected by one or more events, conditions, contingencies or risks that are not already adequately reflected in the calculation of the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base (as applicable); and provided further that no change will be made to the borrowing base standards pursuant to this Section 1.05 if such change would increase the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base in effect at any time above the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base, as applicable, that would be in effect at such time if such Tranche A Borrowing Base or the Tranche A-1 Borrowing Base were calculated using the standards in effect on the date hereof or, if such standards have been amended pursuant to Section 9.02(b)(vi), using the standards as in effect on the date of such 49 amendment. The Administrative Agent will provide written notice to the Company of any adjustments made pursuant to this Section 1.05 on the date of such adjustments. SECTION 1.06 Letter of Credit Amounts. Unless otherwise specified, all references herein to the amount of a Letter of Credit at any time shall be deemed to be the Stated Amount of such Letter of Credit in effect at such time; provided, however, that with respect to any Letter of Credit that, by its terms of any documents related thereto, provides for one or more automatic increases in the Stated Amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum Stated Amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum Stated Amount is in effect at such time. ARTICLE II The Credits SECTION 2.01 Loans; Mandatory Advances of Tranche A-1 Loans. (a) Subject to the terms and conditions set forth herein, (x) each Tranche A Lender severally agrees to make loans (each such loan, a "Tranche A Loan") to the Borrowers from time to time, on any Business Day during the Availability Period, in an aggregate principal amount not to exceed at any time outstanding the lesser of (i) the amount of such Lender's Tranche A Commitment or (ii) such Lender's Applicable Percentage of the Tranche A Borrowing Base and (y) each Tranche A-1 Lender severally agrees to make loans (each such loan, a "Tranche A-1 Loan") to the Borrowers from time to time, on any Business Day during the Availability Period, in an aggregate principal amount not to exceed at any time the lesser of (i) the amount such Lender's Tranche A-1 Commitment, as applicable, or (y) such Lender's Applicable Percentage of Incremental Availability; subject in each case to the following limitations: (i) after giving effect to any Borrowing, the total Exposure shall not exceed the lesser of (A) the Aggregate Commitments, or (B) the Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the then Tranche A Borrowing Base, (ii) after giving effect to any Borrowing, the aggregate outstanding principal amount of the Tranche A Loans of any Tranche A Lender, plus such Lender's Applicable Percentage of the outstanding L/C Exposure in respect of Letters of Credit, plus such Tranche A Lender's Applicable Percentage of the outstanding principal amount of all Swingline Loans shall not exceed the lesser of (x) such Tranche A Lender's Tranche A Commitment, or (y) such Tranche A Lender's Applicable Percentage of (i) the Tranche A Borrowing Base, less (ii) the Aggregate Term Outstandings, less (iii) the Aggregate Term A-2 Outstandings, (iii) after giving effect to any Borrowing, the aggregate outstanding principal amount of the Tranche A-1 Loans of any Tranche A-1 Lender, shall not exceed the lesser of (x) such Tranche A-1 Lender's Tranche A-1 Commitment, or (y) such Tranche A-1 Lender's Applicable Percentage of Incremental Availability, (iv) The L/C Exposure in respect of Letters of Credit shall not at any time exceed the Letter of Credit Sublimit, 50 (v) The aggregate outstanding principal amount of the Tranche A Credit Extensions shall not at any time exceed the Aggregate Tranche A Commitments; and (vi) The aggregate outstanding amount of the Tranche A-1 Credit Extensions shall not exceed the lesser of the Aggregate Tranche A-1 Commitments or Incremental Availability. (b) Subject to the terms and conditions set forth in the Existing Credit Agreement, each Term Lender severally made a term loan to the Borrowers on the Effective Date, in a principal amount equal to the then outstanding Term Commitment of each such Term Lender. (c) Subject to the terms and conditions set forth herein, each Term A-2 Lender severally agrees to make a term loan to the Borrowers on the Restatement Effective Date, in a principal amount not to exceed at any time outstanding the Term A-2 Commitment of each such Term A-2 Lender. Proceeds of the Term A-2 Loans made pursuant to this Section 2.01(c) shall be applied first to the repayment of the principal amount of the then outstanding Tranche A Loans, and second, to the repayment of the principal amount of the then outstanding Tranche A-1 Loans. (d) Within the foregoing limits, and subject to the other terms and conditions hereof, the Borrowers may borrow under this Section 2.01, prepay under Section 2.11, and, except with respect to the Term Loan and the Term A-2 Loan, reborrow under this Section 2.01. Loans may be ABR Loans or LIBOR Loans, as further provided herein. (e) Except as otherwise provided in , all Credit Extensions under the Tranche A-1 Commitments shall be Tranche A-1 Loans and all Letters of Credit shall be issued under Tranche A Commitments. (f) Except as provided in Section 2.01(f), each Borrowing of Loans to the Borrowers (other than Swingline Loans) shall be made by the Lenders pro rata in accordance with their respective Tranche A Commitments, Tranche A-1 Commitments, or Term A-2 Commitments. The failure of any Lender to make any Loan to the Borrowers shall neither relieve any other Lender of its obligation to fund its Loan to the Borrowers in accordance with the provisions of this Agreement nor increase the obligation of any other such Lender. (g) Notwithstanding anything to the contrary herein contained, no Borrowings of Tranche A Loans shall be made unless Tranche A-1 Loans are outstanding in an aggregate principal amount equal to the lesser of Incremental Availability or the then outstanding Tranche A-1 Commitments. In that regard, all requests for Borrowings shall be deemed to be a request for a Tranche A-1 Loan until the outstanding Tranche A-1 Loans equal the lesser of (i) Incremental Availability and (ii) the then unfunded amount of the outstanding Tranche A-1 Commitments. Proceeds of any Tranche A-1 Loan made pursuant to this Section 2.01(f) shall be first applied to the repayment of the principal amount of the then outstanding Tranche A Loans, if any. SECTION 2.02 Increase in Tranche A Commitments 51 (a) So long as no Default or Event of Default exists or would arise therefrom, (i) the Company shall have the right, at any time from time to time after the Effective Date, to request an increase of the aggregate of the then outstanding Tranche A Commitments by an amount not to exceed in the aggregate $100,000,000. Any such requested increase shall be first made to all existing Tranche A Lenders on a pro rata basis based on their respective Tranche A Applicable Percentages. At the time of sending such notice, the Company (in consultation with the Administrative Agent) shall specify the time period within which each Tranche A Lender is requested to respond (which shall in no event be less than ten (10) Business Days from the date of delivery of such notice to the Tranche A Lenders). Each Tranche A Lender shall notify the Administrative Agent within such time period whether or not it agrees to increase its Tranche A Commitment and, if so, whether by an amount equal to, greater than, or less than its Tranche A Applicable Percentage of such requested increase. Any Tranche A Lender not responding within such time period shall be deemed to have declined to increase its Tranche A Commitment. To the extent that the existing Tranche A Lenders decline to increase their Tranche A Commitments, or decline to increase their Tranche A Commitments to the amount requested by the Company, the Administrative Agent, in consultation with the Company, will use its reasonable efforts to arrange for other Persons to become a Tranche A Lender hereunder and to issue commitments in an amount equal to the amount of the increase in the Tranche A Commitments requested by the Company and not accepted by the existing Tranche A Lenders (each such increase by either means, a "Commitment Increase," and each Person issuing, or Tranche A Lender increasing, its Commitment, an "Additional Commitment Lender"), provided, however, that (i) no Tranche A Lender shall be obligated to provide a Commitment Increase as a result of any such request by the Company, and (ii) any Additional Commitment Lender which is not an existing Tranche A Lender shall be subject to the approval of the Administrative Agent, the Issuing Bank and the Company (which approval shall not be unreasonably withheld). Each Commitment Increase shall be in a minimum aggregate amount of at least $10,000,000 and in integral multiples of $5,000,000 in excess thereof. (b) No Commitment Increase shall become effective unless and until each of the following conditions have been satisfied: (i) The Additional Commitment Lender shall have executed and delivered a joinder to the Loan Documents, which shall have been consented to by the Administrative Agent and the Company, in substantially the form of Exhibit H hereto; (ii) The Borrowers shall deliver, or cause to be delivered, to the Administrative Agent a certificate of each Loan Party dated as of the Commitment Increase Date signed by a responsible officer of such Person (i) certifying and attaching the resolutions adopted by such Person approving or consenting to such increase, and (ii) in the case of the Borrowers, certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Article III and the other Loan Documents are true and correct on and as of the Commitment Increase Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and (B) no Default or Event of Default exists. 52 (iii) The Borrowers shall have paid such fees and other compensation to the Additional Commitment Lenders and to the Administrative Agent as the Borrowers and the Administrative Agent or such Additional Commitment Lenders, as applicable, shall agree; (iv) The Borrowers shall deliver to the Administrative Agent and the Tranche A Lenders an opinion or opinions, in form and substance reasonably satisfactory to the Administrative Agent, from counsel to the Borrowers reasonably satisfactory to the Administrative Agent and dated such date; and (v) The Borrowers and the Additional Commitment Lender shall have delivered such other instruments, documents and agreements as the Administrative Agent, may reasonably have requested in order to effectuate the documentation of the foregoing. (c) The Administrative Agent shall promptly notify each Lender as to the effectiveness of each Commitment Increase (with each date of such effectiveness being referred to herein as a "Commitment Increase Date"), and at such time (i) the Tranche A Commitments, under, and for all purposes of, this Agreement shall be increased by the aggregate amount of such Commitment Increases, (ii) Schedule 2.01 shall be deemed modified, without further action, to reflect the revised Tranche A Commitments of the Tranche A Lenders and (iii) this Agreement shall be deemed amended, without further action, to the extent necessary to reflect such increased Tranche A Commitments. The Borrowers shall prepay any Tranche A Loans outstanding on the Commitment Increase Date (and pay any breakage costs and additional amounts required pursuant to Section 2.16) to the extent necessary to keep the outstanding Tranche A Loans ratable with any revised Tranche A Applicable Percentages arising from any nonratable increase in the Tranche A Commitments under this Section 2.02. SECTION 2.03 Loans and Borrowings. (a) Each Loan shall be made as part of a Borrowing consisting of Loans of the same Type made by the Lenders ratably in accordance with their respective Applicable Percentages. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Each Borrowing shall be denominated in Dollars and comprised entirely of ABR Loans or LIBOR Loans as the Borrowers may request in accordance herewith; provided that all Swingline Loans shall be ABR Loans. Each Lender at its option may make any LIBOR Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrowers to repay such Loan in accordance with the terms of this Agreement and provided further, that the exercise of such option shall not result in an increase in additional amounts payable by the Borrowers pursuant to Section 2.17. (c) At the commencement of each Interest Period for any LIBOR Borrowing, such Borrowing shall be in an aggregate principal amount that is an integral multiple of $1,000,000 53 and not less than $3,000,000. At the time that each ABR Borrowing is made, such Borrowing shall be in an aggregate principal amount that is an integral multiple of $1,000,000 and not less than $3,000,000; provided that an ABR Borrowing may be in an aggregate principal amount that is equal to the entire unused balance of Tranche A Commitments or Tranche A-1 Commitments, or the entire outstanding balance of the Term Loan or the Term A-2 Loan, as applicable, or that is required to finance the reimbursement of a L/C Disbursement as contemplated by Section 2.06(e). Borrowings of more than one Type may be outstanding at the same time; provided that there shall not at any time be more than a total of ten (10) LIBOR Borrowings outstanding. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be deemed as made under separate Borrowings. (d) Notwithstanding any other provision of this Agreement, the Borrowers shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. SECTION 2.04 Requests for Borrowings To request a Borrowing, the Company shall notify the Administrative Agent of such request by telephone (a) in the case of a LIBOR Borrowing, not later than 4:00 p.m., Boston, Massachusetts time, three Business Days before the date of the proposed Borrowing, or (b) in the case of an ABR Borrowing, not later than 2:00 p.m., Boston, Massachusetts time, on the day of the proposed Borrowing; provided that any such notice of an ABR Borrowing to finance the reimbursement of an L/C Disbursement as contemplated by Section 2.06(e) may be given not later than 10:00 a.m., Boston, Massachusetts time on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Company. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.03: (i) the Borrower(s) on whose behalf the Company is requesting such Borrowing; (ii) the aggregate amount of such Borrowing; (iii) the date of such Borrowing, which shall be a Business Day; (iv) whether such Borrowing is to be an ABR Borrowing or a LIBOR Borrowing; (v) in the case of a LIBOR Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (vi) the location and number of the Borrowers' account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07. If no election as to the Type of Borrowing is specified with respect to a Borrowing in Dollars, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested LIBOR Borrowing, then the Borrowers shall be deemed to have selected 54 an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each of the Lenders of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.05 Swingline Loans. (a) During the Availability Period, the Swingline Lender is authorized by the Tranche A Lenders, and shall make Swingline Loans at any time (subject to Section 2.05(b) to the Borrowers up to the amount of the sum of the Swingline Sublimit upon a notice of Borrowing from the Company received by the Administrative Agent and the Swingline Lender (which notice, at the Swingline Lender's discretion, may be submitted prior to 3:00 p.m., Boston, Massachusetts time on the Business Day on which such Swingline Loan is requested). Immediately upon the making of a Swingline Loan, each Tranche A Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Swingline Lender a risk participation in such Swingline Loan in an amount equal to the such Tranche A Lender's Tranche A Applicable Percentage of the amount of such Swingline Loan. Swingline Loans shall be ABR Loans and shall be subject to weekly settlement with the Tranche A Lenders. (b) The Company's request for a Swingline Loan shall be deemed a representation that the applicable conditions for borrowing under Article IV are satisfied. If the conditions for borrowing under Article IV cannot in fact be fulfilled, (x) the Company shall give immediate notice (a "Noncompliance Notice") thereof to the Administrative Agent and the Swingline Lender, and the Administrative Agent shall promptly provide each Tranche A Lender with a copy of the Noncompliance Notice, and (y) the Required Lenders may direct the Swingline Lender to, and the Swingline Lender thereupon shall, cease making Swingline Loans until such conditions can be satisfied or are waived in accordance with Section 9.02. Unless the Required Lenders so direct the Swingline Lender, the Swingline Lender may, but is not obligated to, continue to make Swingline Loans commencing one (1) Business Day after the Noncompliance Notice is furnished to the Tranche A Lenders. Notwithstanding the foregoing, no Swingline Loans shall be made pursuant to this Section 2.05(b) if the aggregate outstanding amount of the Exposure would exceed the limitations set forth in Section 2.01. (c) Each Tranche A Lender's obligation to purchase and fund risk participations in Swingline Loans pursuant to this Section 2.05 shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Tranche A Lender may have against the Swingline Lender, the Borrowers or any other Person for any reason whatsoever, (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing. No such funding of risk participations shall relieve or otherwise impair the obligation of the Borrowers to repay Swingline Loans, together with interest as provided herein. SECTION 2.06 Letters of Credit. (a) General. Subject to the terms and conditions set forth herein, at any time and from time to time during the Availability Period, the Company may request the issuance of a Letter of Credit for the account of a Borrower, in a form appropriately completed and reasonably 55 acceptable to the Administrative Agent and the Issuing Bank. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Company or any Borrower to, or entered into by the Company or any Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. Each Letter of Credit shall be denominated in Dollars. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Company shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Company or the applicable Borrower also shall submit a letter of credit application on the Issuing Bank's standard form in connection with any request for a Letter of Credit. Following receipt of such notice and prior to the issuance of the requested Letter of Credit or the applicable amendment, renewal or extension, the Administrative Agent shall notify the Company and the Issuing Bank whether such Letter of Credit may be issued under this Agreement after giving effect to (i) the issuance, amendment, renewal or extension of such Letter of Credit, (ii) the issuance or expiration of any other Letter of Credit that is to be issued or will expire prior to the requested date of issuance of such Letter of Credit and (iii) the borrowing or repayment of any Loans that (based upon notices delivered to the Administrative Agent by the Company or a Borrower) are to be borrowed or repaid prior to the requested date of issuance of such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit, the Borrowers shall be deemed to represent and warrant that) such issuance, amendment, renewal or extension the total L/C Exposure shall not exceed $400,000,000, (2) the total Exposure shall not exceed the Aggregate Commitments and (3) the total Exposure of the Tranche A Lenders shall not exceed the lesser of the Aggregate Tranche A Commitments or the Tranche A Borrowing Base then in effect. (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one (1) year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) unless cash collateralized or otherwise credit supported to the reasonable satisfaction of the Issuing Bank, the date that is five (5) Business Days prior to the Maturity Date. Each Letter of Credit may, upon the request of the Company include a provision whereby such Letter of Credit shall be renewed automatically for additional consecutive periods of twelve (12) months or less (but not beyond the date that is five (5) Business Days prior to the Maturity Date) unless the Issuing Bank notifies the beneficiary thereof at least thirty (30) days prior to the then-applicable expiration date that such Letter of Credit will not be renewed; provided, 56 however, that no Letter of Credit shall be renewed or extended on or after the occurrence of a Default or an Event of Default. (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Tranche A Lender, and each such Tranche A Lender hereby acquires from such Issuing Bank, a participation in such Letter of Credit equal to such Tranche A Lender's Tranche A Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each such Tranche A Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of such Issuing Bank, such Tranche A Lender's Tranche A Applicable Percentage of each L/C Disbursement made by such Issuing Bank and not reimbursed by the Borrowers on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrowers for any reason. If any L/C Exposure remains outstanding upon the termination of the Tranche A Commitments, to the extent the lesser of the Aggregate Tranche A-1 Commitments or Incremental Availability exceeds the Tranche A-1 Loans (the "Excess Amount") upon such termination of the Tranche A Commitments, the Tranche A Lenders shall be deemed to have sold to each Tranche A-1 Lender, and each Tranche A-1 Lender shall be deemed unconditionally and irrevocably to have so purchased from the Tranche A Lenders, without recourse or warranty, an undivided interest and participation, to the extent of such Tranche A-1 Lender's Tranche A-1 Applicable Percentage in the lesser of such Excess Amount or such undivided interest and participation of each Tranche A Lender in the L/C Exposure, each drawing thereunder and the obligations of the Borrowers under this Agreement and the other Loan Documents with respect thereto. Each Tranche A Lender and Tranche A-1 Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Tranche A Commitments or the Tranche A-1 Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) Reimbursement. If the Issuing Bank in respect of a Letter of Credit shall make any L/C Disbursement in respect of such Letter of Credit, the Borrowers shall reimburse such L/C Disbursement by paying to the Administrative Agent an amount equal to such L/C Disbursement (i) prior to the close of business, Boston, Massachusetts time, on the Business Day immediately following the day that such L/C Disbursement is made, if the Borrowers shall have received notice of such L/C Disbursement prior to 11:00 a.m., Boston, Massachusetts time, or (ii) if such notice has not been received by the Borrowers prior to 11:00 a.m., Boston, Massachusetts time, then prior to the close of business, Boston, Massachusetts time, on the second Business Day immediately following the day the Borrowers receive such notice; provided that, if such L/C Disbursement is not less than $1,000,000, the Borrowers may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.04 that such payment be financed with an ABR Borrowing in an equivalent amount and, to the extent so financed, the Borrowers' obligation to make such payment shall be discharged and replaced by the resulting ABR Loan. If the Borrowers fail to make such payment when due, subject to the obligations of Tranche A-1 Lenders with respect to the Excess Amount, the Administrative Agent shall notify each Tranche A Lender of the applicable L/C Disbursement, the payment then 57 due from the Borrowers in respect thereof and such Tranche A Lender's Tranche A Applicable Percentage thereof. Promptly following receipt of such notice, each such Tranche A Lender shall pay to the Administrative Agent its Tranche A Applicable Percentage of the payment then due from the Borrowers, in the same manner as provided in Section 2.07 with respect to Loans made by such Tranche A Lender (and Section 2.07 shall apply, mutatis mutandis, to the payment obligations of such Tranche A Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from such Tranche A Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrowers pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Tranche A Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Tranche A Lenders and the Issuing Bank as their interests may appear. Any payment made by a Tranche A Lender pursuant to this paragraph to reimburse the Issuing Bank for any L/C Disbursement (other than the funding of ABR Loans as contemplated above) shall not constitute a Loan and shall not relieve the Borrowers of their obligation to reimburse such L/C Disbursement. (f) Obligations Absolute. Each Borrower's obligation to reimburse L/C Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or any Loan Document, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrowers' obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to a Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by each of the Borrowers to the extent permitted by Applicable Law) suffered by a Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for 58 further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrowers by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an L/C Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrowers of their obligation to reimburse the Issuing Bank and Lenders with respect to any such L/C Disbursement. (h) Interim Interest. If the Issuing Bank in respect of a Letter of Credit shall make any L/C Disbursement under such Letter of Credit, then, unless the Borrowers shall reimburse such L/C Disbursement in full on the date such L/C Disbursement is due pursuant to paragraph (e) of this Section, the unpaid amount thereof shall bear interest, for each day from and including the date such L/C Disbursement is made to but excluding the date that the Borrowers reimburse such L/C Disbursement, at the rate per annum then applicable to ABR Loans; provided that, if the Borrowers fail to reimburse such L/C Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Company, the Administrative Agent and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrowers shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(c). From and after the effective date of any such replacement, (i) such successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" and the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. (j) Cash Collateralization. If any Event of Default shall occur and be continuing, on the Business Day that the Company receives notice from the Administrative Agent or the Required Lenders demanding the deposit of cash collateral pursuant to this paragraph, the Borrowers shall deposit in an account with the Administrative Agent an amount in cash for the benefit of the Lenders, equal to the total L/C Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to 59 any Borrower described in clause (h) or (i) of Section 7.01. The Borrowers also shall deposit cash collateral pursuant to this paragraph as and to the extent required by Section 2.11(g) and Section 2.11(h). Each such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the Obligations of the Borrowers. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such accounts. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrowers' risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such accounts. Moneys in such accounts shall be (i) applied by the Administrative Agent to reimburse the Issuing Bank for L/C Disbursements for which it has not been reimbursed and (ii), to the extent not so applied, held for the satisfaction of the reimbursement obligations of the Borrowers for their L/C Exposure at such time, or (iii) be applied to satisfy other obligations of the Borrowers under this Agreement. If the Borrowers are required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrowers within three Business Days after all Events of Default have been cured or waived. If the Borrowers are required to provide cash collateral other than as a result of an occurrence of an Event of Default hereunder, such amount (to the extent not applied as aforesaid) shall be promptly returned to the extent that, and following such time as, after giving effect to such return: (i) the total Exposure does not exceed the Aggregate Commitments, and (ii) the total Exposure of the Tranche A Lenders does not exceed the lesser of the Aggregate Tranche A Commitments or the Tranche A Borrowing Base as then in effect and (iii) the total Exposure of the Tranche A-1 Lenders does not exceed the lesser of the Aggregate Tranche A-1 Commitments or Incremental Availability. SECTION 2.07 Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 2:00 p.m., Boston, Massachusetts time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make each such Loan available to the Borrowers by promptly crediting the amounts so received, in like funds, to an account of the Borrowers maintained with the Administrative Agent in Boston, Massachusetts and designated by the Company in the applicable Borrowing Request; provided that any ABR Loans made to finance the reimbursement of an L/C Disbursement as provided in Section 2.06(e) shall be remitted by the Administrative Agent to the Issuing Bank. (b) Each Borrowing of Tranche A Loans (other than Swingline Loans) shall be made by the Tranche A Lenders pro rata in accordance with their respective Tranche A Applicable Percentage; each Borrowing of Tranche A-1 Loans shall be made by the Tranche A-1 Lenders pro rata in accordance with their respective Tranche A-1 Applicable Percentage; and each Borrowing of Term A-2 Loans shall be made by the Term A-2 Lenders pro rata in accordance with their respective Term A-2 Applicable Percentage. The failure of any Lender to make any Loan shall neither relieve any other Lender of its obligation to fund its Loan in accordance with the provisions of this Agreement nor increase the obligation of any such other Lender. 60 (c) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Loan to be made by such Lender on the occasion of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrowers a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then such Lender and the Borrowers jointly and severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrowers to but excluding the date of payment to the Administrative Agent, at (i) in the case of any Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrowers, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.08 Interest Elections. (a) Each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a LIBOR Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrowers may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a LIBOR Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrowers may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. (b) To make an election pursuant to this Section, the Company shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.04 if the Company were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Company. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.03 and Section 2.04: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); 61 (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a LIBOR Borrowing; and (iv) if the resulting Borrowing is a LIBOR Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". (d) If any such Interest Election Request requests a LIBOR Borrowing but does not specify an Interest Period, then the Borrowers shall be deemed to have selected an Interest Period of one month's duration. (e) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each affected Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (f) If the Company fails to deliver a timely Interest Election Request with respect to a LIBOR Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Company, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a LIBOR Borrowing and (ii) unless repaid, each LIBOR Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.09 Termination or Reduction of Commitments. (a) The Borrowers may, upon irrevocable notice from the Company to the Administrative Agent, terminate the Aggregate Tranche A Commitments, the Letter of Credit Sublimit or the Swingline Sublimit or from time to time permanently reduce the Aggregate Tranche A Commitments, the Letter of Credit Sublimit or the Swingline Sublimit; provided that (i) any such notice shall be received by the Administrative Agent not later than 11:00 a.m. five Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $10,000,000 or any whole multiple of $1,000,000 in excess thereof, (iii) the Borrowers shall not terminate or reduce (A) the Aggregate Tranche A Commitments if, after giving effect thereto and to any concurrent prepayments hereunder, the total Exposure of the Tranche A Lenders would exceed the Aggregate Tranche A Commitments, (B) the Letter of Credit Sublimit if, after giving effect thereto, the L/C Exposure not fully cash collateralized in accordance with Section 2.06(j) hereunder would exceed the Letter of Credit Sublimit, and (C) the Swingline Sublimit if, after giving effect thereto, and to any concurrent payments hereunder, the outstanding principal amount of Swingline Loans hereunder would exceed the Swingline Sublimit. In the event that the Tranche A Commitments are terminated in their entirety, the Tranche A-1 Commitments shall thereupon also be automatically terminated without any further action of the Loan Parties. 62 (b) If, after giving effect to any reduction of the Aggregate Tranche A Commitments, the Letter of Credit Sublimit or the Swingline Sublimit exceeds the amount of the Aggregate Tranche A Commitments, such Letter of Credit Sublimit or Swingline Sublimit shall be automatically reduced by the amount of such excess. (c) The Borrowers may terminate the Aggregate Tranche A-1 Commitments in whole or in part, upon irrevocable notice from the Company to the Administrative Agent, if (i) at the time of such termination, (A) there are no outstanding Tranche A Loans and (B) Excess Availability is not less than twenty percent (20%) of the Tranche A Borrowing Base, and (ii) the Borrowers have demonstrated to the reasonable satisfaction of the Administrative Agent that Excess Availability, as projected on a pro-forma basis for the twelve (12) months following such payment, will be equal to or greater than twenty percent (20%) of the Tranche A Borrowing Base provided that any such notice shall be received by the Administrative Agent not later than 11:00 a.m. five Business Days prior to the date of termination or reduction. Each such reduction shall be in the principal amount of $5,000,000 or any integral multiple thereof. The Borrowers shall pay to the Administrative Agent for application as provided herein (i) at the effective time of any such termination (but not any partial reduction), all Unused Fees accrued on the Aggregate Tranche A-1 Commitments so terminated, and (ii) at the effective time of any such reduction or termination, any amount by which the Tranche A-1 Credit Extensions to the Borrowers outstanding on such date exceed the amount to which the Aggregate Tranche A-1 Commitments are to be reduced effective on such date. (d) The Administrative Agent will promptly notify the Lenders of any termination or reduction of the Letter of Credit Sublimit, the Swingline Sublimit, the Aggregate Tranche A Commitments or the Aggregate Tranche A-1 Commitments under this Section 2.09. Upon any reduction of the Aggregate Tranche A Commitments, the Tranche A Commitment of each Tranche A Lender shall be reduced by such Tranche A Lender's Tranche A Applicable Percentage of such reduction amount. Upon any reduction of the Aggregate Tranche A-1 Commitments, the Tranche A-1 Commitment of each Tranche A-1 Lender shall be reduced by such Tranche A-1 Lender's Tranche A-1 Applicable Percentage of such reduction amount. All fees (including, without limitation, Unused Fees and Letter of Credit Fees) in respect of the Aggregate Revolving Commitments, as applicable, accrued until the effective date of any termination of such Commitments shall be paid on the effective date of such termination. (e) Each notice delivered by the Company pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Company (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. (f) On the Effective Date and the funding of the Term Loan, the Term Commitments of the Term Lenders terminated. (g) On the Restatement Effective Date and the funding of the Term A-2 Loan, the Term A-2 Commitments of the Term A-2 Lenders shall be terminated. 63 (h) To the extent that any Real Estate which constitutes a Principal Property on the Effective Date is reasonably determined by the Administrative Agent to no longer constitute a Principal Property, at the Company's election, the Term Loan may be decreased by an amount equal to the Appraised Value of such Real Estate; provided that (i) the Aggregate Tranche A Commitments are increased by a corresponding amount (in which event the Tranche A Commitment of each Tranche A Lender shall be automatically be increased by an amount equal to its Tranche A Applicable Percentage of such increase in the Aggregate Tranche A Commitments) and (ii) the Mortgages and other Loan Documents are amended in form reasonably satisfactory to the Administrative Agent (A) to provide that such Real Estate secures all Obligations and (B) as may otherwise be reasonably required by the Administrative Agent to reflect that such Real Estate is no longer a Principal Property. Any increase in the Aggregate Tranche A Commitments under this Section 2.09(h) shall in no way impair the rights of the Borrowers under Section 2.02 hereof. (i) To the extent that any Real Estate owned on the Effective Date which has been determined not to constitute a Principal Property on the Effective Date but is reasonably determined by the Administrative Agent after the Effective Date to have constituted a Principal Property on the Effective Date, at the Company's election, the Term Loan may be increased by an amount equal to the Appraised Value of such Real Estate; provided that (i) the Tranche A Commitments are decreased by a corresponding amount (in which event the Tranche A Commitment of each Tranche A Lender shall be automatically be reduced by an amount equal to its Tranche A Applicable Percentage of such decrease in the Aggregate Tranche A Commitments), and (ii) the Mortgages and other Loan Documents are amended in form reasonably satisfactory to the Administrative Agent (A) to provide that such Real Estate secures only the Term Loans and (B) as may otherwise be reasonably required by the Administrative Agent to reflect that such Real Estate is a Principal Property. SECTION 2.10 Repayment of Loans; Evidence of Debt. (a) Each Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan made to the Borrowers and held by such Lender on the Maturity Date applicable to such Loan. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of each Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from each Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the respective Lenders and each respective Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations 64 recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of any Borrower to repay its Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans made by it to any Borrower or Borrowers be evidenced by a promissory note. In such event, each of the Borrowers shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.11 Prepayment of Loans. (a) Subject to the requirements of this Section and the payment of any amounts required under Section 2.16, each Borrower shall promptly prepay any Borrowing (or deposit such amounts) as may be required by this Agreement, together with any and all amounts required under Section 2.16. (b) The Borrowers may, upon irrevocable notice from the Company to the Administrative Agent, at any time or from time to time voluntarily prepay Tranche A Loans in whole or in part without premium or penalty. (c) In the event the all Tranche A Loans have been paid in full, the Borrowers may, upon irrevocable notice from the Company to the Administrative Agent, prepay the Tranche A-1 Loans in whole or in part without premium or penalty; provided, that no Default or Event of Default then exists or shall arise from such prepayment. (d) The Borrowers may, upon irrevocable notice from the Company to the Administrative Agent, prepay the Tranche A-1 Loans in whole or in part without premium or penalty in connection with the termination or reduction of the Tranche A-1 Commitments in accordance with Sections 2.09(a) and 2.09(c) hereof. Any such prepayment shall be subject to the notice provisions of Section 2.11(d). (e) The Borrowers may, upon irrevocable notice from the Company to the Swingline Lender (with a copy to the Administrative Agent), at any time or from time to time, voluntarily prepay Swingline Loans in whole or in part without premium or penalty; provided that (i) such notice must be received by the Swingline Lender and the Administrative Agent not later than 1:00 p.m. on the date of the prepayment, and (ii) any such prepayment shall be in a minimum principal amount of $100,000. Each such notice shall specify the date and amount of such prepayment. If such notice is given by the Company, the Borrowers shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. (f) Except as provided in Section 2.09(h) and Section 2.09(i) hereof or unless the Term Prepayment Conditions are satisfied, the Borrowers may not prepay the Term Loan until all other Obligations have been paid in full in cash (other than contingent indemnification 65 obligations for which no claim has then been asserted) and the Tranche A Commitments and the Tranche A-1 Commitments have been terminated. (g) Unless the Term Prepayment Conditions are satisfied, the Borrowers may not prepay the Term A-2 Loan until all other Obligations have been paid in full in cash (other than contingent indemnification obligations for which no claim has then been asserted) and the Tranche A Commitments and the Tranche A-1 Commitments have been terminated. Any such prepayment shall be accompanied by the payment of the Prepayment Premium, if any is then due. (h) In the event and on such occasion that the total Exposure exceeds the lesser of the Aggregate Commitments or the Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the then Tranche A Borrowing Base), each as then in effect, each of the Borrowers shall promptly prepay Loans and/or cash collateralize the L/C Exposure in an aggregate amount equal to such excess; provided, however, that the Borrowers shall not be required to cash collateralize the L/C Exposure pursuant to this Section 2.11(h) unless after the prepayment in full of the Loans (other than the Term Loan and the Term A-2 Loan), the total Exposure exceeds the lesser of the Aggregate Commitments or the Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the then Tranche A Borrowing Base), each as then in effect, provided further that the Borrowers shall not be required to prepay the Term Loan pursuant to this Section 2.11(h) unless after the prepayment in full of the Loans (other than the Term Loan and the Term A-2 Loan) and the cash collateralization of the L/C Exposure, the total Exposure exceeds the lesser of the Aggregate Commitments or the Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the then Tranche A Borrowing Base, each as then in effect, and provided further that the Borrowers shall not be required to prepay the Term A-2 Loan pursuant to this Section 2.11(h) unless after the prepayment in full of the Loans (other than the Term A-2 Loan) and the cash collateralization of the L/C Exposure, the total Exposure exceeds the lesser of the Aggregate Commitments or the Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the then Tranche A Borrowing Base), each as then in effect. (i) In the event and on such occasion that the total Exposure of the Tranche A Lenders exceeds the lesser of (A) the Aggregate Tranche A Commitments or (B)(i) the Tranche A Borrowing Base as then in effect, less (ii) the Aggregate Term Outstandings, less (iii) the Aggregate Term A-2 Outstandings, each of the Borrowers shall promptly prepay Tranche A Loans and/or cash collateralize the L/C Exposure in an aggregate amount equal to such excess; provided, however, that the Borrowers shall not be required to cash collateralize the L/C Exposure pursuant to this Section 2.11(i) unless after the prepayment in full of the Tranche A Loans, the total Exposure of the Tranche A Lenders exceeds the lesser of (x) the Aggregate Tranche A Commitments or (y)(i) the Tranche A Borrowing Base as then in effect, less (ii) the Aggregate Term Outstandings, less (iii) the Aggregate Term A-2 Outstandings. (j) At any time that any Loans are outstanding, in the event and on each occasion that any Net Proceeds are received by or on behalf of any Loan Party in respect of any Prepayment Event, including, without limitation, the Net Proceeds of any Permitted Divestiture, such Loan Party shall, within five Business Days after such Net Proceeds are received, prepay Borrowings 66 in an aggregate amount equal to such Net Proceeds, provided that any Net Proceeds from the Principal Properties shall be applied solely to the Term Loan. (k) Prior to any optional or mandatory prepayment of Borrowings hereunder, the Borrowers shall select the Borrowing or Borrowings to be prepaid and shall specify such selection in the notice of such prepayment pursuant to Section 2.11(l). Notwithstanding the foregoing provisions of this Section 2.11, if at any time the Borrowers are required to make a prepayment under this Section 2.11 and the Borrowers would incur breakage costs under Section 2.16 as a result of LIBOR Loans being prepaid other than on the last day of an Interest Period applicable thereto (the "Affected LIBOR Loans"), and provided that no Default has occurred and is continuing at the time, then the Borrowers may in their sole discretion initially deposit a portion (up to 100%) of the amounts that otherwise would have been paid in respect of the Affected LIBOR Loans with the Administrative Agent (which deposit must be equal in amount to the amount of the Affected LIBOR Loans not immediately prepaid) to be held as security for such obligations of the Borrowers hereunder pursuant to a cash collateral agreement to be entered into in form and substance reasonably satisfactory to the Administrative Agent and shall provide for investments in Cash and Cash Equivalents satisfactory to the Administrative Agent and the Company, with such cash collateral to be directly applied upon the first occurrence (or occurrences) thereafter of the last day of an Interest Period applicable to the relevant Loans that are LIBOR Loans (or such earlier date or dates as shall be requested by the Company), to repay an aggregate principal amount of such Loans equal to the Affected LIBOR Loans not initially prepaid pursuant to this sentence. Notwithstanding anything to the contrary contained in the immediately preceding sentence, all amounts deposited as cash collateral pursuant to the immediately preceding sentence shall be held for the sole benefit of the Lenders and may be applied to the prepayment of such Loans immediately if an Event of Default has occurred and is continuing. (l) The Company shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment (other than mandatory prepayments which shall be payable immediately when due without notice and prepayments of Swingline Loans) hereunder (i) in the case of prepayment of a LIBOR Borrowing, not later than 4:00 p.m., Boston, Massachusetts time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Borrowing, not later than 2:00 p.m., Boston, Massachusetts time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment; provided that, if a notice of optional prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Promptly following receipt of any such notice, the Administrative Agent shall advise the relevant Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.03, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. 67 (m) Each prepayment shall be applied to the applicable Loans of the applicable Lenders in accordance with their respective Applicable Percentages. (n) Subject to the provisions of Section 7.03, prepayments made pursuant to this Section 2.11 (other than paragraphs (c), (d), (e), (g) and (h) hereof and other than those made with the Net Proceeds of the Principal Properties), first, shall be applied ratably to the Swingline Loans, second, shall be applied ratably to the outstanding Tranche A Loans, third, shall be applied ratably to the outstanding Tranche A-1 Loans, and, fourth, if an Event of Default then exists, shall be used to cash collateralize the remaining L/C Exposure; fifth, shall, to the extent permitted or required in this Section 2.11, be applied ratably to the outstanding Term Loans, and, sixth, shall, to the extent permitted or required in this Section 2.11, be applied ratably to the outstanding Term A-2 Loans, and, seventh, the amount remaining, if any, after the prepayment in full of all Loans outstanding at such time and the cash collateralization of the remaining L/C Exposure in full may be retained by the Borrowers for use in the ordinary course of its business. Prepayments made pursuant to paragraphs (d) and (e) of this Section 2.11 first shall be applied ratably first to the outstanding Tranche A-1 Loans and then in accordance with the priorities in the preceding sentence. Upon the drawing of any Letter of Credit that has been cash collateralized, the funds held as cash collateral shall be applied (without any further action by or notice to or from the Borrowers or any other Loan Party) to reimburse the Issuing Bank or the Lenders, as applicable. (o) Prepayments of the Term Loan made pursuant to this Section 2.11, including, without limitation those made with the Net Proceeds of the Principal Properties, first, shall be applied ratably to the Term Loans of the Term Lenders, and, second, the amount remaining, if any, after the prepayment in full of all Term Loans outstanding at such time may be retained by the Borrowers for use in the ordinary course of business. (p) Prepayments of the Term A-2 Loan made pursuant to this Section 2.11 shall be applied ratably to the Term A-2 Loans of the Term A-2 Lenders. Anything contained herein to the contrary notwithstanding, in the event the Borrowers are required to make, or voluntarily determine to make, a prepayment (a "Waivable Prepayment") of the Term A-2 Loans, not less than three Business Days prior to the date (the "Prepayment Date") on which the Borrowers elect (or is otherwise required) to make such Waivable Prepayment, the Borrowers shall notify the Administrative Agent of the amount of such prepayment, and the Administrative Agent will promptly thereafter notify each Term A-2 Lender of the amount of such Term A-2 Lender's Applicable Percentage of such Waivable Prepayment and such Term A-2 Lender's option to refuse such amount. Each such Term A-2 Lender (each, a "Declining Lender") may exercise such option by giving written notice to the Administrative Agent of its election to do so on or before the second Business Day prior to the Prepayment Date (it being understood that any Term A-2 Lender which does not notify the Administrative Agent of its election to exercise such option on or before the first Business Day prior to the Prepayment Date shall be deemed to have elected, as of such date, to require such prepayment). On the Prepayment Date, the Borrowers shall pay to the Administrative Agent the amount of the Waivable Prepayment, which amount shall be applied to the Term A-2 Lenders (other than Declining Lenders), to prepay the Term A-2 Loans of such Term A-2 Lenders (which prepayment shall be applied to the principal of the Term A-2 Loans in accordance with the provisions of this Agreement), provided that if all Term A-2 Lenders are Declining Lenders, the Borrowers may nevertheless make such Waivable 68 Prepayment and all Term A-2 Lenders shall be required to accept their Applicable Percentage thereof. (q) The Loans shall be repaid daily in accordance with (and to the extent required under) the provisions of Section 5.14. SECTION 2.12 Fees. (a) The Borrowers shall pay to the Administrative Agent, for its own account, the fees and other charges payable in the amounts and at the times separately agreed upon between the Borrowers and the Administrative Agent. (b) The Borrowers shall pay to the Administrative Agent for the account of each Tranche A Lender, in accordance with its Tranche A Applicable Percentage, a fee, calculated on the basis of a 360 day year and actual days elapsed, equal to the percentage set forth under the heading "Tranche A Unused Fee" in the definition of Applicable Margin times the actual daily amount by which the then Aggregate Tranche A Commitments exceed the sum of (A) the principal amount of Tranche A Loans and Swingline Loans, then outstanding, and (B) the then L/C Exposure. In addition, the Borrowers shall pay to the Administrative Agent for the account of each Tranche A-1 Lender, in accordance with its Tranche A-1 Applicable Percentage, a fee, calculated on the basis of a 360 day year and actual days elapsed, equal to the percentage set forth under the heading "Tranche A-1 Unused Fee" in the definition of Applicable Margin times the actual daily amount by which the then Aggregate Tranche A-1 Commitments exceed the principal amount of Tranche A-1 Loans then outstanding. The foregoing fees (the "Unused Fees") shall accrue at all times during the Availability Period, including at any time during which one or more of the conditions in Article IV is not met, and shall be due and payable quarterly in arrears on the tenth Business Day of each January, April, July and October, commencing with the first such date to occur after the Effective Date, and on the last day of the Availability Period. The Unused Fees shall be calculated quarterly in arrears. (c) The Borrowers shall pay the Administrative Agent for the account of the Lenders, on the tenth Business Day of each October, January, April and July, in arrears, a fee calculated on the basis of a 360 day year and actual days elapsed (each, a "Letter of Credit Fee"), equal to the following per annum percentages of the average Stated Amount of the following categories of Letters of Credit outstanding during the three month period then ended: (i) Standby Letters of Credit for the Borrowers: At a per annum rate equal to the then Applicable Margin for Tranche A LIBOR Loans; and (ii) Commercial Letters of Credit for the Borrowers: At a per annum rate equal to fifty percent (50%) of the then Applicable Margin for Tranche A LIBOR Loans. (d) The Borrowers shall pay directly to the Issuing Bank for its own account a fronting fee with respect to each Letter of Credit, at a rate equal to one-eighth of one percent (0.125%) per annum, computed on the Stated Amount of such Letter of Credit. Such fronting fees shall be due and payable on the tenth Business Day after the end of each October, January, April and July, in arrears, on the basis of a 360 day year and actual days elapsed, commencing with the first such date to occur after the issuance of such Letter of Credit, on the expiration date 69 of such Letter of Credit and thereafter on demand. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of the Letter of Credit shall be determined in accordance with Section 1.06. The Borrowers shall pay to the Issuing Bank, in addition to all Letter of Credit Fees otherwise provided for hereunder, the reasonable and customary fees, costs and charges of the Issuing Bank in connection with the issuance, negotiation, settlement, amendment and processing of each Letter of Credit issued by the Issuing Bank in such amounts as shall be mutually agreed by the Company and the Issuing Bank, provided that no such fees, costs or charges shall be payable in respect of the issuance of any Existing Letters of Credit. Such customary fees and standard costs and charges are due and payable on demand and are nonrefundable. (e) All fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for the respective accounts of the Administrative and other Lenders as provided herein. Once due, all fees shall be fully earned and shall not be refundable under any circumstances. SECTION 2.13 Interest. (a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Margin. (b) The Loans comprising each LIBOR Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin. (c) Notwithstanding the foregoing, upon the occurrence and during the continuance of a Specified Default, at the written election of the Required Lenders, principal or interest on any Loan shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, two percent (2.0%) plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section 2.13 and (ii) in the case of any other amounts, two percent (2.0%) plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section 2.13. (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and upon termination of the Commitments; provided that (i) interest accrued pursuant to paragraph (c) of this Section 2.13 shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan of any Lender (other than a prepayment of an ABR Loan prior to the end of the Availability Period with respect to such Lender), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any LIBOR Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. (e) All interest hereunder shall be computed on the basis of a year of 360 days (or 365/366 days in the case of ABR Loans), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. 70 SECTION 2.14 Alternate Rate of Interest. If prior to the commencement of any Interest Period for a LIBOR Borrowing: (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or (b) the Administrative Agent is advised by a majority in interest of the Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Company and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent thereafter notify the Company and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a LIBOR Borrowing shall be ineffective and (ii) if any Borrowing Request requests a LIBOR Borrowing, such Borrowing shall be made as an ABR Borrowing. SECTION 2.15 Increased Costs. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or any Issuing Bank; or (ii) impose on any Lender or any Issuing Bank or the London interbank market any other condition affecting this Agreement, any Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or Issuing Bank hereunder (whether of principal, interest or otherwise), then the Company will pay to such Lender or Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or any Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or Issuing Bank's capital or on the capital of such Lender's or Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by such Issuing Bank, to a level below that which such Lender or such Issuing Bank or such Lender's or Issuing Bank's holding 71 company could have achieved but for such Change in Law (taking into consideration such Lender's or Issuing Bank's policies and the policies of such Lender's or Issuing Bank's holding company with respect to capital adequacy), then from time to time the Company will pay to such Lender or Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or any Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Company and shall be conclusive absent manifest error. The Company shall pay such Lender or Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; provided that the Company shall not be required to compensate a Lender or Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 180 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Company of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof. (e) This Section 2.15 shall not apply to Taxes, which shall be governed exclusively by Section 2.17. SECTION 2.16 Break Funding Payments. In the event of (a) the payment of any principal of any LIBOR Loan other than on the last day of an Interest Period applicable thereto (including as a result of the acceleration of the Obligations upon the occurrence of an Event of Default or in accordance with the provisions of Section 2.02), (b) the conversion of any LIBOR Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11(l) and is revoked in accordance therewith), or (d) the assignment of any LIBOR Loan other than on the last day of the Interest Period applicable thereto as a result of a request by a Borrower pursuant to Section 2.19, then, in any such event, such Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a LIBOR Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount 72 and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrowers and shall be conclusive absent manifest error. The Borrowers shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17 Taxes. (a) Any and all payments by or on account of any obligation of any Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if such Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all such required deductions (including deductions applicable to additional sums payable under this Section), the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with Applicable Law. (b) In addition, each of the Borrowers shall pay any Other Taxes to the relevant Governmental Authority in accordance with Applicable Law. (c) Each of the Borrowers shall indemnify the Administrative Agent, each Lender and each Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent, Lender or Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of such Borrower hereunder or under any other Loan Document and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability, along with a reasonably detailed explanation of the tax issue, delivered to a Borrower by a Lender or Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or Issuing Bank, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by any Borrower to a Governmental Authority, such Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Lender that is entitled to an exemption from or reduction of withholding tax under the law of any jurisdiction in which any Borrower is located or doing business, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to such Borrower (with a copy to the Administrative Agent) or to the Administrative Agent, at the time or times prescribed by Applicable Law, such properly completed and executed documentation prescribed by Applicable Law or reasonably requested by such Borrower as will 73 permit such payments to be made without withholding or at a reduced rate, provided that such Lender has received written notice from such Borrower or the Administrative Agent advising it of the availability of such exemption or reduction and supplying all applicable documentation. Each Lender will promptly notify the Company and the Administrative Agent in writing if there is any change in such Lender's circumstances that would prevent such Lender from providing updates to the documentation previously delivered or would invalidate any documentation previously delivered. (f) If the Administrative Agent, any Lender or Issuing Bank becomes aware that it is entitled to claim a refund from a Governmental Authority in respect of Indemnified Taxes or Other Taxes as to which it has been indemnified by a Borrower, or with respect to which a Borrower has paid additional amounts pursuant to this Section 2.17, it shall promptly notify such Borrower of the availability of such refund claim and shall, within 30 days after receipt of a request by such Borrower, make a claim to such Governmental Authority for such refund at such Borrower's expense. If the Administrative Agent, any Lender or Issuing Bank receives a refund (including pursuant to a claim for a refund made pursuant to the preceding sentence) in respect of Indemnified Taxes or Other Taxes as to which it has been indemnified by a Borrower in which such Borrower has paid additional amounts pursuant to this Section 2.17, it shall within 30 days from the date of such receipt pay over such refund to such Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by such Borrower under this Section 2.17 with respect to Indemnified Taxes or Other Taxes giving rise to such refund), net of all out of pocket expenses of the Administrative Agent, the Lender or Issuing Bank and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund); provided, however, that such Borrower, upon the request of the Administrative Agent, Lender or Issuing Bank, agrees to repay the amount paid over to such Borrower (plus penalties, interest and other charges, including the reasonable fees and expenses of the Administrative Agent and Collateral Agent) to the Administrative Agent, Lender or Issuing Bank if the Administrative Agent, Lender or Issuing Bank is required to repay such refund to such Governmental Authority. (g) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.17 shall survive the payment in full of the principal of and interest on all Loans and L/C Disbursements made hereunder. (h) Each Non-U.S. Lender shall deliver to the Company and the Administrative Agent two copies of either U.S. Internal Revenue Service Form W-8BEN (in the case of a Non-U.S. Lender claiming treaty benefits), Form W-8BEN and a tax status certificate in form reasonably acceptable to the Company and the Administrative Agent (in the case of a Non-U.S. Lender claiming portfolio interest exemption), Form W-8ECI or, with respect to a Non-U.S. Lender that is not acting for its own account (e.g., where the Non-U.S. Lender is a partnership or a participating lender), Form W-8IMY, or any subsequent versions thereof or successors thereto, properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. federal withholding tax on payments by the Company under this Agreement. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office. In addition, each Non-U.S. Lender shall deliver such forms promptly upon the expiration, obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender and shall promptly notify 74 the Company and the Administrative Agent in writing if there is any change in such Lender's circumstances that would prevent such Lender from providing a new form or would invalidate a form previously delivered. Notwithstanding any other provision of this Section 2.17(h), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.17(h) that such Non-U.S. Lender is not legally able to deliver. (i) Nothing contained in this Section 2.17 shall require the Administrative Agent, any Lender or Issuing Bank to make available any of its tax returns (or any other information that it deems, in its sole discretion, to be confidential or proprietary). SECTION 2.18 Payments Generally; Pro Rata Treatment; Sharing of Setoffs. (a) Each Borrower shall make each payment required to be made by it hereunder or under any other Loan Document (whether of principal, interest, fees, reimbursement of L/C Disbursements, or of amounts payable under Section 2.15, 2.16 or 2.17, or otherwise) prior to the time expressly required hereunder or under such other Loan Document for such payment (or, if no such time is expressly required, prior to 2:00 p.m., Boston, Massachusetts time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 100 Federal Street, Boston, Massachusetts 02110, except payments to be made directly to the Issuing Bank as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Administrative Agent and the Collateral Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document shall be made in Dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed L/C Disbursements, interest and fees then due hereunder in respect of Obligations, then such funds shall be applied in the order and manner set forth in Section 7.03. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or participations in L/C Disbursements resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Loans and participations in L/C Disbursements and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Loans and participations in L/C Disbursements of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and participations in L/C Disbursements; provided that (i) if any such participations are purchased 75 and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by any Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in L/C Disbursements to any assignee or participant, other than to a Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). Each Borrower consents to the foregoing and agrees, to the extent it may effectively do so under Applicable Law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against any Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of such Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from a Borrower prior to the date on which any payment by such Borrower is due to the Administrative Agent for the account of any of the Lenders or the Issuing Bank hereunder that such Borrower will not make such payment, the Administrative Agent may assume that such Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the applicable Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if such Borrower has not in fact made such payment, then each of such Lenders or such Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. SECTION 2.19 Mitigation Obligations; Replacement of Lenders. (a) If any Lender (including for this purpose an Issuing Bank) requests compensation under Section 2.15, or if a Borrower is required to pay any additional amount or indemnification payment to any Lender, the Administrative Agent, or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be materially disadvantageous to such Lender. Each of the Borrowers hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if a Borrower is required to pay any additional amount or indemnification payment to any Lender, the Administrative Agent, or to any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Company may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and 76 subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Company shall have received the prior written consent of the Administrative Agent and the Issuing Bank, which consents shall not be unreasonably withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in L/C Disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrowers (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a material reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Company to require such assignment and delegation cease to apply. SECTION 2.20 Designation of Company as each Borrowers' Agent. (a) Each Borrower hereby irrevocably designates and appoints the Company as such Borrower's agent to obtain Loans and Letters of Credit, the proceeds of which shall be available to each Borrower for such uses as are permitted under this Agreement. As the disclosed principal for its agent, each Borrower shall be obligated to the Administrative Agent and each Lender on account of Loans so made and Letters of Credit so issued as if made directly by the Lenders to such Borrower, notwithstanding the manner by which such Loans and Letters of Credit are recorded on the books and records of the Company and of any other Borrower. (b) Each Borrower represents to the Credit Parties that it is an integral part of a consolidated enterprise, and that each Loan Party will receive direct and indirect benefits from the availability of the joint credit facility provided for herein, and from the ability to access the collective credit resources of the consolidated enterprise which the Loan Parties comprise. Each Borrower recognizes that credit available to it hereunder is in excess of and on better terms than it otherwise could obtain on and for its own account and that one of the reasons therefor is its joining in the credit facility contemplated herein with all other Borrowers. Consequently, each Borrower hereby assumes and agrees to discharge all Obligations of each of the other Borrowers as if such Borrower which is so assuming and agreeing were each of the other Borrowers. (c) The Company shall act as a conduit for each Borrower (including itself, as a Borrower) on whose behalf the Company has requested a Loan. None of the Agents nor any other Credit Party shall have any obligation to see to the application of such proceeds. (d) The authority of the Company to request Loans and Letters of Credit on behalf of, and to bind, the Borrowers, shall continue unless and until the Administrative Agent actually receives written notice of: (i) the termination of such authority, and (ii) the subsequent appointment of a successor Company, which notice is signed by the respective Financial Officers of each Borrower; and (iii) written notice from such successive Company accepting such appointment and acknowledging that from and after the date of such appointment, the newly appointed Company shall be bound by the terms hereof, and that as used herein, the term "Company" shall mean and include the newly appointed Company. 77 ARTICLE III Representations and Warranties Until the Commitments have expired or been terminated and the principal of and interest on each Loan, all fees and other Obligations payable hereunder shall have been paid in full, and all Letters of Credit shall have expired or terminated and all L/C Disbursements shall have been reimbursed, each of the Borrowers represents and warrants to the Lenders that: SECTION 3.01 Organization; Powers. Except as set forth on Schedule 3.01, each of the Company and the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. SECTION 3.02 Authorization; Enforceability. The Transactions to be entered into by each Loan Party are within such Loan Party's corporate powers and have been duly authorized by all necessary corporate and, if required, equityholder action. This Agreement has been duly executed and delivered by each of the Borrowers and constitutes, and each other Loan Document to which any Loan Party is to be a party, when executed and delivered by such Loan Party, will constitute, a legal, valid and binding obligation of each such Borrower or Loan Party (as the case may be), enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03 Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect and have been disclosed to the Lenders to their reasonable satisfaction, and except filings necessary to perfect Liens created under the Loan Documents, (b) will not violate any Applicable Law or regulation or the charter, by-laws or other organizational documents of the Company or any of the Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Company or any of the Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Company or any of the Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Company or any of the Subsidiaries, except Liens created under the Loan Documents. SECTION 3.04 Financial Condition; No Material Adverse Change. (a) The Company has heretofore furnished to the Lenders its consolidated balance sheet and statements of consolidated operations and retained earnings, consolidated shareholders' equity and consolidated cash flows (i) as of and for the fiscal year ended February 24, 2007, reported on by Pricewaterhouse Coopers LLP, independent public accountants, and (ii) as of and for the fiscal quarter and the portion of the fiscal year ended September 8, 2007, certified by its chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Company and the 78 Subsidiaries (other than Pathmark and its Subsidiaries) as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. (b) The Company has heretofore furnished to the Lenders the consolidated balance sheet and statements of consolidated operations and retained earnings, consolidated shareholders' equity and consolidated cash flows of Pathmark and its Subsidiaries (i) as of and for the fiscal year ended February 3, 2007, reported on by Deloitte & Touche, LLP, independent public accountants, and (ii) as of and for the fiscal quarter and the portion of the fiscal year ended August 4, 2007, certified by Pathmark's chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of Pathmark and its Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. (c) The unaudited consolidated pro forma balance sheet of the Company and its Subsidiaries as of September 8, 2007, and the related consolidated statements of income and cash flow of the Company and its Subsidiaries for the twelve month period then ended, certified by the chief financial officer, senior vice president-finance, or treasurer of the Company fairly present the consolidated financial condition of Company and its Subsidiaries as at such date and the consolidated results of operations of the Company and its Subsidiaries for the period ended on such date, in the case of the consolidated balance sheet, giving pro forma effect to the Transactions. (d) The consolidated forecasted balance sheet, statements of income and cash flows of the Company and its Subsidiaries delivered to the Lenders were prepared in good faith on the basis of the assumptions stated therein, which assumptions were reasonable in light of the conditions existing at the time of delivery of such forecasts, and represented, at the time of delivery, a reasonable estimate of the Company's and its Subsidiaries future financial condition and performance, giving pro forma effect to the Transactions. (e) Since August 4, 2007, there has been no material adverse change in (a) the business, assets, operations or condition, financial or otherwise, of the Company and the Subsidiaries, taken as a whole, except as disclosed in the Exchange Act Filings made prior to the Effective Date or in any Schedules or Exhibits to this Agreement as of the Effective Date, (b) after the Effective Date, the ability of any Loan Party to perform any of its obligations under any Loan Document, (c) after the Effective Date, the rights of or benefits available to the Lenders under any Loan Document or (d) the Collateral as a whole. SECTION 3.05 Properties. (a) Each of the Company and the Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for Liens permitted by Section 6.02 or other Liens reasonably acceptable to the Administrative Agent. As of the Restatement Effective Date, the Real Estate listed on Schedule 1.01(C) is the only Real Estate constituting a Principal Property. 79 (b) Each of the Company and the Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Company and the Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.06 Litigation and Environmental Matters. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of any of the Borrowers, threatened against or affecting the Company or any of the Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, would reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve any of the Loan Documents or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, neither the Company nor any of the Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received written notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. (c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. SECTION 3.07 Compliance with Laws and Agreements. Each of the Company and the Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. SECTION 3.08 Investment Company Status. Neither the Company nor any of the Subsidiaries is an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940. SECTION 3.09 Taxes. Each of the Company and the Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) any Taxes that are being contested in good faith by appropriate proceedings and for which the Company or such Subsidiary, as applicable, has set aside on its books adequate reserves in accordance with GAAP or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. 80 SECTION 3.10 Employee Benefit Plans. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. SECTION 3.11 Disclosure. To the best knowledge of the Borrowers, the Borrowers have disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which the Company or any of the Subsidiaries is subject, and all other matters known to any of them, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or any other Loan Document or delivered hereunder or thereunder (as modified or supplemented by other information so furnished) contains, as of the date hereof (or in the case of items furnished after the date hereof, when furnished), any material misstatement of fact or omits, as of the date hereof (or in the case of items furnished after the date hereof, when furnished), to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrowers represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time so furnished. SECTION 3.12 Subsidiaries. Schedule 3.12 sets forth the name of, and the ownership interest of the Company in, each Subsidiary of the Company, in each case as of the Restatement Effective Date. SECTION 3.13 Insurance. Schedule 3.13 sets forth a description of all insurance maintained by or on behalf of the Company and the Subsidiaries as of the Restatement Effective Date. As of the Restatement Effective Date, all premiums in respect of such insurance have been paid. The insurance maintained by or on behalf of the Company and the Subsidiaries is in full force and effect and complies with the requirements set forth in Section 5.07. SECTION 3.14 Labor Matters. As of the Restatement Effective Date, there are no strikes, lockouts or slowdowns against the Company or any Subsidiary pending or, to the knowledge of any Borrower, threatened. The Company and the Subsidiaries have not been in violation of, in any material respect, the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with hours worked by or payments made to employees or any similar matters. All payments due from the Company or any Subsidiary, or for which any claim may be made against the Company or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of the Company or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Company or any Subsidiary is bound. SECTION 3.15 Security Documents. (a) The Pledge Agreement creates in favor of the Collateral Agent, for the benefit of the Secured Parties referred to therein, a legal, valid, continuing and enforceable security interest 81 in the Collateral (as defined in the Pledge Agreement), the enforceability of which is subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law, and the Pledged Securities (as defined in the Pledge Agreement) have been delivered to the Collateral Agent (together with stock powers or other appropriate instruments of transfer executed in blank form). The Collateral Agent has a fully perfected first priority Lien on, and security interest in, to and under all right, title and interest of each pledgor thereunder in such Collateral, and such security interest is in each case prior and superior in right and interest to any other Person. (b) The Security Agreement creates in favor of the Collateral Agent, for the benefit of the Secured Parties referred to therein, a legal, valid, continuing and enforceable security interest in the Collateral (as defined in the Security Agreement), the enforceability of which is subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. The financing statements, releases and other filings set forth on Schedule 3.15(b) are in appropriate form and have been or will be filed in the offices specified in the Perfection Certificate. Upon such filings and/or the obtaining of "control," the Collateral Agent will have a perfected Lien on, and security interest in, to and under all right, title and interest of the grantors thereunder in all Collateral that may be perfected by filing, recording or registering a financing statement or analogous document (including without limitation the proceeds of such Collateral subject to the limitations relating to such proceeds in the UCC) or by obtaining control, under the UCC (in effect on the date this representation is made) in each case prior and superior in right to any other Person other than with respect to Liens expressly permitted by Section 6.02 hereof. (c) When the Security Agreement is filed in the United States Patent and Trademark Office and the United States Copyright Office and when financing statements, releases and other filings set forth on Schedule 3.15(c) in appropriate form are filed in the offices specified on the Perfection Certificate, the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the applicable Loan Parties in the Intellectual Property (as defined in the Security Agreement) in which a security interest may be perfected by filing, recording or registering a security agreement, financing statement or analogous document in the United States Patent and Trademark Office or the United States Copyright Office, as applicable, in each case prior and superior in right to any other Person other than with respect to Liens expressly permitted by Section 6.02 hereof (it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a Lien on registered trademarks, trademark applications and copyrights acquired by the Loan Parties after the date hereof). (d) The Mortgages create in favor of the Collateral Agent, for the benefit of the Secured Parties referred to therein (other than those on the Principal Properties which secure obligations due to on account of the Term Lenders and the Collateral Agent with respect to the Term Loan only), a legal, valid, continuing and enforceable Lien in the Mortgaged Property (as defined in the Mortgages), the enforceability of which is subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity 82 or at law. Upon the filing of the Mortgages with the appropriate Governmental Authorties, the Collateral Agent will have a perfected Lien on, and security interest in, to and under all right, title and interest of the grantors thereunder in all Mortgaged Property that may be perfected by such filing (including without limitation the proceeds of such Mortgaged Property, in each case prior and superior in right to any other Person other than with respect to Liens expressly permitted by Section 6.02 hereof or other Liens reasonably acceptable to the Collateral Agent. SECTION 3.16 Federal Reserve Regulations. (a) No Loan Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. (b) No part of the proceeds of any Loan or any Letter of Credit will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to buy or carry Margin Stock or to extend credit to others for the purpose of buying or carrying Margin Stock or to refund indebtedness originally incurred for such purpose in violation of Regulation U or X or (ii) for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation U or Regulation X. ARTICLE IV Conditions SECTION 4.01 Restatement Effective Date. This Agreement shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02): (a) The Administrative Agent shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Administrative Agent shall have received a favorable written opinion (addressed to the Agents, the Issuing Bank and the Lenders and dated the Restatement Effective Date) of Cahill Gordon & Reindel LLP, counsel for the Loan Parties, substantially in the form of Exhibit I. Each of the Borrowers hereby requests such counsel to deliver such opinions. (c) The Administrative Agent shall have received a true and complete copy of each Loan Party's organizational documents, an incumbency certificate for each person authorized to execute Loan Documents on behalf of a Loan Party, resolutions authorizing the due execution, delivery and performance of the Loan Documents and the Transactions and a good standing certificate from each jurisdiction where a Loan Party is organized and each jurisdiction necessary for it to carry on its business and such other documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the Transactions and any other legal matters relating to the Loan Parties, the Loan Documents or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel. The Loan Parties' delivery of the foregoing documents to the Administrative Agent on the Effective Date shall be deemed to have satisfied this condition. 83 (d) The Administrative Agent shall have received a certificate, dated the Restatement Effective Date and signed by the president, a vice president or a Financial Officer of the Company, confirming compliance with the conditions set forth in this Section 4.01. (e) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Restatement Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel) required to be reimbursed or paid by any Loan Party hereunder or under any other Loan Document. (f) The Administrative Agent shall have received a completed Borrowing Base Certificate dated the Restatement Effective Date and signed by a Financial Officer of the Company, calculating the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base as of the end of the month ended immediately prior to the Restatement Effective Date. (g) The Administrative Agent shall have received the results of satisfactory lien searches (including, without limitation, the results of satisfactory tax lien and judgment lien searches) showing the absence of any Liens (except for the Liens in favor of the Collateral Agent) on any of any of the Collateral other than Liens expressly permitted by Section 6.02 hereof or Liens which will be terminated on the Restatement Effective Date (including, without limitation, those Liens in favor of the lenders under the Bridge Financing Facility (as defined in the Existing Credit Agreement). The Administrative Agent's receipt of the foregoing on the Effective Date shall be deemed to have satisfied this condition (other than with respect to the termination of the Liens with respect to the Bridge Financing Facility, which shall be required to be delivered prior to the Restatement Effective Date). (h) All necessary consents and approvals to the transactions contemplated hereby shall have been obtained and shall be satisfactory to the Administrative Agent. (i) The Administrative Agent, based upon delivery of a customary officer's solvency certificate together with the consolidated balance sheet of the Company, shall be satisfied that Loan Parties, on a consolidated basis, are Solvent on the Restatement Effective Date, before and after giving effect to the Credit Extensions made on the Restatement Effective Date. (j) To the extent required to be satisfied on the Restatement Effective Date, the Real Estate Eligibility Requirements shall have been satisfied. (k) The Administrative Agent shall have received such other instruments, documents, and agreements as the Administrative Agent or its counsel may reasonably request. The Administrative Agent shall notify the Company and the Lenders of the Restatement Effective Date, and such notice shall be conclusive and binding. SECTION 4.02 Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing and of each Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to receipt of the request therefor in accordance herewith and to the satisfaction of the following conditions: 84 (a) The representations and warranties of each Loan Party set forth in the Loan Documents shall be true and correct in all material respects on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable (unless a representation or warranty is made as of a specific date, in which case such representation or warranty shall remain true and correct as of such specified date). (b) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default or Event of Default shall have occurred and be continuing. (c) No indictment of, or institution of any legal process or proceeding against, the Company or any Loan Party, under any federal, state, municipal, and other civil or criminal statute, rule, regulation, order, or other requirement having the force of law, which is reasonably likely to have a Material Adverse Effect shall have occurred. (d) Each of the Borrowers, in connection with each Borrowing, and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to have represented and warranted on the date thereof that the conditions specified in paragraphs (a) and (b) of this Section 4.02 have been satisfied at that time and that after giving effect to such extension of credit the Borrowers shall continue to be in compliance with the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base. The conditions set forth in this Section 4.02 are for the sole benefit of the Administrative Agent, the Issuing Bank and the Lenders and may be waived by the Administrative Agent, in whole or in part, without prejudice to the rights of the Administrative Agent, the Issuing Bank or any Lender. ARTICLE V Affirmative Covenants Until the Commitments have expired or been terminated and the principal of and interest on each Loan, all fees and other Obligations payable hereunder shall have been paid in full, and all Letters of Credit shall have expired or terminated and all L/C Disbursements shall have been reimbursed, each of the Borrowers covenants and agrees with the Lenders that: SECTION 5.01 Financial Statements and Other Information. The Company will furnish to the Administrative Agent and each Lender each of the following together with all supporting documentation as the Administrative Agent may reasonably require: (a) within 90 days after the end of each fiscal year of the Company, its audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by PricewaterhouseCoopers LLP or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Company and its consolidated subsidiaries on a consolidated basis in accordance with GAAP consistently applied; 85 (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, the Company's consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Company and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (c) within 45 days after the end of each of the first two (or three, in the event of a fiscal quarter having four fiscal four week periods) fiscal four-week periods of each fiscal quarter of the Company (other than the first fiscal four-week period of each fiscal year), its consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such fiscal four-week periods and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers as presenting in all material respects the financial condition and results of operations of the Company and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; provided that, the information required by this Section shall not be required with respect to any month during which the average daily Exposure during such month is less than $50,000,000; (d) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer (i) certifying as to whether a Default or an Event of Default has occurred and, if a Default or Event of Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 6.12, and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the Company's audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (e) concurrently with any delivery of financial statements under clause (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default or an Event of Default (which certificate may be limited to the extent required by accounting rules or guidelines); (f) within ten (10) Business Days after the end of each fiscal month, a completed Borrowing Base Certificate calculating and certifying the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base as of the last day of such fiscal month, signed on behalf of the Company by one of its Financial Officers, provided, however, that upon the occurrence of a Triggering Event, the Borrowing Base Certificate required by this paragraph will be delivered by the Borrowers weekly within eight (8) Business Days after the end of each calendar week and shall calculate and certify the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base as of the last day of such calendar week; 86 (g) prior to the end of the first fiscal quarter of each fiscal year of the Company, a reasonably detailed consolidated budget for such fiscal year (including a projected consolidated balance sheet and related statements of projected operations and cash flow as of the end of and for each fiscal quarter during such fiscal year and setting forth the assumptions used for purposes of preparing such budget) and, promptly when available and from time to time, any significant revisions of such budget (including, without limitation, any amounts to be paid to any pension plan (including any Plan, or, the best of the Company's knowledge, a Multiemployer Plan) or to any third party on account of any such pension plan); (h) within ten (10) Business Days after any sale, transfer or other disposition of assets permitted by clause (c) of Section 6.05, a complete description of such sale, transfer or other disposition, and, with respect to sales, transfers or other dispositions resulting in Net Proceeds greater than $20,000,000, (i) the most recently delivered Borrowing Base Certificate delivered pursuant to Section 5.01(f) revised to give pro forma effect to such sale, transfer or other disposition and (iii) any significant revisions to the budget previously delivered pursuant to clause (g) of this Section; (i) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Company or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by the Company to its stockholders generally, as the case may be; (j) the financial and collateral reports described on Schedule C hereto, at the times set forth in such Schedule; provided that, the information required by this Section shall not be required with respect to any month during which the average daily Exposure during such month is less than $50,000,000; (k) upon the reasonable request of the Administrative Agent, (i) a list of all "business associate agreements" (as such term is defined in HIPAA) that any Loan Party has entered into with any Person and true, correct and complete copies of all of such agreements; and (ii) a list of all participation agreements of the Borrowers with health maintenance organizations, insurance programs, preferred provider organizations and other third party payors; and (l) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Company or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request. Documents required to be delivered pursuant to Section 5.01(a), Section 5.01(b) or Section 5.01 (c) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Company posts such documents, or provides a link thereto on the Company's website on the Internet at the website address listed on Schedule 5.01; or (ii) on which such documents are posted on the Company's behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (x) at the 87 reasonable request of any Lender, the Company shall deliver paper copies of the documents requested by such Lender to the Administrative Agent for delivery to such Lender, and (y) the Company shall notify the Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. The Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Loan Parties with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents. The Loan Parties hereby acknowledge that (a) the Administrative Agent will make available to the Lenders and the Issuing Bank materials and/or information provided by or on behalf of the Loan Parties hereunder (collectively, "Borrower Materials") by posting the Borrower Materials on IntraLinks or another similar electronic system (the "Platform") and (b) certain of the Lenders may be "public-side" Lenders (i.e., Lenders that do not wish to receive material non-public information with respect to the Loan Parties or their securities) (each, a "Public Lender"). The Loan Parties hereby agree that so long as any Loan Party is the issuer of any outstanding debt or equity securities that are registered or issued pursuant to a private offering or is actively contemplating issuing any such securities they will use commercially reasonable efforts to identify that portion of the Borrower Materials that may be distributed to the Public Lenders and that (w) all such Borrower Materials shall be clearly and conspicuously marked "PUBLIC" which, at a minimum, shall mean that the word "PUBLIC" shall appear prominently on the first page thereof; (x) by marking Borrower Materials "PUBLIC," the Loan Parties shall be deemed to have authorized the Administrative Agent, the Issuing Banks and the Lenders to treat such Borrower Materials as not containing any material non-public information (although it may be sensitive and proprietary) with respect to the Loan Parties or their securities for purposes of United States Federal and state securities laws (provided, however, that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 10.07); (y) all Borrower Materials marked "PUBLIC" are permitted to be made available through a portion of the Platform designated "Public Investor"; and (z) the Administrative Agent shall be entitled to treat any Borrower Materials that are not marked "PUBLIC" as being suitable only for posting on a portion of the Platform not designated "Public Investor." SECTION 5.02 Notices of Material Events. The Company will furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) the occurrence of any Default or Event of Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Company or any Affiliate thereof (including, without limitation, based upon any provision of any pharmaceutical law or Medicare and Medicaid program rules and regulations applicable to it) that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other related ERISA Events that have occurred, could reasonably be expected to result in liability of the Company and its Subsidiaries in an aggregate amount exceeding $5,000,000; 88 (d) during the period commencing on the Effective Date and ending on the date on which Eligible Leaseholds are no longer included in the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base, the receipt by any Loan Party of any notice from any lessor of such lessor's intention to terminate any Lease relating to Eligible Leaseholds, together with a copy of all such notices of intended termination from the lessors thereunder; and (e) any other development (other than those specified above as to which the Lenders have received due notice) that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Company setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03 Information Regarding Collateral. (a) The Company will furnish to the Administrative Agent at least fifteen (15) days (or such shorter period of time as may be agreed to by the Administrative Agent) prior written notice of any change (i) in any Loan Party's corporate, limited liability company or partnership name, (ii) in the location of any Loan Party's its "location" (as determined under Section 9-307 of the UCC), chief executive office or principal place of business (including the establishment of any such new office or facility), (iii) in any Loan Party's organizational structure or (iv) in any Loan Party's Federal Taxpayer Identification Number or state organizational number. The Company agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Collateral Agent to continue at all times following such change to have a valid, legal and perfected security interest in all of the Collateral. (b) Each year, at the time required for delivery of annual financial statements with respect to the preceding fiscal year pursuant to clause (a) of Section 5.01, the Company shall deliver to the Administrative Agent a certificate of a Financial Officer and the chief legal officer of the Company (i) setting forth the information required pursuant to Section 2 of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Effective Date or the date of the most recent certificate delivered pursuant to this Section and (ii) certifying that all Uniform Commercial Code financing statements (including fixture filings, as applicable) or other appropriate filings, recordings or registrations, including all refilings, rerecordings and reregistrations, containing a description of the Collateral have been filed of record in each governmental, municipal or other appropriate office in each jurisdiction identified pursuant to clause (i) above to the extent necessary to protect and perfect the security interests under the Security Agreement for a period of not less than eighteen (18) months after the date of such certificate (except as noted therein with respect to any continuation statements to be filed within such period). SECTION 5.04 Existence; Conduct of Business. The Company will, and will cause each of the Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges, franchises, 89 patents, copyrights, trademarks and trade names material to the conduct of its business; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03. SECTION 5.05 Payment of Obligations. The Company will, and will cause each of its Subsidiaries to, pay its Indebtedness and other obligations, including Tax liabilities, before the same shall become delinquent or in default, except where (a) (1) the validity or amount thereof is being contested in good faith by appropriate proceedings, (2) the Company or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP, and (3) such contest effectively suspends collection of the contested obligation and the enforcement of any Lien securing such obligation or (b) the failure to make such payment could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.06 Maintenance of Properties. The Company will, and will cause each of the Subsidiaries to, keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted. SECTION 5.07 Insurance. (a) The Company will, and will cause each of its Subsidiaries to, (i) maintain insurance with financially sound and reputable insurers reasonably acceptable to the Administrative Agent on such of its property and in at least such amounts and against at least such risks as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance against claims for personal injury or death occurring upon, in or about or in connection with the use of any properties owned, occupied or controlled by it including the insurance required pursuant to the Security Documents; (ii) maintain such other insurance as may be required by law; and (iii) upon request by the Administrative Agent, which request need not be made in writing, furnish the Administrative Agent with certificates evidencing the insurance required by this paragraph. In the event of the Company's or Loan Parties' failure to obtain or maintain the insurance required by this paragraph, without waiving any Event of Default occasioned thereby, the Administrative Agent shall have the right to obtain the required coverage and invoice the Company for the premium payments therefor. To the extent consistent with prudent business practice, the Company may maintain a program of self-insurance in place of any of the insurance required by this paragraph. (b) Fire and extended coverage policies with respect to any Collateral shall not include (i) a provision to the effect that any of the Borrowers, the Administrative Agent, the Collateral Agent, or any other party shall be a coinsurer and (ii) shall be endorsed, which endorsement shall be satisfactory in form and substance to the Collateral Agent, to name the Collateral Agent for the benefit of the Lenders, as additional insured or loss payee, as appropriate, and shall include such other provisions as the Collateral Agent may reasonably require from time to time to protect the interests of the Lenders, provided that the requested provisions are available at reasonable cost. Each such policy referred to in this paragraph also shall provide that it shall not be cancelled, modified or not renewed (i) by reason of nonpayment of premium except upon not less than 30 days' prior written notice thereof by the insurer to the Collateral Agent (giving the Collateral Agent the right to cure defaults in the payment of 90 premiums) or (ii) for any other reason except upon not less than 30 days' prior written notice thereof by the insurer to the Collateral Agent. The Borrowers shall deliver to the Collateral Agent, prior to the cancellation of any such policy of insurance, a Certificate of Insurance for the replacement policy. (c) If at any time the area in which any Eligible Real Estate or Eligible Leaseholds are located is designated (i) a "flood hazard area" in any Flood Insurance Rate Map published by the Federal Emergency Management Agency (or any successor agency), the Borrowers shall obtain flood insurance in such total amount as is reasonable and customary for companies engaged in the business of operating supermarkets, and otherwise comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973, as amended from time to time, or (ii) a "Zone 1" area, the Borrower shall obtain earthquake insurance in such total amount as is reasonable and customary for companies engaged in the business of operating supermarkets. (d) The Company and the Loan Parties acknowledge and agree that all income, payments and proceeds of a physical damage property insurance claim payable to them and relating to the Collateral will be received by the Company and the Loan Parties as agent hereunder for the benefit of the Lenders and deposited in an account subject to a Blocked Account Agreement. Unless a Triggering Event or an Event of Default has occurred and is continuing, the Collateral Agent shall use commercially reasonable efforts to cause any insurance proceeds for which it is loss payee for the benefit of the Secured Parties to be made available to the Borrowers as promptly as practicable after receipt thereof by the Collateral Agent. The Company and the Loan Parties disclaim any right, title or interest in or to such income, payments or proceeds and hereby confirm that the Company and the Loan Parties have granted a first priority security interest to the Collateral Agent (for the benefit of the Lenders) in all such income, payments and proceeds. (e) The Company shall continue to maintain, for itself and its subsidiaries, a Directors and Officers insurance policy, and a "Blanket Crime" policy including employee dishonesty, forgery or alteration, theft, disappearance and destruction, robbery and safe burglary, property, and computer fraud coverage with responsible companies in such amounts as are customarily carried by business entities engaged in similar businesses similarly situated, and will upon request by the Administrative Agent, which request need not be made in writing, furnish the Administrative Agent certificates evidencing renewal of each such policy. SECTION 5.08 Casualty and Condemnation. The Borrowers (a) will furnish to the Administrative Agent and the Lenders prompt written notice of any casualty or other insured damage to any material portion of any Collateral or the commencement of any action or proceeding for the taking of any Collateral or any part thereof or interest therein under power of eminent domain or by condemnation or similar proceeding and (b) will ensure that the Net Proceeds of any such event (whether in the form of insurance proceeds or otherwise) are collected and applied in accordance with the applicable provisions of this Agreement and the Security Documents. SECTION 5.09 Books and Records; Inspection and Audit Rights. 91 (a) The Company will keep proper financial records in accordance with GAAP. The Company will, and will cause each of the Subsidiaries to, permit any representatives designated by the Administrative Agent in consultation with the Borrowers, upon reasonable prior notice, no less frequently than semi-annually in any period of twelve (12) consecutive months commencing on or after the Effective Date, to visit and inspect its properties, to examine and make extracts from such records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at reasonable times. The foregoing provisions are supplemental of the rights of the Administrative Agent set forth in Section 5.09(b) below. (b) The Company will, and will cause each of the Subsidiaries to, permit any representatives designated by the Administrative Agent (including any consultants, accountants, lawyers and appraisers retained by the Administrative Agent) in consultation with the Borrowers to conduct commercial finance examinations and appraisals of the assets included in the computation of the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base, including supporting systems, processes and controls, all at the expense of the Borrowers (i) one (1) time during any twelve month period in which Excess Availability is at all times greater than $250,000,000, (ii) up to two (2) times during any twelve month period in which Excess Availability is at any time less than or equal to $250,000,000 but greater than or equal to $100,000,000, (iii) up to three (3) times during any twelve month period in which Excess Availability is at any time less than $100,000,000 and (iv) at any time at the request of the Administrative Agent after the occurrence and the continuation of an Event of Default; provided, that, notwithstanding the provisions of clause (iii) above, no more than two (2) appraisals of Eligible Real Estate, Eligible Leaseholds, and Scripts may be conducted during any twelve month period unless an Event of Default has occurred and is continuing. In addition to the foregoing the Administrative Agent will have the right to conduct such commercial finance examinations and appraisals at the expense of the Administrative Agent, but no more frequently than twice in any calendar year. The expenses reimbursable by the Borrowers pursuant to his Section shall include the reasonable fees and expenses of any representatives retained by the Administrative Agent. (c) The Administrative Agent may, from time to time, engage a third party, reasonably acceptable to the Company to undertake Phase I environmental site assessments during the term of this Agreement of the Eligible Real Estate and Eligible Leaseholds, provided that such assessments may only be undertaken during the continuance of any Specified Default. The Borrowers will, and will cause each of their Subsidiaries to, cooperate in all respects with the Administrative Agent and such third parties to enable such assessment and evaluation to be timely completed in a manner reasonably satisfactory to the Administrative Agent. SECTION 5.10 Compliance with Laws. The Company will, and will cause each of the Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.11 Use of Proceeds and Letters of Credit. The proceeds of the Loans will be used to (i) on the Effective Date, to finance a portion of the Merger, (ii) to refinance the Existing Financing Agreements, and (iii) for general corporate purposes, including working capital, repayment of Indebtedness (including , without limitation, pursuant to Section 6.08(b)(iii)), 92 capital expenditures, permitted acquisitions, permitted distributions, and stock repurchases. No part of the proceeds of any Loan will be used, directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X. Letters of Credit will be issued only for general corporate purposes. SECTION 5.12 Additional Subsidiaries. If any additional Subsidiary is formed or acquired after the Effective Date or if an Immaterial Subsidiary is not dissolved or liquidated or merged into another Loan Party as contemplated by the Company, the Company will notify the Administrative Agent, the Collateral Agent and the Lenders thereof and (a) the Company will cause such Subsidiary (i) to become a party to (A) the Guaranty (or this Agreement if such Subsidiary shall be a Borrower hereunder by executing a Joinder in the form of Exhibit R), (B) the Indemnity, Subrogation and Contribution Agreement, (C) the Security Agreement and (D) the Pledge Agreement, in each case in the manner provided therein and within ten (10) Business Days after such Subsidiary is formed or acquired and (ii) promptly to take such actions to perfect the Liens on such Subsidiary's assets granted under the Security Documents as the Administrative Agent or the Required Lenders shall reasonably request and (b) if any Equity Interests of such Subsidiary are owned by or on behalf of any Loan Party, the Company will cause such Equity Interests to be pledged pursuant to the Pledge Agreement within ten (10) Business Days after such Subsidiary is formed or acquired (excluding, if such Subsidiary is a Foreign Subsidiary, shares of voting stock of such Subsidiary). SECTION 5.13 Further Assurances (a) The Borrowers will, and will cause each other Loan Party to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, termination statements, fixture filings and other documents), which may be required under any Applicable Law, or which the Administrative Agent or the Required Lenders may reasonably request, to effectuate the transactions contemplated by the Loan Documents or to grant, preserve, protect or perfect the Liens created or intended to be created by the Security Documents or the validity or priority of any such Lien, all at the expense of the Loan Parties. The Borrowers also agree to provide to the Administrative Agent, from time to time upon request, evidence reasonably satisfactory to the Administrative Agent as to the perfection and priority of the Liens created or intended to be created by the Security Documents. (b) During the period commencing on the Effective Date and ending on the date on which Eligible Leaseholds are no longer included in the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base, if the Appraised Value of all Eligible Leaseholds is at any time less than $300,000,000, the Loan Parties will cause additional Leaseholds having an Appraised Value at least equal to the Leasehold Differential to become the subject of a Mortgage in favor of the Collateral Agent, failing which the Tranche A Leasehold Cap shall be reduced by the amount of the Leasehold Differential, and if such reduction does not equal the amount of the Leasehold Differential, the Term A-2 Leasehold Cap shall be reduced by any remaining portion of the Leasehold Differential. (c) During the period commencing on the Effective Date and ending on the date on which Eligible Leaseholds are no longer included in the Tranche A Borrowing Base or the 93 Tranche A-1 Borrowing Base, the Borrowers will, and will cause each of the Subsidiaries to, use their commercially reasonable efforts to obtain lease terms in any lease entered into by any Borrower or any Loan Party after the date hereof not expressly prohibiting the recording in the relevant real estate filing office of an appropriate memorandum of lease and the encumbrancing of the leasehold interest of such Borrower or such other Loan Party, as the case may be, in the property that is the subject of such lease. (d) If requested by the Administrative Agent in its reasonable discretion, with respect to any Distribution Center, the Loan Parties shall use their commercially reasonable efforts to obtain a Priority of Claims Waiver from the holder of any Indebtedness incurred under Section 6.01(a)(vi) with respect to such Distribution Center. (e) To the extent that the Obligations shall at any time be less than the amount originally set forth in any Mortgage on Real Estate located in the State of New York or to the extent otherwise required by Applicable Law to grant, preserve, protect or perfect the Liens created by such Mortgage and the validity or priority thereof, the Borrowers shall to take all further actions including the payment of any additional mortgage recording taxes, fees, charges, costs and expenses required so too grant, preserve, protect or perfect the Liens created by such Mortgage to the maximum amount of Obligations by its terms secured thereby and the validity or priority of any such Lien. SECTION 5.14 Cash Management. (a) Annexed hereto as Schedule 5.14(a) is a schedule of all DDAs that are maintained by the Loan Parties, which schedule shall include, with respect to each depository (i) the name and address of such depository; (ii) the account number(s) maintained with such depository; and (iii) a contact person at such depository. (b) Annexed hereto as Schedule 5.14(b) is a list describing all arrangements to which any Loan Party is a party with respect to the payment to such Loan Party of the proceeds of all credit card charges for sales by such Loan Party. (c) Annexed hereto as Schedule 5.14(c) is a list describing all payors of the third party insurance provider accounts from which a Loan Party receives payments of Eligible Third Party Insurance Provider Account Receivables. (d) Within ninety (90) days after the Effective Date (or such longer time as the Administrative Agent may, in its sole discretion, agree in writing), each Loan Party shall: (i) deliver to the Administrative Agent notifications (each, a "Credit Card Notification") substantially in the form attached hereto as Exhibit K which have been executed on behalf of such Loan Party and addressed to such Loan Party's credit card clearinghouses and processors; (ii) deliver to the Administrative Agent notifications, (each, an "Insurance Provider Notification") substantially in the form attached as Exhibit L which have been executed on behalf of such Loan Party and addressed to such Loan Party's payors of third party insurance providers accounts; 94 (iii) enter into a Blocked Account Agreement substantially in the form attached as Exhibit M (or in such other form reasonably acceptable to the Administrative Agent) with the banks with which such Borrower maintains accounts into which the DDAs are concentrated (collectively, the "Blocked Accounts") listed on Schedule 5.14(d)(iii) attached hereto; and (iv) deliver to the Administrative Agent a notification, (the "Coinstar Notification") substantially in the form attached as Exhibit N which has been executed on behalf of the Loan Parties and addressed to Coinstar, Inc. (e) At the request of the Administrative Agent (which request shall not be made prior to the date that is forty-five (45) days after the Effective Date), each Loan Party shall deliver to the Administrative Agent notifications (each, a "DDA Notification") substantially in the form attached as Exhibit O which have been executed on behalf of each Loan Party to each depository institution with which any DDA is maintained. (f) Each DDA Notification, Credit Card Notification, Insurance Provider Notification and Blocked Account Agreement and the Coinstar Notification shall require, after the occurrence and during the continuance of a Triggering Event, the Loan Parties shall promptly and in any event within two Business Days, cause the ACH or wire transfer on each Business Day (and whether or not there is then an outstanding balance in the Loan Account) of all available cash receipts (the "Cash Receipts") to the concentration account maintained by the Administrative Agent at Bank of America (the "Agent's Account") from: (i) the sale of Inventory and other Collateral; (ii) all proceeds of collections of Accounts; (iii) all Net Proceeds, and all other cash payments received by a Loan Party from any Person or from any source or on account of any Prepayment Event or other transaction or event; (iv) the then contents of each DDA; (v) the then entire ledger balance of each Blocked Account; and (vi) the proceeds of all credit card charges. (g) Upon the occurrence of a Triggering Event, the Borrowers shall accurately report to the Administrative Agent all amounts deposited in the Blocked Accounts to ensure the proper transfer of funds as set forth above. If, at any time after the occurrence of a Triggering Event, any cash or cash equivalents owned by any Loan Party that constitutes Collateral are deposited to any account, or held or invested in any manner, otherwise than in a Blocked Account that is subject to a Blocked Account Agreement (or a DDA which is swept daily to a Blocked Account), the Administrative Agent may require the applicable Loan Party to close such account and have all funds therein transferred to a Blocked Account, and all future deposits made to a Blocked Account which is subject to a Blocked Account Agreement. 95 (h) The Loan Parties may close DDAs or Blocked Accounts and/or open new DDAs or Blocked Accounts, subject to the execution and delivery to the Administrative Agent of appropriate Blocked Account Agreements consistent with the provisions of this Section 5.14 and otherwise satisfactory to the Administrative Agent. Unless consented to in writing by the Administrative Agent, the Loan Parties shall not enter into any agreements with credit card processors other than the ones expressly contemplated herein unless contemporaneously therewith, a Credit Card Notification, is executed and delivered to the Administrative Agent. (i) The Borrowers may also maintain one or more disbursement accounts (the "Disbursement Accounts") to be used by the Borrowers for disbursements and payments (including payroll) in the ordinary course of business or as otherwise permitted hereunder. The only Disbursement Accounts as of the Restatement Effective Date are those described in Schedule 5.14(i). (j) The Agent's Account shall at all times be under the sole dominion and control of the Administrative Agent. Each Loan Party hereby acknowledges and agrees that (i) such Loan Party has no right of withdrawal from the Agent's Account, (ii) the funds on deposit in the Agent's Account shall at all times continue to be collateral security for all of the Obligations, and (iii) the funds on deposit in the Agent's Account shall be applied as provided in Section 2.11(m) or Section 7.03 of this Agreement, as applicable. In the event that, notwithstanding the provisions of this Section 5.14, any Loan Party receives or otherwise has dominion and control of any such proceeds or collections, such proceeds and collections shall be held in trust by such Loan Party for the Administrative Agent, shall not be commingled with any of such Loan Party's other funds or deposited in any account of such Loan Party and shall, not later than the Business Day after receipt thereof, be deposited into the Agent's Account or dealt with in such other fashion as such Loan Party may be instructed by the Administrative Agent. (k) Any amounts received in the Agent's Account at any time when all of the Obligations have been and remain fully repaid shall be remitted to the Borrowers, if and as the Company may request. (l) The following shall apply to deposits and payments under and pursuant to this Agreement: (i) Funds shall be deemed to have been deposited to the Agent's Account on the Business Day on which deposited, provided that notice of such deposit is available to the Administrative Agent by 12:00 noon, Boston, Massachusetts time, on that Business Day; (ii) Funds paid to the Administrative Agent other than by deposit to the Agent's Account, shall be deemed to have been received on the Business Day when they are good and collected funds, provided that notice of such payment is available to the Administrative Agent by 12:00 noon, Boston, Massachusetts time, on that Business Day; (iii) If notice of a deposit to a Agent's Account or payment is not available to the Administrative Agent until after 12:00 noon, Boston, Massachusetts time, on a 96 Business Day, such deposit or payment shall be deemed to have been made at 9:00 a.m., Boston, Massachusetts time, on the then next Business Day; (iv) If any item deposited to the Agent's Account and credited to the Loan Account is dishonored or returned unpaid for any reason, whether or not such return is rightful or timely, the Administrative Agent shall have the right to reverse such credit and charge the amount of such item to the Loan Account and the Borrowers shall indemnify the Administrative Agent and the Lenders against all claims and losses resulting from such dishonor or return. SECTION 5.15 Priority of Claims Waivers. Unless reserved for in accordance with the provisions hereof, the Borrowers from time to time shall promptly deliver, or cause to be promptly delivered, a Priority of Claims Waiver from each vendor, landlord, public warehouse operator or other third party bailee that has not provided a Priority of Claims Waiver in form and substance satisfactory to the Administrative Agent for each third party storage facility located in any Priming Jurisdiction. SECTION 5.16 Benefit Plans Payments. The Loan Parties, Subsidiaries and all ERISA Affiliates shall make all required contributions under any Plans or Multiemployer Plans which, if not made, could result in a Material Adverse Effect unless such payment is being contested pursuant to Section 5.05. ARTICLE VI Negative Covenants Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees and other Obligations payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all L/C Disbursements shall have been reimbursed, each of the Borrowers covenants and agrees with the Lenders that: SECTION 6.01 Indebtedness; Certain Equity Securities. (a) The Company will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except: (i) Indebtedness created under the Loan Documents; (ii) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof (except to the extent of any reasonable premiums, fees and expenses incurred in connection with any such extensions, renewals and replacements) or result in an earlier maturity date or decreased weighted average life thereof; (iii) Indebtedness of the Company to any Subsidiary and of any Subsidiary to the Company or any other Subsidiary; provided that Indebtedness of any Subsidiary that is not a Loan Party owing to any Loan Party shall be subject to Section 6.04; 97 (iv) Guarantees by the Company of Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of the Company or any other Subsidiary; provided that Guarantees by any Loan Party of Indebtedness of any Subsidiary that is not a Loan Party shall be subject to Section 6.04; (v) Indebtedness of the Company or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations (other than in respect of leased real property) and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof (except to the extent of any reasonable premiums, fees and expenses incurred in connection with any such extensions, renewals and replacements) or result in an earlier maturity date or decreased weighted average life thereof; provided that (A) before and after giving effect to the incurrence of such Indebtedness, no Default or Event of Default shall have occurred and be continuing, (B) such Indebtedness is incurred prior to or within 180 days after such acquisition or the completion of such construction or improvement and (C) the aggregate principal amount of Indebtedness incurred on or after the Effective Date and permitted by this clause (v) and clause (vii) below, plus the aggregate book value of all assets sold after the Effective Date pursuant to sale and leaseback transactions permitted by clause (b) of Section 6.06 shall not exceed $300,000,000; (vi) Without duplication of Indebtedness described in clause (v) hereof, Indebtedness of the Company or any Subsidiary incurred to finance the acquisition by the Company or any Subsidiary after the Effective Date of real property and improvements thereto (but not inventory or other personal property located therein), and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof (except to the extent of any reasonable premiums, fees and expenses incurred in connection with any such extensions, renewals and replacements) or result in an earlier maturity date or decreased weighted average life thereof; provided that (A) before and after giving effect to the incurrence of such Indebtedness, no Default or Event of Default shall have occurred and be continuing,(B) the terms of such Indebtedness are commercially reasonable and (C) the secured recourse to the Company or any Subsidiary of such Indebtedness shall be limited to the value of the real property and improvements financed by such Indebtedness; (vii) Indebtedness of the Company or any Subsidiary relating to purchase money security interests (as defined in the New York Uniform Commercial Code, as amended); provided that, (A) before and after giving effect to the incurrence of such Indebtedness, no Default or Event of Default shall have occurred and be continuing, and (B) the aggregate principal amount of Indebtedness permitted by this clause (vii) shall be subject to the limitation set forth in the proviso to clause (v) above. (viii) Guarantees by the Company or any of its Subsidiaries of Indebtedness of third parties given in connection with the acquisition or improvement of real property for 98 use in the business of the Company and its Subsidiaries not exceeding $10,000,000 at any one time outstanding; (ix) software licenses required to be reflected as indebtedness on the Company's consolidated balance sheet in an aggregate amount not exceeding $10,000,000; (x) without duplication of any other Indebtedness permitted hereunder, liabilities for leases of real property characterized as Indebtedness for purposes of GAAP; (xi) other unsecured Indebtedness in an aggregate principal amount not exceeding $50,000,000 at any time outstanding; (xii) Indebtedness on account of the Series A Warrants issued to Yucaipa Corporate Initiatives Fund I, L.P., Yucaipa American Alliance (Parallel) Fund I, L.P. and Yucaipa American Alliance Fund I, L.P. in connection with the Transactions to the extent that GAAP requires such Warrants to be included as a liability on the Consolidated balance sheet of the Company and its Subsidiaries; (xiii) Indebtedness of the Borrowers in an amount not to exceed $32,700,000 to Blue Ridge Investments, LLC which Indebtedness shall be secured pursuant to Section 6.02(i) hereof; and (xiv) Indebtedness of the Borrowers on account of the Convertible Notes, in an aggregate principal amount not to exceed $420,000,000, plus any additional amounts recorded in accordance with GAAP related to the convertible bond hedge and warrant transaction issued concurrently with the Convertible Notes, outstanding at any time (or such greater amount as the Administrative Agent, in its discretion, may agree). (b) The Company will not, nor will the Company permit any Subsidiary to, issue any preferred stock or other preferred Equity Interests, other than Qualified Preferred Stock. SECTION 6.02 Liens. The Company will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Liens created under the Loan Documents and the Blocked Account Agreements; (b) Permitted Encumbrances; (c) any Lien on any property or asset of the Company or any Subsidiary set forth in Schedule 6.02; provided that (i) such Lien shall not apply to any asset contained in the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base, (ii) such Lien shall not apply to any other property or asset of the Company or any Subsidiary and (iii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof, the obligations thereunder or the property or assets securing such obligations; 99 (d) any Lien existing on any property or asset prior to the acquisition thereof by the Company or any Subsidiary; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition, (ii) such Lien shall not apply to any other property or assets of the Company or any Subsidiary, (iii) such Lien (other than Permitted Encumbrances) shall not apply to any asset contained in the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base, and (iv) such Lien shall secure only those obligations which it secures on the date of such acquisition and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof (except to the extent of any reasonable premiums, fees and expenses incurred in connection with any such extensions, renewals and replacements); (e) Liens on fixed or capital assets acquired, constructed or improved by the Company or any Subsidiary; provided that (i) such security interests secure Indebtedness permitted by clause (v) of Section 6.01(a), (ii) such security interests and the Indebtedness secured thereby are incurred prior to or within 180 days after such acquisition or the completion of such construction or improvement, (iii) the Indebtedness secured thereby does not exceed the cost of acquiring, constructing or improving such fixed or capital assets and (iv) such security interests shall not apply to any other property or assets of the Company or any Subsidiary; (f) Liens on real properties and improvements thereto (but not inventory or other personal property located therein) owned or leased by the Company or any Subsidiary; provided that such Liens secure Indebtedness permitted by clause (vi) of Section 6.01(a); (g) Liens of sellers of goods to any Loan Party arising under the provisions of Applicable Law similar to Article 2 of the UCC in the ordinary course of business, covering only goods (other than Inventory and Equipment (as defined in the Security Agreement) included in Tranche A Borrowing Base or the Tranche A-1 Borrowing Base), and Liens that secure Indebtedness permitted by clause (vii) of Section 6.01 ; (h) Liens constituting leasehold interests made by a Loan Party as lessor entered into in the ordinary course of business; (i) Liens in favor of Blue Ridge Investments, LLC to secure Indebtedness permitted under Section 6.01(a)(xiii) on the Company's short-term investment in Columbia Strategic Cash Portfolio, a series of Columbia Qualified Purchaser Funds, LLC, a Delaware limited liability company; and (j) Any right, title and interest of the landlord under any lease pursuant to which a Loan Party has a leasehold interest in any property or assets and any liens that by operation of law have been placed by such landlord on property over which any Loan Party has any real property interest. SECTION 6.03 Fundamental Changes. (a) The Company will not, nor will it permit any Subsidiary to, merge into or consolidate or amalgamate with any other Person, or permit any other Person to merge into or consolidate with it, or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing (i) any Subsidiary may merge into or with the Company in a transaction in which the Company 100 is the surviving corporation, (ii) any Subsidiary may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary and (if any party to such merger is a Loan Party) is a Loan Party (iii) any Subsidiary (other than a Borrower) may liquidate or dissolve if the Company determines in good faith that such liquidation or dissolution is in the best interests of the Company and the Subsidiaries, taken as a whole, and is not materially disadvantageous to the Lenders; (iv) any Immaterial Subsidiary may liquidate or dissolve, and (v) the Company may cause the Merger as contemplated in the Merger Agreement to be undertaken, provided that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.04. (b) The Company will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Company and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto. SECTION 6.04 Investments, Loans, Advances, Guarantees and Acquisitions. The Company will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any Equity Interests in or evidence of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (a) Cash and Cash Equivalents; (b) the Company's short-term investment in Columbia Strategic Cash Portfolio, a series of Columbia Qualified Purchaser Funds, LLC and the other investments existing on the date hereof and set forth on Schedule 6.04 and any other investments from time to time not to exceed at any time outstanding an aggregate principal amount in excess of the Net Proceeds received from the disposition of investments permitted by this Section 6.04(b); (c) investments by the Company and its Subsidiaries in Equity Interests in their respective Subsidiaries; provided that (i) any such Equity Interests held by a Loan Party shall be pledged pursuant to the Pledge Agreement (excluding the common stock of any Foreign Subsidiary), (ii) the aggregate amount of investments by Loan Parties in, and loans and advances by Loan Parties to, and Guarantees by Loan Parties of Indebtedness of, Subsidiaries that are not Loan Parties (including all such investments, loans, advances and Guarantees existing on the Effective Date) shall not exceed $20,000,000 at any time outstanding and (iii) neither the Company nor any of the Subsidiaries will create or acquire any Subsidiary after the Effective Date that is not a Loan Party; (d) loans or advances made by the Company to any Subsidiary and made by any Subsidiary to the Company or any other Subsidiary; provided that the amount of such loans and advances made by Loan Parties to Subsidiaries that are not Loan Parties shall be subject to the limitation set forth in clause (c) above; 101 (e) Guarantees constituting Indebtedness permitted by Section 6.01; provided that the aggregate principal amount of Indebtedness of Subsidiaries that are not Loan Parties that is Guaranteed by any Loan Party shall be subject to the limitation set forth in clause (c) above; (f) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business; (g) non-cash consideration received in connection with the sale, transfer, lease or disposition of any asset in compliance with Sections 6.05 and 6.06; (h) other investments made after the Effective Date; provided that at any time there is any outstanding Exposure hereunder, (i) the aggregate amount of such investments plus the aggregate amount of Restricted Payments made pursuant to Section 6.08(a)(i) shall not exceed $150,000,000 in the aggregate and (ii) immediately before and after giving effect to the making of any such Investments, (A) Excess Availability shall be in an amount greater than twenty percent (20%) of the Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the Tranche A Borrowing Base) then in effect, and (B) no Default or Event of Default has occurred and is continuing; and (i) earn-outs and other customary post-disposition obligations arising out of Permitted Divestitures. SECTION 6.05 Asset Sales. The Company will not, and will not permit any of its Subsidiaries to, sell, transfer, lease or otherwise dispose of any asset, including any Equity Interest owned by it, nor will the Company permit any of its Subsidiaries to issue any additional Equity Interest in such Subsidiary, except: (a) sales, transfers or other dispositions of inventory, used or surplus equipment, or Cash or Cash Equivalents made pursuant to Section 6.04(a) or (h), in each case in the ordinary course of business; (b) sales, transfers and dispositions to the Company or a Subsidiary; provided that any such sales, transfers or dispositions involving a Subsidiary that is not a Loan Party shall be made in compliance with Section 6.09; (c) sales, transfers and other dispositions of assets that are not permitted by any other clause of this Section; provided that immediately before and after giving effect to such sale, transfer or disposition (i) the Loan Parties, on a consolidated basis, are Solvent, and (ii) no Default or Event of Default has occurred or is continuing; and provided further that the assets sold, transferred or otherwise disposed of (including assets sold, transferred or disposed of by means of the sale, transfer or disposition of any Equity Interests) in reliance upon this clause (c) during any fiscal year of the Company shall not exceed fifteen percent (15%) of the operating assets of the Loan Parties as of the Effective Date; (d) sales of assets pursuant to sale and leaseback transactions permitted by Section 6.06; 102 (e) leases or subleases of property (excluding sale and leaseback transactions) by any Loan Party in the ordinary course of business; (f) Permitted Divestitures, provided that any Net Proceeds received by the Borrowers and the Subsidiaries in connection with any such Permitted Divestiture shall be paid to the Administrative Agent for application to the Obligations in accordance with the provisions of Section 2.11(m); (g) the Borrowers and the Subsidiaries may enter into Asset Swaps, provided that the aggregate fair market value of the stores or facilities transferred by the Borrowers and the Subsidiaries pursuant to Asset Swaps in a year shall not exceed $10,000,000; (h) (i) mergers and consolidations, and (ii) liquidations and dissolutions, in each case in compliance with Section 6.03(a); and (i) sales of assets or Equity Interests of Subsidiaries acquired by the Company in its acquisition of Best Cellars, Inc. and the Subsidiaries of Best Cellars, Inc.; provided that all sales, transfers, leases and other dispositions permitted hereby shall be made for fair value and at least 70% cash consideration (other than those permitted by clauses (a), (b) and (h) above). SECTION 6.06 Sale and Leaseback Transactions. The Company will not, and will not permit any of its Subsidiaries to, enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereinafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred, except (a) any such sale of any fixed or capital assets that is made for consideration having a cash component in an amount not less than the greater of (i) the fair market value of such fixed or capital asset, or (ii) the amount, if any, of availability generated by such asset (without giving effect to any amounts which have been advanced against such asset) under the Tranche A-1 Borrowing Base (or if the Tranche A-1 Commitments have been terminated, the Tranche A Borrowing Base) and, in each case, is consummated within 180 days after the Company or such Subsidiary acquires or completes the construction of such fixed or capital asset, and (b) any other such sale of fixed or capital assets, provided that (i) any such sale of any fixed or capital assets that is made for consideration having a cash component in an amount not less than the amount, if any, of availability generated by such asset (without giving effect to any amounts which have been advanced against such asset) under the Tranche A-1 Borrowing Base (or if the Tranche A-1 Commitments have been terminated, the Tranche A Borrowing Base), and (ii) the aggregate book value of all assets sold after the Effective Date pursuant to this clause (b) shall be subject to the limitation set forth in the proviso to clause (v) of Section 6.01(a). SECTION 6.07 Hedging Agreements. The Company will not, and will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate interest rate, currency or energy exposure to which the Company or any Subsidiary is exposed in the conduct of its business. SECTION 6.08 Restricted Payments; Certain Payments of Indebtedness. 103 (a) The Company will not, nor will it permit any Subsidiary to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except (i) the Company may make any Restricted Payment provided that immediately before and after giving effect to any such Restricted Payment (1) the Loan Parties, on a consolidated basis, are Solvent, (2) Excess Availability on the date of any such dividend and average monthly Excess Availability projected on a pro forma basis for the following twelve months shall be in an amount greater than twenty percent (20%) of Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the then Tranche A Borrowing Base), and (3) no Default or Event of Default has occurred and is continuing, (ii) the Company may declare and pay dividends with respect to its capital stock payable solely in additional shares of its common stock and (iii) Subsidiaries may declare and pay dividends ratably with respect to their capital stock. (b) The Company will not, nor will it permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) in respect of principal of, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of, (i) any Indebtedness of the Company or any Subsidiary that is scheduled to mature after the Maturity Date, (ii) any other Indebtedness of the Company or any Subsidiary provided that: (i) except as provided in clauses (iv) and (v) below, the Loan Parties may make regularly scheduled or mandatory repayments or redemptions of Indebtedness permitted under Section 6.01 (including, without limitation, payments of principal and interest as and when due); (ii) the Company or any Subsidiary may make voluntary payments and distributions in respect of any Indebtedness of the Company or any Subsidiary, provided that immediately before and after giving effect to any such distribution or payment (A) the Loan Parties, on a consolidated basis, are Solvent, (B) Excess Availability on the date of such distribution or payment and projected on a pro forma basis for the following twelve months shall be in an amount greater than twenty percent (20%) of the Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the then Tranche A Borrowing Base), and (C) no Default or Event of Default has occurred and is continuing or would arise therefrom; (iii) the Company may make mandatory prepayments of principal due under the Convertible Notes as long as immediately before and after giving effect to any such distribution or payment (A) the Loan Parties, on a consolidated basis, are Solvent, (B) Excess Availability on the date of such payment and projected on a pro forma basis for the following twelve months shall be in an amount greater than twenty percent (20%) of the Tranche A-1 Borrowing Base (or, if the Tranche A-1 Commitments have been terminated, the then Tranche A Borrowing Base), and (C) no Default or Event of Default has occurred and is continuing or would arise therefrom; and (iv) refinancings and refundings of such Indebtedness subject to and in accordance with the terms of this Agreement. 104 SECTION 6.09 Transactions with Affiliates. The Company will not, nor will it permit any Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Company or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, or (b) transactions between or among the Loan Parties not involving any other Affiliate. SECTION 6.10 Restrictive Agreements. Except as set forth in Schedule 6.10, the Company will not, nor will it permit any Subsidiary to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Company or any Subsidiary to create, incur or permit to exist any Lien securing Obligations or any refinancing thereof upon any property or assets actually owned by it, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Company or any other Subsidiary or to Guarantee Indebtedness of the Company or any other Subsidiary; provided that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document, (ii) the foregoing shall not apply to customary provisions included in licenses, contracts, leases, agreements and other instruments restricting assignment and/or encumbrance, (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases restricting the assignment thereof. SECTION 6.11 Amendment of Material Documents. The Company will not, nor will it permit any Subsidiary to, amend, modify or waive any of (a) the provisions of its certificate of incorporation, by-laws or other organizational documents in a manner materially adverse to the Lenders (b) its rights and obligations under other Material Contracts in a manner materially adverse to the Lenders, (c) the terms of the Company's 9 3/8% Senior Quarterly Interest Bonds due 2039 and any refinancings or replacements of any of the foregoing in a manner materially adverse to the Lenders, or (d) the terms of the Convertible Notes and any refinancings or replacements of any of the foregoing, in the case of all of the foregoing, (i) shorten the scheduled maturity date of the Convertible Notes other than as the result of an acceleration after the occurrence of an event of default thereunder; or (ii) change the prepayment, redemption or defeasance provisions thereof in a manner adverse to any Loan Party; or (iii) is otherwise materially adverse to the Lenders. SECTION 6.12 Minimum Excess Availability. The Loan Parties shall not permit Excess Availability, at any time, to be less than the lesser of (a) ten percent (10%) of the then Tranche A-1 Borrowing Base (or if the Tranche A-1 Commitments have been terminated, the Tranche A Borrowing Base) and (b) ten percent (10%) of the Aggregate Commitments. SECTION 6.13 Limitation on Change in Fiscal Year. The Company will not permit its fiscal year to end on a date other than the last Saturday in the month of February in each calendar year. 105 ARTICLE VII Events of Default SECTION 7.01 Events of Default. If any of the following events ("Events of Default") shall occur: (a) any Loan Party shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any L/C Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof (including, as required under Section 2.11) or otherwise; (b) any Loan Party shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement or any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three Business Days; (c) any representation or warranty made or deemed made by or on behalf of any Borrower or any other Loan Party in or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made; (d) any Borrower shall (i) fail to observe or perform any covenant, condition or agreement contained in Sections 5.01 (excluding clauses (a), (b), (c) and (f) thereof), 5.02 (other than Section 5.02(d)), 5.04 (with respect to the existence of any Borrower), 5.11 or 5.14(f) or in Article VI or (ii) fail to observe or perform any covenant, condition or agreement contained in clauses (a), (b) or (c) of Section 5.01, and such failure shall continue unremedied for a period of fifteen (15) days (thirty (30) days if approved in writing by the Administrative Agent in its discretion) or (iii) fail to observe or perform any covenant, condition or agreement contained in clause (f) of Section 5.01 (subject to a grace period of up to five (5) Business Days if approved in writing by the Administrative Agent in its discretion) or (iv) fail to observe or perform any covenant, condition or agreement contained in Section 5.07, and such failure shall continue unremedied for a period of five (5) days or (v) fail to observe or perform any covenant, condition or agreement contained in Section 5.09(b) and such failure shall continue unremedied for a period of fifteen (15) days; (e) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of thirty (30) days after written notice thereof from the Administrative Agent to the Company (which notice may be given at the request of any Lender); (f) the Company or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; 106 (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (after the giving of notice and/or the lapse of any applicable grace period) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Company or any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) the Company or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Section 7.01, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) the Company or any Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $35,000,000 shall be rendered against the Company, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Company or any Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; (m) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party not to be, a valid and perfected Lien on any material portion of the Collateral, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents, (ii) as a result of the Collateral Agent's failure (x) to 107 maintain possession of any stock certificates, promissory notes or other instruments delivered to it under the Pledge Agreement or (y) to file any document delivered by the Loan Parties to it for filing or (iii) as a result of the Collateral Agent's failure to take any action that the Company reasonably requests, in writing, the Collateral Agent to take; (n) a Change in Control shall occur; or (o) the occurrence of an event of default on the part of the Company or any Loan Party under any Material Contract or Material Indebtedness to which the Company or any Loan Party is a party or any indenture or other agreement relating to any Material Indebtedness of the Company or any Loan Party; (p) the determination by the Company or any Loan Party, to suspend the operation of their business in the ordinary course, liquidate all or substantially all of the Company's or such Loan Party's assets or employ an agent or other third party to conduct a program of closings, liquidations or "Going-Out-Of-Business" sales of all or substantially all of the business; or (q) any Loan Document shall not be in full force and effect. Solely for purposes of determining whether a Default or Event of Default has occurred under clause (h), (i), (j), or (p) of this Article VII, any reference in any such clause to any "Subsidiary" or any "Loan Party" shall be deemed not to include any Excluded Subsidiary. SECTION 7.02 Remedies Upon Event of Default. If any Event of Default occurs and is continuing, the Administrative Agent may, or, at the request of the Required Lenders shall, take any or all of the following actions: (a) declare the Commitment of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions to be terminated, whereupon such commitments and obligation shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Loan Parties; (c) require that the Loan Parties cash collateralize the L/C Exposure; (d) whether or not the maturity of the Obligations shall have been accelerated pursuant hereto, may (and at the direction of the Required Lenders, shall) proceed to protect, enforce and exercise all rights and remedies of the Credit Parties under this Agreement, any of the other Loan Documents or Applicable Law, including, but not limited to, by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement and the other Loan Documents or any instrument pursuant to which the Obligations are evidenced, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the Credit Parties; 108 provided, however, that upon the occurrence of any Event of Default under Section 7.01(h) or (i), the obligation of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions shall automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable, and the obligation of the Loan Parties to cash collateralize the L/C Exposure as aforesaid shall automatically become effective, in each case without further act of the Administrative Agent or any Lender and without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Loan Parties. No remedy herein is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of Law. SECTION 7.03 Application of Funds. After the exercise of remedies provided for in Section 7.02 (or after the Loans have automatically become immediately due and payable and the L/C Exposure have automatically been required to be cash collateralized as set forth in the proviso to Section 7.02), any amounts received on account of the Obligations shall be applied by the Administrative Agent in the following order: (a) All Collateral Other Than Principal Properties: First, to payment of that portion of the Obligations (excluding the Other Liabilities) constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent and the Collateral Agent and amounts payable under Article II payable to the Administrative Agent and the Collateral Agent), each in its capacity as such; Second, to payment of that portion of the Obligations (excluding the Other Liabilities) constituting indemnities, expenses, and other amounts (other than principal, interest and fees) payable to the Tranche A Lenders, the Term Lenders and the Issuing Bank, ratably among them in proportion to the amounts described in this clause Second; Third, to the extent that Swingline Loans have not been refinanced by a Loan, payment to the Swingline Lender of that portion of the Obligations constituting accrued and unpaid interest on the Swingline Loans; Fourth, to payment of that portion of the Obligations (other than Tranche A-1 Loans, Term A-2 Loans, and L/C Exposure in which the Tranche A-1 Lenders participate) constituting accrued and unpaid interest on the Loans, L/C Exposure and such other Obligations, and fees (including Letter of Credit Fees), ratably among the Tranche A Lenders, the Term Lenders, and the Issuing Bank in proportion to the respective amounts described in this clause Fourth payable to them; Fifth, to the extent that Swingline Loans have not been refinanced by a Loan, to payment to the Swingline Lender of that portion of the Obligations constituting unpaid principal of the Swingline Loans; 109 Sixth, to payment of that portion of the Obligations constituting unpaid principal of the Loans (other than Tranche A-1 Loans and Term A-2 Loans) unreimbursed L/C Disbursements (other than those in which the Tranche A-1 Lenders participate), ratably among the Tranche A Lenders, the Term Lenders and the Issuing Bank in proportion to the respective amounts described in this clause Seventh held by them; Seventh, to the Administrative Agent for the account of the Issuing Bank, to cash collateralize that portion of L/C Exposure comprised of the aggregate undrawn amount of Letters of Credit (other than those in which the Tranche A-1 Lenders participate); Eighth, ratably to pay any fees, indemnities, expenses and other amounts then due to the Tranche A-1 Lenders until paid in full; Ninth, ratably to pay accrued and unpaid interest in respect of the Tranche A-1 Loans until paid in full; Tenth, ratably to pay principal due in respect of Tranche A-1 Loans until paid in full; Eleventh, to the Administrative Agent for the account of the Issuing Bank, to cash collateralize that portion of L/C Exposure comprised of the aggregate undrawn amount of Letters of Credit in which the Tranche A-1 Lenders participate; Twelfth, ratably to pay any fees, indemnities, expenses and other amounts then due to the Term A-2 Lenders until paid in full; Thirteenth, ratably to pay accrued and unpaid interest in respect of the Term A-2 Loans until paid in full; Fourteenth, ratably to pay principal due in respect of Term A-2 Loans until paid in full; Fifteenth, to payment of all other Obligations (including without limitation the cash collateralization of unliquidated indemnification obligations, but excluding any Other Liabilities), ratably among the Credit Parties in proportion to the respective amounts described in this clause Fifteenth held by them Sixteenth, to payment of that portion of the Obligations arising from Cash Management Services, ratably among the Credit Parties in proportion to the respective amounts described in this clause Sixteenth held by them; Seventeenth, to payment of all other Obligations arising from Bank Products, ratably among the Credit Parties in proportion to the respective amounts described in this clause Seventeenth held by them; and Last, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Loan Parties or as otherwise required by Applicable Law. 110 Subject to Section 2.06, amounts used to cash collateralize the aggregate undrawn amount of Letters of Credit pursuant to clauses Seventh and Eleventh above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as cash collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above. Any amounts received by the Term Lenders pursuant to Section 7.03(a) shall be held as cash collateral for the Obligations relating to the Term Loans until (i) the liquidation of the Principal Properties and application of the Net Proceeds thereof to the Term Loans, or (ii) such earlier date that the Administrative Agent and the Company shall otherwise agree. (b) Principal Properties First, to payment of fees, indemnities, expenses and other amounts, including fees, charges and disbursements of counsel to the Administrative Agent and the Collateral Agent, with respect to the realization on the Principal Properties; Second, to payment of accrued and unpaid interest on the Term Loans, ratably among the Term Lenders in proportion to the respective amounts described in this clause Second payable to them Third, to payment of unpaid principal of the Term Loans ratably among the the Term Lenders in proportion to the respective amounts described in this clause Third held by them; Fourth, to payment of all other Obligations relating solely to the Term Loan ratably among the Term Lenders in proportion to the respective amounts described in this clause Fourth held by them; and Last, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Loan Parties or as otherwise required by Applicable Law. ARTICLE VIII The Agents SECTION 8.01 Appointment and Administration by Administrative Agent. Each Lender and each Issuing Bank hereby irrevocably designate Bank of America as Administrative Agent under this Agreement and the other Loan Documents. The general administration of the Loan Documents shall be by the Administrative Agent. The Lenders and each Issuing Bank each hereby (a) irrevocably authorizes the Administrative Agent (i) to enter into the Loan Documents to which it is a party, and (ii) at its discretion, to take or refrain from taking such actions as agent on its behalf and to exercise or refrain from exercising such powers under the Loan Documents as are delegated by the terms hereof or thereof, as appropriate, together with all powers reasonably incidental thereto, and (b) agrees and consents to all of the provisions of the Security Documents. The Administrative Agent shall have no duties or responsibilities except as set forth in this Agreement and the other Loan Documents, nor shall it have any fiduciary relationship with any other Credit Party, and no implied covenants, 111 responsibilities, duties, obligations, or liabilities shall be read into the Loan Documents or otherwise exist against the Administrative Agent. SECTION 8.02 Appointment of Collateral Agent. Each Lender and each Issuing Bank hereby irrevocably designate Bank of America as Collateral Agent under this Agreement and the other Loan Documents. The Lenders and each Issuing Bank each hereby (a) irrevocably authorizes the Collateral Agent (i) to enter into the Loan Documents to which it is a party, and (ii) at its discretion, to take or refrain from taking such actions as agent on its behalf and to exercise or refrain from exercising such powers under the Loan Documents as are delegated by the terms hereof or thereof, as appropriate, together with all powers reasonably incidental thereto, and (b) agrees and consents to all of the provisions of the Security Documents. All Collateral shall be held or administered by the Collateral Agent (or its duly-appointed agent) for its own benefit and for the ratable benefit of the other Credit Parties. Any proceeds received by the Collateral Agent from the foreclosure, sale, lease or other disposition of any of the Collateral and any other proceeds received pursuant to the terms of the Security Documents or the other Loan Documents shall be paid over to the Administrative Agent for application as provided in this Agreement and the other Loan Documents. The Collateral Agent shall have no duties or responsibilities except as set forth in this Agreement and the other Loan Documents, nor shall it have any fiduciary relationship with any other Credit Party, and no implied covenants, responsibilities, duties, obligations, or liabilities shall be read into the Loan Documents or otherwise exist against the Collateral Agent. SECTION 8.03 Agreement of Applicable Lenders. Upon any occasion requiring or permitting an approval, consent, waiver, election or other action on the part of the Lenders, action shall be taken by the Administrative Agent, for and on behalf or for the benefit of all Credit Parties upon the direction of the requisite percentage of Lenders, and any such action shall be binding on all Credit Parties. No amendment, modification, consent, or waiver shall be effective except in accordance with the provisions of Section 9.02. SECTION 8.04 Liability of Agents. (a) The Agents, when acting on behalf of the Credit Parties, may execute any of their respective duties under this Agreement by or through any of its officers, agents and employees, and no Agent nor its respective directors, officers, agents or employees shall be liable to any other Credit Party for any action taken or omitted to be taken in good faith, or be responsible to any other Credit Party for the consequences of any oversight or error of judgment, or for any loss, except to the extent of any liability imposed by law by reason of such Agent's own gross negligence, bad faith or willful misconduct. No Agent or its respective directors, officers, agents and employees shall in any event be liable to any other Credit Party for any action taken or omitted to be taken by it pursuant to instructions received by it from the requisite percentage of Lenders, or in reliance upon the advice of counsel selected by it. Without limiting the foregoing, no Agent or any of its respective directors, officers, employees, or agents shall be: (i) responsible to any other Credit Party for the due execution, validity, genuineness, effectiveness, sufficiency, or enforceability of, or for any recital, statement, warranty or representation in, this Agreement, any other Loan Document or any related agreement, document or order; (ii) required to ascertain 112 or to make any inquiry concerning the performance or observance by any Loan Party of any of the terms, conditions, covenants, or agreements of this Agreement or any of the Loan Documents; (iii) responsible to any other Credit Party for the state or condition of any properties of the Loan Parties or any other obligor hereunder constituting Collateral for the Obligations or any information contained in the books or records of the Loan Parties; (iv) responsible to any other Credit Party for the validity, enforceability, collectibility, effectiveness or genuineness of this Agreement or any other Loan Document or any other certificate, document or instrument furnished in connection therewith; or (v) responsible to any other Credit Party for the validity, priority or perfection of any Lien securing or purporting to secure the Obligations or for the value or sufficiency of any of the Collateral. (b) The Agents may execute any of their duties under this Agreement or any other Loan Document by or through its agents or attorneys-in-fact, and shall be entitled to the advice of counsel concerning all matters pertaining to its rights and duties hereunder or under the other Loan Documents. The Agents shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. (c) None of the Agents nor any of their respective directors, officers, employees, or agents shall have any responsibility to any Loan Party on account of the failure or delay in performance or breach by any other Credit Party (other than by each such Agent in its capacity as a Lender) of any of its respective obligations under this Agreement or any of the other Loan Documents or in connection herewith or therewith. (d) The Agents shall be entitled to rely, and shall be fully protected in relying, upon any notice, consent, certificate, affidavit, or other document or writing believed by them to be genuine and correct and to have been signed, sent or made by the proper person or persons, and upon the advice and statements of legal counsel (including, without, limitation, counsel to the Loan Parties), independent accountants and other experts selected by any Loan Party or any Credit Party. The Agents shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless they shall first receive such advice or concurrence of the requisite percentage of the Lenders as it deems appropriate or they shall first be indemnified to its satisfaction by the other Credit Parties against any and all liability and expense which may be incurred by them by reason of the taking or failing to take any such action. SECTION 8.05 Notice of Default. The Agents shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless such Agent has actual knowledge of the same or has received notice from a Credit Party or Loan Party referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that an Agent obtains such actual knowledge or receives such a notice, such Agent shall give prompt notice thereof to each of the other Credit Parties. Upon the occurrence of an Event of Default, the Administrative Agent shall (subject to the provisions of Section 9.02) take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders. Unless and until the Administrative Agent shall have received such direction, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking 113 such action, with respect to any such Default or Event of Default as it shall deem advisable in the best interest of the Credit Parties. In no event shall the Administrative Agent be required to comply with any such directions to the extent that the Administrative Agent believes that its compliance with such directions would be unlawful. SECTION 8.06 Credit Decisions. Each Credit Party (other than the Agents) acknowledges that it has, independently and without reliance upon the Agents or any other Credit Party, and based on the financial statements prepared by the Loan Parties and such other documents and information as it has deemed appropriate, made its own credit analysis and investigation into the business, assets, operations, property, and financial and other condition of the Loan Parties and has made its own decision to enter into this Agreement and the other Loan Documents. Each Credit Party (other than the Agents) also acknowledges that it will, independently and without reliance upon the Agents or any other Credit Party, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in determining whether or not conditions precedent to closing any Loan hereunder have been satisfied and in taking or not taking any action under this Agreement and the other Loan Documents. SECTION 8.07 Reimbursement and Indemnification. Each Credit Party (other than the Agents) agrees to (i) reimburse the Agents and their Affiliates for such Credit Party's Applicable Percentage of (x) any expenses and fees incurred by any Agent for the benefit of Credit Parties under this Agreement and any of the other Loan Documents, including, without limitation, counsel fees and compensation of agents and employees paid for services rendered on behalf of the Credit Parties, and any other expense incurred in connection with the operations or enforcement thereof not reimbursed by the Loan Parties and (y) any expenses of any Agent incurred for the benefit of the Credit Parties that the Loan Parties have agreed to reimburse pursuant to this Agreement or any other Loan Document and have failed to so reimburse and (ii) indemnify and hold harmless each Agent and any of its Affiliates, directors, officers, employees, or agents, on demand, in the amount of such Credit Party's Applicable Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it or any Credit Party in any way relating to or arising out of this Agreement or any of the other Loan Documents or any action taken or omitted by it or any of them under this Agreement or any of the other Loan Documents to the extent not reimbursed by the Loan Parties, including, without limitation, costs of any suit initiated by any Agent against any Credit Party (except such as shall have been determined by a court of competent jurisdiction by final and non-appealable judgment to have resulted from the gross negligence, bad faith or willful misconduct of such Agent); provided, however, that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against such Credit Party in its capacity as such. The provisions of this Section 8.07 shall survive the repayment of the Obligations and the termination of the Commitments. SECTION 8.08 Rights of Agents. 114 It is understood and agreed that the Agents shall have the same rights and powers hereunder (including the right to give such instructions) as the other Lenders and may exercise such rights and powers, as well as their rights and powers under other agreements and instruments to which they are or may be party, and engage in other transactions with the Loan Parties, as though they were not the Agents. Each Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of commercial or investment banking, trust, advisory or other business with the Loan Parties and their Affiliates as if it were not an Agent hereunder. SECTION 8.09 Notice of Transfer. The Administrative Agent may deem and treat a Lender party to this Agreement as the owner of such Lender's portion of the Obligations for all purposes, unless and until, and except to the extent, an Assignment and Acceptance shall have become effective as set forth in Section 9.04. SECTION 8.10 Successor Agents. Any Agent may resign at any time by giving thirty (30) Business Days' written notice thereof to the other Credit Parties and the Company. Upon any such resignation of an Agent, the Required Lenders shall have the right to appoint a successor Agent, which, so long as there is no Event of Default, shall be reasonably satisfactory to the Company (whose consent in any event shall not be unreasonably withheld or delayed). If no successor Agent shall have been so appointed by the Required Lenders and/or none shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation, the retiring Agent may, on behalf of the other Credit Parties, appoint a successor Agent which shall be a Person capable of complying with all of the duties of such Agent hereunder (in the opinion of the retiring Agent and as certified to the other Credit Parties in writing by such successor Agent) which, so long as there is no Event of Default, shall be reasonably satisfactory to the Company (whose consent shall not in any event be unreasonably withheld or delayed). Upon the acceptance of any appointment as Agent by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as such Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was such Agent under this Agreement. SECTION 8.11 Relation Among the Lenders. The Lenders are not partners or co-venturers, and no Lender shall be liable for the acts or omissions of, or (except as otherwise set forth herein in case of any Agent) authorized to act for, any other Lender. SECTION 8.12 Reports and Financial Statements. By signing this Agreement, each Lender: 115 1) agrees to furnish the Administrative Agent on the first day of each month with a summary of all Other Liabilities due or to become due to such Lender; 2) is deemed to have requested that the Administrative Agent furnish such Lender, promptly after they become available, copies of all financial statements required to be delivered by the Company hereunder (including, without limitation, those described in Sections 5.01(a) through (f) hereof) and all commercial finance examinations and appraisals of the Collateral received by the Administrative Agent (collectively, the "Reports"); 3) expressly agrees and acknowledges that the Administrative Agent (i) makes no representation or warranty as to the accuracy of the Reports, and (ii) shall not be liable for any information contained in any Report; 4) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that the Administrative Agent or any other party performing any audit or examination will inspect only specific information regarding the Loan Parties and will rely significantly upon the Loan Parties' books and records, as well as on representations of the Loan Parties' personnel; 5) agrees to keep all Reports confidential in accordance with Section 9.12; and 6) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold the Administrative Agent and any such other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any Credit Extensions that the indemnifying Lender has made or may make to the Borrowers, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a Loan or Loans of the Borrowers; and (ii) to pay and protect, and indemnify, defend, and hold the Administrative Agent and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including attorney costs) incurred by the Administrative Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. SECTION 8.13 Agency for Perfection. Each Lender hereby appoints each other Lender as agent for the purpose of perfecting Liens for the benefit of the Agents and the Lenders, in assets which, in accordance with Article 9 of the UCC or any other Applicable Law of the United States of America can be perfected only by possession. Should any Lender (other than an Agent) obtain possession of any such 116 Collateral, such Lender shall notify the Administrative Agent thereof, and, promptly upon the Administrative Agent's request therefor, shall deliver such Collateral to the Collateral Agent or otherwise deal with such Collateral in accordance with the Collateral Agent's instructions. SECTION 8.14 Delinquent Lender. (a) If for any reason any Lender shall fail or refuse to abide by its obligations under this Agreement, including without limitation its obligation to make available to Administrative Agent its Applicable Percentage of any Loans, expenses or setoff or purchase its Applicable Percentage of a participation interest in the Swingline Loans or L/C Exposure (a "Delinquent Lender") and such failure is not cured within ten (10) days of receipt from the Administrative Agent of written notice thereof, then, in addition to the rights and remedies that may be available to the other Credit Parties, the Loan Parties or any other party at law or in equity, and not at limitation thereof, (i) such Delinquent Lender's right to participate in the administration of, or decision-making rights related to, the Obligations, this Agreement or the other Loan Documents shall be suspended during the pendency of such failure or refusal, and (ii) a Delinquent Lender shall be deemed to have assigned any and all payments due to it from the Loan Parties, whether on account of outstanding Loans, interest, fees or otherwise, to the remaining non-delinquent Lenders for application to, and reduction of, their proportionate shares of all outstanding Obligations until, as a result of application of such assigned payments the Lenders' respective Applicable Percentages of all outstanding Obligations shall have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. The Delinquent Lender's decision-making and participation rights and rights to payments as set forth in clauses (i) and (ii) hereinabove shall be restored only upon the payment by the Delinquent Lender of its Applicable Percentage of any Obligations, any participation obligation, or expenses as to which it is delinquent, together with interest thereon at the rate set forth in SECTION 2.13(c) hereof from the date when originally due until the date upon which any such amounts are actually paid. (b) The non-Delinquent Lenders shall also have the right, but not the obligation, in their respective, sole and absolute discretion, to cause the termination and assignment, without any further action by the Delinquent Lender for no cash consideration (pro rata, based on the respective Commitments of those Lenders electing to exercise such right), of the Delinquent Lender's Commitment to fund future Loans. Upon any such purchase of the Applicable Percentage of any Delinquent Lender, the Delinquent Lender's share in future Credit Extensions and its rights under the Loan Documents with respect thereto shall terminate on the date of purchase, and the Delinquent Lender shall promptly execute all documents reasonably requested to surrender and transfer such interest, including, if so requested, an Assignment and Acceptance. (c) Each Delinquent Lender shall indemnify the Administrative Agent and each non-delinquent Lender from and against any and all loss, damage or expenses, including but not limited to reasonable attorneys' fees and funds advanced by the Administrative Agent or by any non-delinquent Lender, on account of a Delinquent Lender's failure to timely fund its Applicable Percentage of a Loan or to otherwise perform its obligations under the Loan Documents. SECTION 8.15 Collateral and Guaranty Matters. The Lenders and the Issuing Bank irrevocably authorize the Administrative Agent, at its option and in its discretion, 117 (a) to release or direct the Collateral Agent to release any Lien on any property granted to or held by the Collateral Agent or the Administrative Agent under any Loan Document (i) upon termination of the Aggregate Commitments and payment in full of all Obligations (other than contingent indemnification obligations) and the expiration or termination of all Letters of Credit, (ii) that is sold or to be sold as part of or in connection with any sale permitted hereunder or under any other Loan Document, or (iii) if approved, authorized or ratified in writing in accordance with Section 9.02; (b) to release any Loan Party from its obligations under the Loan Documents if such Person ceases to be a Subsidiary as a result of a transaction permitted hereunder; and (c) to subordinate any Lien on any property granted to or held by the Administrative Agent or the Collateral Agent under any Loan Document to the holder of any Lien on such property that is permitted by Section 6.02. Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent's or the Collateral Agent's authority, as applicable, to release or subordinate its interest in particular types or items of property, or to release any Loan Party from its obligations under the Loan Documents pursuant to this Section 8.14. In each case as specified in this Section 8.14, the Administrative Agent and the Collateral Agent will, at the Company's expense, execute and deliver to the applicable Loan Party such documents as such Loan Party may reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted under the Security Documents or to subordinate its interest in such item, or to release such Loan Party from its obligations under the Loan Documents, in each case in accordance with the terms of the Loan Documents and this Section 8.15. SECTION 8.16 Co-Syndication Agents; Documentation Agent and Co-Lead Arrangers. Notwithstanding the provisions of this Agreement or any of the other Loan Documents, no Person who is or becomes a Co-Syndication Agent or a Documentation Agent nor the Co-Lead Arrangers shall have any powers, rights, duties, responsibilities or liabilities with respect to this Agreement and the other Loan Documents. ARTICLE IX Miscellaneous SECTION 9.01 Notices (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows: (i) if to any Borrower, to it in care of the Company at Two Paragon Drive, Montvale, New Jersey 07645, Attention of the Treasurer (Telecopy No. (201) 571-8036) 118 with a copy to the Company at Two Paragon Drive, Montvale, New Jersey 07645, Attention of the Office of General Counsel (Telecopy No. (201) 571-8106); (ii) if to the Administrative Agent, the Collateral Agent or the Swingline Lender to Bank of America, N.A., 100 Federal Street, Boston, Massachusetts 02110, Attention: Christine Hutchinson (Telecopy No. (617) 790-1234), (E-Mail to christine.hutchinson@bankofamerica.com), with a copy to Riemer & Braunstein, LLP, Three Center Plaza, Boston, Massachusetts 02108, Attention: David S. Berman, Esquire (Telecopy No. (617) 880-3456), (E-Mail to dberman@riemerlaw.com); (iii) if to the Issuing Bank, to it at Letters of Credit Department, Bank of America, N.A. 1 Fleet Way, Scranton, Pennsylvania 18507, Attention Michael Grizzanti (telecopy No. (800) 755-8743), (E-Mail to Michael.A.Grizzanti@bankofamerica.com); (iv) if to a Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. (b) Notices and other communications to the Lenders and the Issuing Bank hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender or the Issuing Bank pursuant to Article II if such Lender or the Issuing Bank, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Company may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor. (c) The Platform. THE PLATFORM IS PROVIDED "AS IS" AND "AS AVAILABLE." THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY 119 OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Agents or any of their Related Parties (collectively, the "Agent Parties") have any liability to any Loan Party, any Lender, the Issuing Bank or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Loan Parties' or the Administrative Agent's transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided, however, that in no event shall any Agent Party have any liability to any Loan Party, any Lender, the Issuing Banks or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages). SECTION 9.02 Waivers; Amendments. (a) No failure or delay by the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by clause (b) of this Section 9.02, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default or Event of Default, regardless of whether the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default or Event of Default at the time. (b) Neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Agent that is a party thereto and the Loan Party or Loan Parties that are parties thereto, in each case with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or unreimbursed L/C Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan under Section 2.10 or the required date of reimbursement of any L/C Disbursement, or any date for the payment of any interest or fees payable hereunder, or reduce the amount of, waive or excuse any such payment (including, without limitation, the 120 waiver of any Event of Default occasioned by any non-payment of such amounts when due), or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Sections 2.11(l), 2.11(m), 2.11(n), 2.18(b), 2.18(c) or 7.03, without the written consent of each Lender, (v) change any of the provisions of this Section or the percentage set forth in the definition of "Required Lenders" or any other provision of any Loan Document specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender, (vi) directly or indirectly, whether by amendment, waiver or otherwise (A) increase any of advance rates contained in the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base (including, without limitation, any increase to the Tranche A Leasehold Cap, the Term A-2 Leasehold Cap, the Additional Availability Amount, or the percentages of Eligible Scripts, Eligible Leaseholds and Eligible Real Estate which may comprise the Tranche A Borrowing Base and the Tranche A-1 Borrowing Base) without the written consent of each Lender, (B) add additional categories of assets to the Tranche A Borrowing Base or the Tranche A-1 Borrowing Base (e.g. intellectual property) without the written consent of each Lender, or (C) any other provisions of the definitions of "Tranche A Borrowing Base", "Tranche A-1 Borrowing Base", "Eligible Inventory", "Eligible Coinstar Receivables", "Eligible Credit Card Accounts Receivable", "Eligible Third Party Insurance Provider Accounts Receivable", "Eligible Real Estate", "Eligible Leaseholds" or "Scripts", in each case in a manner adverse to the interests of the Lenders or in a manner that would make more credit available to the Borrowers, without the written consent of the Required Lenders (calculated for the purpose of this clause (B) as though the percentage specified in the definition of "Required Lenders" were 66-2/3% instead of 50%), (vii) increase the total Commitments (other than, with respect to the Tranche A Commitments, in accordance with Section 2.02), without the written consent of each Lender, (viii) release any Loan Party from its Guarantee under the Guaranty (except as expressly provided in the Guaranty), or limit its liability in respect of such Guaranty, without the written consent of each Lender or (ix) release (A) all or any substantial part of the Collateral from the Liens of the Security Documents (except with respect to sales or transfers of, and other transactions relating to, Collateral permitted pursuant to the Loan Documents), without the written consent of each Lender, or (B) the Principal Properties from the Liens of the Security Documents (except with respect to sales or transfers of, and other transactions relating to, the Principal Properties permitted pursuant to the Loan Documents), without the written consent of each Term Lender and the Required Lenders (which, for purposes of calculation, shall include the Term Lenders); provided further that no such agreement shall (x) directly or indirectly change (A) any of advance rates contained in the Tranche A-1 Borrowing Base without the written consent of each Tranche A-1 Lender, (B) any other provisions of the definitions of "Tranche A-1 Borrowing Base" in a manner adverse to the interests of the Tranche A-1 Lenders or in a manner that would make more credit available to the Borrowers under the Tranche A-1 Borrowing Base, without the written consent of 66-2/3% of the Tranche A-1 Lenders, or (C) any provisions relating to the conditions precedent to the payment or prepayment of the Tranche A-1 Loans, the reduction of termination of the Tranche A-1 Commitments, or the conditions to the making of Tranche A-1 Loans under Section 2.01(f) hereof without the written consent of the Tranche A-1 Lenders, (y) directly or indirectly change any provisions relating to the conditions precedent to the payment or prepayment of the Term A-2 Loans without the written consent of the Term A-2 Lenders, or (z) amend, modify or otherwise affect the rights or duties of the Administrative Agent or the Issuing Bank or the Collateral Agent without the prior 121 written consent of the Administrative Agent or the Issuing Bank or the Collateral Agent, as the case may be. Notwithstanding the foregoing, any provision of this Agreement may be amended by an agreement in writing entered into between the Borrowers, the Required Lenders and the Administrative Agent (and, if their rights or obligations are affected thereby, the Issuing Bank) if (i) by the terms of such agreement, the Commitment and L/C Exposure of each Lender not consenting to the amendment provided for therein shall, for such Lender, terminate upon the effectiveness of such amendment and (ii) at the time such amendment becomes effective, each Lender not consenting thereto receives payment in full of the principal of and interest accrued on each Loan owed to it and all other amounts owing to it or accrued for its account under this Agreement. SECTION 9.03 Expenses; Indemnity; Damage Waiver. (a) The Borrowers agree, jointly and severally, to pay (i) all fees and reasonable out-of-pocket expenses (including, without limitation, the fees and expenses incurred in connection with any field examination and any appraisal of any of the Collateral) incurred by the Administrative Agent, the Collateral Agent and their respective Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent and the Collateral Agent, in connection with the syndication of the credit facilities provided for herein, the preparation, execution, delivery and administration of the Loan Documents or any amendments, supplements, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses (including the reasonable and documented fees, charges and disbursements of any counsel for the Administrative Agent, the Collateral Agent, the Issuing Bank and/or any Lender) incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender, including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender, in connection with the enforcement or protection of their rights in connection with the Loan Documents, including their rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses (including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender) incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit, provided that the Lenders who are not the Agents shall be entitled to reimbursement for no more than one counsel representing all such Lenders (absent a conflict of interest in which case the Lenders may engage and be reimbursed for additional counsel). (b) The Borrowers agree, jointly and severally, to indemnify the Administrative Agent, the Collateral Agent, the Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless (on an after tax basis) from, any and all losses, claims, causes of action, damages, liabilities, settlement payments, costs and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated hereby or thereby, the performance by the parties to the Loan Documents of their respective obligations thereunder or the consummation of the Transactions or any other transactions contemplated hereby or 122 thereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property currently or formerly owned or operated by the Company or any of its subsidiaries, or any Environmental Liability related to the operations of the Company or any of its subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities, costs or related expenses are determined by a court of competent jurisdiction by final judgment to have resulted from the gross negligence, bad faith, or willful misconduct of such Indemnitee, or relate to Hazardous Materials that first arise at any property owned by a Borrower after such property is transferred to any Indemnitee or its successors and assigns by foreclosure, deed in lieu of foreclosure or similar transfer. (c) To the extent that the Borrowers fail to pay any amount required to be paid by them to the Administrative Agent, the Collateral Agent or the Issuing Bank under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent, the Collateral Agent or the Issuing Bank, as the case may be, such Lender's pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent, the Collateral Agent or the Issuing Bank in its capacity as such. For purposes hereof, a Lender's "pro rata share" shall be determined based upon its Applicable Percentage. (d) To the extent permitted by Applicable Law, none of the Borrowers shall assert, and each of the Borrowers hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable promptly after written demand therefor. (f) For the avoidance of doubt, this Section 9.03 shall not apply to Tax matters, which shall be governed exclusively by Section 2.17. SECTION 9.04 Successors and Assigns. (a) Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Loan Party may assign or otherwise transfer any of its 123 rights or obligations hereunder or under any other Loan Document without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of Section 9.04(b), (ii) by way of participation in accordance with the provisions of subsection Section 9.04(d), or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 9.04(f) (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in Section 9.04(d) and, to the extent expressly contemplated hereby, the Related Parties of each of the Credit Parties) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Assignments by Lenders. Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment(s) and the Loans (including for purposes of this Section 9.04(b), participations in L/C Exposure and in Swingline Loans) at the time owing to it); provided that any such assignment shall be subject to the following conditions: (i) Minimum Amounts (A) in the case of an assignment of the entire remaining amount of the assigning Lender's Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, no minimum amount need be assigned; and (B) in any case not described in subsection (b)(i)(A) of this Section, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent or, if "Trade Date" is specified in the Assignment and Acceptance, as of the Trade Date, shall not be less than $5,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Company otherwise consents (each such consent not to be unreasonably withheld or delayed); provided, however, that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met; (ii) Proportionate Amounts. Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to such Lender's Tranche A Loans, Term Loans and Tranche A Commitment, except that this clause (ii) shall not (A) apply to the Swingline Lender's rights and obligations in respect of Swingline Loans, or (B) prohibit any Lender 124 from assigning all or any portion of its rights and obligations with respect to (1) its Tranche A Commitment and Term Loan and (2) its Tranche A-1 Commitment and Term A-2 Loan on a non-pro rata basis; (iii) Required Consents. No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and, in addition: (A) the consent of the Company (such consent not to be unreasonably withheld or delayed) shall be required unless (1) an Event of Default has occurred and is continuing at the time of such assignment or (2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund of such Lender; and (B) the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of any Commitment if such assignment is to a Person that is not a Lender, an Affiliate of such Lender or an Approved Fund of such Lender; and (C) the consent of the Issuing Bank (such consent not to be unreasonably withheld or delayed) shall be required for any assignment that increases the obligation of the assignee to participate in exposure under one or more Letters of Credit (whether or not then outstanding); and (D) the consent of the Swingline Lender (such consent not to be unreasonably withheld or delayed) shall be required for any assignment in respect of the assignment of any Commitment. (iv) Assignment and Acceptance. The parties to each assignment (other than assignments by a Lender to its Affiliate or an Approved Fund of such Lender or pursuant to Sections 2.09, 2.19 or 9.04(f)) shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, provided, however, that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Acceptance, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03. with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, the Borrowers (at their expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations 125 under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 9.04(d). (c) Register. (i) The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at the Administrative Agent's Office a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal and interest amounts of the Loans and L/C Obligations owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, absent manifest error, and the Loan Parties, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Company and any Lender at any reasonable time and from time to time upon reasonable prior notice. (ii) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in Section 9.04(b) and any written consent to such assignment required by Section 9.04(b), the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Assignment unless it has been recorded in the Register as provided in this paragraph. (d) Participations. Any Lender may at any time, without the consent of, or notice to, the Loan Parties or the Administrative Agent, sell participations to any Person (other than a natural person or the Loan Parties or any of the Loan Parties' Affiliates or Subsidiaries) (each, a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and/or the Loans (including such Lender's participations in L/C Obligations and/or Swingline Loans) owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Loan Parties, the Administrative Agent, the Collateral Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce the Loan Documents and to approve any amendment, supplement, modification or waiver of any provision of the Loan Documents; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, supplement, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to Section (c), each Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 (subject to the requirements and limitations of such Sections) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 9.04(b). To the extent permitted by law, each 126 Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.18(c) as though it were a Lender. (e) Limitations upon Participant Rights. A Participant shall not be entitled to receive any greater payment under Sections 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Company's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Company is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrowers, to comply with Section 2.17(e) as though it were a Lender. Each Lender that sells a participation shall, acting solely for this purpose as a non-fiduciary agent of the Borrowers, maintain a register on which it enters the name and address of each participant and the principal and interest amount of each participant's interest in the Loans held by it (the "Participant Register"). The entries in the Participant Register shall be conclusive, absent manifest error, and such Lender shall treat each person whose name is recorded in the Participant Register as the owner of the participation in question for all purposes of this Agreement notwithstanding any notice to the contrary. (f) Certain Pledges. Any Lender may at any time grant, pledge, hypothecate or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any grant, pledge, hypothecation or assignment to secure obligations to a Federal Reserve Bank, and none of the restrictions or conditions set forth in this Section 9.04 related to any grant, pledge, hypothecation or assignment shall apply to any such grant, pledge, hypothecation or assignment of a security interest; provided that no such grant, pledge, hypothecation or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such grantee, pledgee, hypothecatee or assignee for such Lender as a party hereto. (g) Electronic Execution of Assignments. The words "execution," "signed," "signature," and words of like import in any Assignment and Acceptance shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any Applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act. (h) Resignation as Issuing Bank or Swingline Lender after Assignment. Notwithstanding anything to the contrary contained herein, if at any time Bank of America assigns all of its Commitments and Loans pursuant to subsection (b) above, Bank of America may, (i) upon 30 days' notice to the Company and the Lenders, resign as Issuing Bank and/or (ii) upon 30 days' notice to the Company, resign as Swingline Lender. In the event of any such resignation as Issuing Bank or Swingline Lender, the Company shall be entitled to appoint from among the Lenders a successor Issuing Bank or Swingline Lender hereunder; provided, however, that no failure by the Company to appoint any such successor shall affect the resignation of Bank of America as Issuing Bank or Swingline Lender, as the case may be. If Bank of America resigns as Issuing Bank, it shall retain all the rights, powers, privileges and duties of the Issuing 127 Bank hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as Issuing Bank and all L/C Obligations with respect thereto. If Bank of America resigns as Swingline Lender, it shall retain all the rights of the Swingline Lender provided for hereunder with respect to Swingline Loans made by it and outstanding as of the effective date of such resignation, including the right to require the Lenders to make Loans or fund risk participations in outstanding Swingline Loans pursuant to Section 2.05. Upon the appointment of a successor Issuing Bank and/or Swingline Lender, (a) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring Issuing Bank or Swingline Lender, as the case may be, and (b) the successor Issuing Bank shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangements satisfactory to Bank of America to effectively assume the obligations of Bank of America with respect to such Letters of Credit. SECTION 9.05 Survival. All covenants, agreements, representations and warranties made by the Loan Parties in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or electronic transmission shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07 Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of 128 such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08 Right of Setoff. If one or more Events of Default shall have occurred and be continuing, each Lender shall have the right, in addition to and not in limitation of any right which any such Lender may have under Applicable Law or otherwise, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or its Affiliates to or for the credit or the account of any of the Borrowers against any of and all the obligations of any of the Borrowers now or hereafter existing under this Agreement and the other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 9.08 are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. No Credit Party will, or will permit its Participant to, exercise its rights under this Section 9.08 without the consent of the Administrative Agent or the Required Lenders. ANY AND ALL RIGHTS TO REQUIRE THE ADMINISTRATIVE AGENT TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE THE RIGHT OF SETOFF UNDER THIS SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. SECTION 9.09 GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK (EXCEPT FOR THE CONFLICT OF LAWS RULES THEREOF, BUT INCLUDING GENERAL OBLIGATIONS LAW SECTIONS 5-1401 AND 5-1402). (b) Each of the Borrowers hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against any of the Borrowers or their respective properties in the courts of any jurisdiction. (c) Each of the Borrowers hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter 129 have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.11 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12 Confidentiality. Each of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below) except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors, and funding sources (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by Applicable Law or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Company or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than the Borrowers. For the purposes of this Section, "Information" means all information received from any of the Borrowers relating to the Borrowers or their business, other than any 130 such information that is available to the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by any of the Borrowers; provided that, in the case of information received from a Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. SECTION 9.13 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under Applicable Law (collectively, the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with Applicable Law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 9.14 Patriot Act. Each Lender hereby notifies the Borrowers that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies the Borrowers, which information includes the name and address of each Borrower and other information that will allow such Lender to identify such Borrower in accordance with the Act. Each Borrower is in compliance, in all material respects, with the Patriot Act. No part of the proceeds of the Loans will be used by the Borrowers, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended. SECTION 9.15 Foreign Asset Control Regulations. Neither of the advance of the Loans nor the use of the proceeds of any thereof will violate the Trading With the Enemy Act (50 U.S.C. Section 1 et seq., as amended) (the "Trading With the Enemy Act") or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) (the "Foreign Assets Control Regulations") or any enabling legislation or executive order relating thereto (which for the avoidance of doubt shall include, but shall not be limited to (a) Executive Order 13224 of September 21, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) (the 131 "Executive Order") and (b) the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56)). Furthermore, none of the Borrowers or their Affiliates (a) is or will become a "blocked person" as described in the Executive Order, the Trading With the Enemy Act or the Foreign Assets Control Regulations or (b) knowingly engages or will engage in any dealings or transactions, or be otherwise associated, with any such "blocked person" or in any manner violative of any such order. SECTION 9.16 Additional Waivers. (a) The Obligations are the joint and several obligation of each Loan Party. To the fullest extent permitted by Applicable Law, the obligations of each Loan Party hereunder shall not be affected by (i) the failure of the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender to assert any claim or demand or to enforce or exercise any right or remedy against any other Loan Party under the provisions of this Agreement, any other Loan Document or otherwise, (ii) any rescission, waiver, amendment or modification of, or any release of any Loan Party from, any of the terms or provisions of, this Agreement, any other Loan Document, or (iii) the failure to perfect any security interest in, or the release of, any of the Collateral or other security held by or on behalf of the Administrative Agent, the Collateral Agent the Issuing Bank or any Lender. (b) The obligations of each Loan Party to pay the Obligations in full hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the payment in full in cash of the Obligations and termination of the Commitments), including any claim of waiver, release, surrender, alteration or compromise of any of the Obligations and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of any of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Loan Party hereunder shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender to assert any claim or demand or to enforce any remedy under this Agreement, any other Loan Document or any other agreement, by any waiver or modification of any provision of any thereof, any default, failure or delay, willful or otherwise, in the performance of any of the Obligations, or by any other act or omission that may or might in any manner or to any extent vary the risk of any Loan Party or that would otherwise operate as a discharge of any Loan Party as a matter of law or equity (other than the payment in full in cash of all the Obligations and termination of the Commitments). (c) To the fullest extent permitted by Applicable Law, each Loan Party waives any defense based on or arising out of any defense of any other Loan Party or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of any other Loan Party, other than the payment in full in cash of all the Obligations and termination of the Commitments. The Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders may, at their election, foreclose on any security held by one or more of them by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Obligations, make any other accommodation with any other Loan Party, or exercise any other right or remedy available to 132 them against any other Loan Party, without affecting or impairing in any way the liability of any Loan Party hereunder except to the extent that all the Obligations have been indefeasibly paid in full in cash and performed in full and the Commitments terminated. Pursuant to Applicable Law, each Loan Party waives any defense arising out of any such election even though such election operates, pursuant to Applicable Law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of such Loan Party against any other Loan Party, as the case may be, or any security. (d) Each Loan Party hereby agrees to keep each other Loan Party fully apprised at all times as to the status of its business, affairs, finances, and financial condition, and its ability to perform its Obligations under the Loan Documents and in particular as to any adverse developments with respect thereto. Each Loan Party hereby agrees to undertake to keep itself apprised at all times as to the status of the business, affairs, finances, and financial condition of each other Loan Party, and of the ability of each other Loan Party to perform its Obligations under the Loan Documents, and in particular as to any adverse developments with respect to any thereof. Each Loan Party hereby agrees, in light of the foregoing mutual covenants to inform each other, and to keep themselves and each other informed as to such matters, that the none of the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender shall have any duty to inform any Loan Party of any information pertaining to the business, affairs, finances, or financial condition of any other Loan Party, or pertaining to the ability of any other Loan Party to perform its Obligations under the Loan Documents, even if such information is adverse, and even if such information might influence the decision of one or more of the Loan Parties to continue to be jointly and severally liable for, or to provide Collateral for, Obligations of one or more of the other Loan Parties. To the fullest extent permitted by Applicable Law, each Loan Party hereby expressly waives any duty of the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender to inform any Loan Party of any such information. SECTION 9.17 No Advisory or Fiduciary Responsibility. In connection with all aspects of each transaction contemplated hereby, the Loan Parties each acknowledge and agree that: (i) the credit facility provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document) are an arm's-length commercial transaction between the Loan Parties, on the one hand, and the Agents, the Issuing Bank and the Lenders, on the other hand, and each of the Loan Parties is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, waiver or other modification hereof or thereof); (ii) in connection with the process leading to such transaction, the each Agent, Issuing Bank and Lender is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Loan Parties or any of their respective Affiliates, stockholders, creditors or employees or any other Person; (iii) none of the Agent, Issuing Bank or Lenders has assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Loan Parties with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, waiver or other modification hereof or of any other Loan Document (irrespective of whether any of the Agents, Issuing Bank or Lenders has advised or is currently advising 133 any Loan Party or any of its Affiliates on other matters) and none of the Agent, Issuing Bank or Lenders has any obligation to any Loan Party or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; (iv) the Agent, Issuing Bank and Lenders and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Loan Parties and their respective Affiliates, and none of the Agent, Issuing Bank or Lenders has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (v) none of the Agent, Issuing Bank and Lenders have provided or will provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Loan Document) and each of the Loan Parties has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate. Each of the Loan Parties hereby waives and releases, to the fullest extent permitted by law, any claims that it may have against each of the Agents, Issuing Bank and Lenders with respect to any breach or alleged breach of agency or fiduciary duty. SECTION 9.18 Press Releases. The Company agrees that neither it nor its Affiliates will in the future issue any press releases or other public disclosure using the name of Administrative Agent or its Affiliates or referring to this Agreement or the other Loan Documents without at least two (2) Business Days' prior notice to Administrative Agent and without the prior written consent of Administrative Agent unless (and only to the extent that) Company is required to do so under Applicable Law (including, without limitation, under the reporting requirements of the Securities and Exchange Commission or other Governmental Authority). Each Loan Party consents to the publication by Administrative Agent or any Lender of advertising material relating to the financing transactions contemplated by this Agreement using any Loan Party's name, product photographs, logo or trademark. Administrative Agent or such Lender shall provide a draft at least five (5) Business Days in advance of any advertising material to the Company for review and comment prior to the publication thereof. Administrative Agent reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements. SECTION 9.19 Existing Credit Agreement Amended and Restated Upon satisfaction of the conditions precedent to this Agreement in Section 4.01, (a) this Agreement shall amend and restate the Existing Credit Agreement in its entirety, (b) the rights and obligations of the parties under the Existing Credit Agreement shall be subsumed within and be governed by this Agreement; provided, however, that each of the Borrowers, each Agent, each Lender and each Issuing Bank hereby agrees that (i) each of the "Loans" (as such term is defined in the Existing Credit Agreement) outstanding under the Existing Credit Agreement on the Restatement Effective Date shall, for purposes of this Agreement, be included as Loans hereunder; (ii) each "Letter of Credit" (as defined in the Existing Credit Agreement) outstanding under the Existing Credit Agreement on the Restatement Effective Date shall be a Letter of Credit hereunder, (iii) all Obligations of the Borrowers under the Existing Credit Agreement shall remain outstanding, shall constitute continuing Obligations secured by the Collateral, and this Agreement shall not be deemed to evidence or result in a novation or repayment and reborrowing of such Obligations, and (iv) all references to the Existing Credit Agreement in any 134 Loan Document or other document or instrument delivered in connection therewith shall be deemed to refer to this Agreement and the provisions hereof. [SIGNATURE PAGES FOLLOW] 136 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., AS A BORROWER By: /s/William Moss ---------------------------------- Name: William Moss Title: Vice President and Treasurer EACH OF THE BORROWERS LISTED ON ANNEX A HERETO By: /s/William Moss --------------------------------- Name: William Moss Title: Vice President EACH OF THE BORROWERS LISTED ON ANNEX B HERETO By: /s/William Moss ----------------------------- Name: William Moss Title: Senior Vice President [Credit Agreement] ANNEX A APW SUPERMARKETS, INC. COMPASS FOODS, INC. FOOD BASICS, INC. HOPELAWN PROPERTY I, INC. MCLEAN AVENUE PLAZA CORP. SHOPWELL, INC. SUPER FRESH FOOD MARKETS, INC. SUPER FRESH/SAV-A-CENTER, INC. SUPER MARKET SERVICE CORP. SUPER PLUS FOOD WAREHOUSE, INC. TRADEWELL FOODS OF CONN., INC. WALDBAUM, INC. [Credit Agreement] ANNEX B PATHMARK STORES, INC. AAL REALTY CORP. MACDADE BOULEVARD STUART, LLC BERGEN STREET PATHMARK, INC. BRIDGE STUART INC. EAST BRUNSWICK STUART INC. LANCASTER PIKE STUART, LLC PLAINBRIDGE LLC UPPER DARBY STUART, LLC [Credit Agreement] LO-LO DISCOUNT STORES, INC., as a Borrower By: /s/Harry Austin ---------------------- Name: Harry Austin Title: Vice President [Credit Agreement] BANK OF AMERICA, N.A., as Administrative Agent, as Collateral Agent, and as a Lender By: /s/Stephen L. DeMenna ------------------------- Name: Stephen L. DeMenna Title: Managing Director [Credit Agreement] THE CIT GROUP/BUSINESS CREDIT, INC., as a Lender By: /s/Matthew DeFranco ------------------------ Name: Matthew DeFranco Title: Vice President [Credit Agreement] GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By: /s/Robert E. Kelly ------------------- Name: Robert E. Kelly Title: Duly Authorized Signatory BURDALE FINANCIAL LIMITED, as a Lender By: /s/David Grende ------------------------ Name: David Grende Title: Managing Director By: /s/Phillip Webb ---------------------------- Name: Phillip Webb Title: Vice President [Credit Agreement] NATIONAL CITY BUSINESS CREDIT, INC., as a Lender By: /s/Joseph Kwasny ------------------------ Name: Joseph Kwasny Title: Managing Director [Credit Agreement] TEXTRON FINANCIAL CORPORATION, as a Lender By: /s/Susan M. Hall ------------------------------- Name: Susan M. Hall Title: Senior Account Executive [Credit Agreement] TEXTRON FINANCIAL CORPORATION, as a Lender By: /s/Pamela Petrick ------------------------------- Name: Pamela Petrick Title: Senior Account Executive [Credit Agreement] WELLS FARGO RETAIL FINANCE LLC, as a Lender By:/s/Emily Abrahamson ------------------------------ Name: Emily Abrahamson Title: Account Executive, AVP [Credit Agreement] JPMORGAN CHASE BANK, N.A., as a Lender By: /s/James M. Barbato ----------------------- Name: James M. Barbato Title: Vice President [Credit Agreement] WACHOVIA BANK, NATIONAL ASSOCIATION, as a Lender By: /s/Alex Lurye -------------- Vice President [Credit Agreement] -----END PRIVACY-ENHANCED MESSAGE-----