-----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, QoGoURNpGYvplky7kU4EChZntI/LMpNV67GhcQF+9gQQK6RwQeCzMrm6/WFjD27W mhwhZoM8X4DUR/4YTsteWg== 0000927946-03-000139.txt : 20030701 0000927946-03-000139.hdr.sgml : 20030701 20030701144950 ACCESSION NUMBER: 0000927946-03-000139 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WINE & SPIRITS INC CENTRAL INDEX KEY: 0001081971 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-BEER, WINE & DISTILLED ALCOHOLIC BEVERAGES [5180] STATE OF INCORPORATION: IN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-74589 FILM NUMBER: 03767684 BUSINESS ADDRESS: STREET 1: P O BOX 1602 700 W MORRIS STREET CITY: INDIANAPOLIS STATE: IN ZIP: 46206 BUSINESS PHONE: 3176366091 10-K 1 nws10k.htm National Wine & Spirits, Inc. - Form 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K


                  (Mark One)

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 31, 2003.

[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



Commission File Number: 333-74589

NATIONAL WINE & SPIRITS, INC.
(Exact name of registrant as specified in its charter)



Indiana
(State or other jurisdiction of
incorporation or organization)
 
35-2064429
(I.R.S. Employer Identification No.)

700 West Morris Street, P.O. Box 1602
Indianapolis, Indiana
(Address of principal executive offices)
 
46206
(Zip Code)

(317) 636-6092
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:        None

Securities registered pursuant to Section 12(g) of the Act:        None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes    [X]           No    [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes     [   ]           No    [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any Amendment to this Form 10-K.    [X]

The registrant is a privately held corporation. As such, there is no practicable method to determine the aggregate market value of the voting stock held by non-affiliates of the registrant.

The number of shares of Common Stock, $.01 par value, of National Wine & Spirits, Inc. outstanding as of June 20, 2003 was 5,330,521, of which 104,520 were voting stock.

Documents Incorporated by Reference:    None

TABLE OF CONTENTS


Page
Part I    
Item 1. Business
Item 2. Properties 12 
Item 3. Legal Proceedings 12 
Item 4. Submission of Matters to a Vote of Security Holders 12 
 
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 
Item 6. Selected Consolidated Financial Data 13 
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 25 
Item 8. Financial Statements and Supplementary Data 26 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 
 
Part III
Item 10. Directors and Executive Officers of the Registrant 49 
Item 11. Executive Compensation 51 
Item 12. Security Ownership of Certain Beneficial Owners and Management 53 
Item 13. Certain Relationships and Related Transactions 53 
Item 14. Controls and Procedures 55 
Item 15. Principal Accountant Fees and Services 55 
 
Part IV
Item 16. Exhibits, Financial Statement Schedules and Reports on Form 8-K 56 

PART I


Disclosure Regarding Forward-Looking Statements

        This Form 10-K, including, but not limited to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology, such as “may,” “intend,” “will,” “expect,” “anticipate,” “should,” “plans to,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. In particular, any statement, express or implied, concerning future operating results or the ability to generate revenues, income or cash flow to service the Company’s debt are forward-looking statements. Such statements are necessarily estimates reflecting the Company’s best judgment and expectations based upon current information. Although the Company believes that the expectations will prove to have been correct, all forward-looking statements are expressly qualified by the cautionary statements set forth on Exhibit 99.1 to this Form 10-K, and the Company undertakes no obligation to update such forward-looking statements.

Item 1.    Business

General

        National Wine & Spirits, Inc. (NWS) is one of the largest distributors of wine and spirits in the United States. NWS’ markets include, among others, Chicago and Detroit, which are the second largest and the sixth largest metropolitan markets for spirits in the United States, respectively. NWS is the largest distributor of spirits in Indiana with 47% market share and Michigan with 48% market share. In Illinois, NWS was one of the largest distributors in fiscal 2003 with approximately 32% market share. NWS currently expects market share in Illinois for fiscal 2004 to be approximately 20% due to changes in its Illinois operations described under “Business — Recent Developments” and other circumstances. NWS was incorporated in the state of Indiana in 1998. NWS conducts its operations through its wholly owned subsidiaries, National Wine & Spirits Corporation in Indiana (NWS-Indiana), NWS-Illinois, LLC (NWS-Illinois), NWS Michigan, Inc. (NWS-Michigan), and United States Beverage, L.L.C. (USB). USB distributes and markets import and craft beer along with malt based products throughout the United States.

        From 1999 to 2003, NWS’ total revenue increased steadily from $553.2 million to $712.9 million, representing a compound annual growth rate of 6.5%. NWS achieved this performance by successfully integrating several strategic acquisitions, actively developing new geographic market areas, pursuing new supplier and brand relationships, implementing advanced product handling technology and proprietary information systems, and providing high levels of supplier and customer service.

        Under the three-tier regulatory framework established by federal and state law, suppliers of alcohol-based beverages are generally prohibited from selling their products directly to retail outlets or consumers, effectively requiring suppliers to use distributors such as NWS. This regulatory framework effectively insulates distributors from vertical competition from suppliers or retail customers. In some states, referred to as “control states,” state law has historically mandated the state to act as the exclusive wholesale distributor and/or retailer of alcohol-based beverages. In 1996, Michigan became the first control state to privatize aspects of the wholesale distribution of spirits, and NWS has become the leading administrative distribution agent of spirits in that state.

Recent Developments

        The wine and spirits industry has undergone significant changes in recent months. Rapid consolidation has occurred in the supplier sector, and distributors have expanded their operations to cover a larger number of states. In several states, only two major distributors continue to operate.

        Diageo and Schieffelin & Somerset have undertaken a process of state-by-state consolidation and realignment of their brands, including the brands which Diageo acquired from Seagram in 2001. As a result, several changes have occurred in the Company’s distribution relationship with Diageo in the states of Indiana, Illinois and Michigan. The Company has been selected as Diageo’s exclusive distributor in Indiana and the exclusive distributor and authorized distribution agent for Diageo and Schieffelin & Somerset in Michigan. The Company will no longer act as Diageo’s distributor in the state of Illinois.



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        Many other suppliers have undertaken a process of reviewing state distribution rights in light of determinations made by Diageo. As a result, the Company will no longer have distribution rights in Illinois for Future Brands and Canandaigua Wine Company. The Company anticipates that suppliers and distributors will continue to consolidate and realign their brands in the foreseeable future and expects to have the opportunity of acquiring the representation of competing brands as a result of those consolidations and realignments. There can be no assurance, however, that the Company will acquire such representation or that any failure to acquire such representation would not have a material adverse effect on the Company or its operations.

        On February 27, 2003 and March 25, 2003, NWS entered into two agreements with Glazer’s Wholesale Drug Company (“Glazer”) under which NWS and Glazer will form a strategic alliance for the purpose of distributing alcohol-based beverages in the state of Illinois. Under the management services agreement, Glazer will provide management and consulting services and assistance in Illinois. A separate contribution agreement sets forth the terms upon which the parties may agree in the future to conduct operations in Illinois through a new entity to be equally owned by NWS-Illinois and Glazer.

        As consolidations and realignment continue within the Illinois market, NWS continues to analyze its operations in Illinois and has taken steps to appropriately size its workforce in relation to its customer needs. Approximately 300 employees in the Illinois operations are no longer actively employed by NWS. As it adjusts the size and scope of its Illinois operations, NWS will continue to concentrate on maintaining customer and supplier relationships and infrastructure necessary to operate its Illinois business with lower costs and increased efficiencies, until such time as new business supports expanded operations. NWS has discontinued warehousing operations in its Champaign and Peoria facilities, but it continues to use those locations as cross-docking facilities and office space. Continuing efforts are also being made to replace lost revenue in Illinois.

Industry Overview

        The United States alcohol-based beverage industry generated total retail sales of approximately $137.2 billion in calendar 2002. Sales of wine and spirits, in which NWS primarily competes, accounted for approximately 15% and 31%, respectively, or $62.8 billion of total retail sales in 2002. In the United States wine and spirits markets, total consumption has increased since 1994 and 1998, respectively. During 2002, wine and spirits consumption in the United States grew 3.3% and 1.8% respectively, as compared to 2001, with imported products showing stronger growth than domestics. In both the wine and spirits industries, consumer preference has been to purchase higher quality and more expensive products; management believes this trend will continue.

        Since the repeal of Prohibition in 1933, the federal and state governments have regulated the sale of spirits, wine, and beer. State regulatory frameworks fall into two types: control and open. In nearly all circumstances, suppliers may not legally sell directly to retailers. In the 18 control states, the state controls either the distribution or the retail sale, or both. In open states, including Indiana, Illinois, and Kentucky, the distributors and retailers are privately owned businesses. In the open-franchise states, there are laws and regulations that restrict the suppliers’ ability to change distributors.

        Given the three tier regulatory structure, the wine and spirits distribution industry varies greatly from other industries such as food, drugs, non-alcohol-based beverages and paper products. As suppliers can compete directly with the distributors in these other industries by shipping directly to retailers, distributor margins can be much lower than those in the wine and spirits industry. In addition, the liquor industry as a whole has shown a remarkable resilience to economic downturns relative to other industries.

        In June of 2000, Seagram announced its intention to merge with Vivendi and divest of their wine and spirits business. Subsequently, Diageo and Pernod Ricard jointly bid and agreed to purchase the brands with the intention of assigning them to their respective companies. The most notable Seagram brands that Diageo purchased were Crown Royal, Seagrams V.O., 7 Crown, Captain Morgan and Myers’s Rum. The notable brands Pernod purchased include Chivas Regal, The Glenlivet, Martell Cognacs and Seagrams Gin. The purchase agreement was approved by the Federal Trade Commission in December, 2001. Absolut Vodka, which had a marketing arrangement with Seagram, has assigned the U.S. marketing rights to Future Brands L.L.C., a joint venture with V & S (parent of Absolut) and Jim Beam Brands. Diageo is in the process of completing its nationwide efforts to consolidate the rights to distribute the brands it purchased from Seagram. Pernod has consolidated the Seagram brands it purchased into its existing distribution network. Other suppliers are developing strategies to deal with the brand sales to Diageo and Pernod Ricard. See “Business – Recent Developments” for a description of some of the consequences of these events for NWS.



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Suppliers and Products

        NWS represents many of the largest suppliers of wine and spirits in the United States, and offers hundreds of brands and more than 12,000 individual products. The breakdown of sales among wine, spirits and other products distributed by NWS in 2003, 2002 and 2001 is as follows:

Wine (in thousands)
Spirits (in thousands)
Other (in thousands)
2003   2002   2001 2003   2002   2001 2003   2002   2001
 
Product sales     $ 165,388   $ 161,445   $ 160,840   $ 392,580   $ 408,199   $ 397,754   $ 131,891   $ 89,950   $ 78,285  
Distribution fees       ---     ---     ---     22,999     21,963     21,573     ---     ---     ---  
Percentage of total
Company revenue
      23.2 %   23.7 %   24.4 %   58.3 %   63.1 %   63.7 %   18.5 %   13.2 %   11.9 %


        In each of the last three fiscal years, sales of wine and spirits accounted for more than eighty percent of consolidated revenue. USB was primarily the reason for the growth in the other category, which includes revenues derived from beer, non-alcoholic and tobacco products. The financial statements contained in Item 8 of this Form 10-K set forth the Company revenues from external customers, profit and total assets for each of the last three fiscal years.

        In Michigan, spirits distributors have exclusive relationships with suppliers by law, and receive distribution fees from suppliers as set by the state, rather than purchasing from the suppliers for resale to customers. This arrangement has the effect of understating the importance of spirits in NWS’ overall product mix. For purposes of illustrating the scale of NWS’ operations in Michigan, the total wholesale prices of products delivered by NWS for Michigan in 2003, 2002 and 2001 was $334.0 million, $360.0 million and $355.0 million, respectively, based on the fixed wholesale prices of the spirits delivered by NWS.

        NWS’ products include the following brands, among many others:



- - 5 -

Product Type Brand Names
Vodka: Absolut Popov
VOX Smirnoff
Grey Goose Stolichnaya
Gordons Belvedere
 
Bourbon and Blended Whiskey: Crown Royal Seven Crown
Jim Beam Wild Turkey
Seagram's V.O. Windsor Canadian
Old Grand Dad Knob Creek
 
Scotch and Single Malt Whiskey: Chivas Regal Glenlivet
Grant's Isle of Jura
Balvenie J&B Rare
Bowmore Dalmore
Glenfiddich Macallan
Johnny Walker
 
Gin: Boodles Gilbey's
Seagram's Gordons
Tanqueray
 
Rum: Captain Morgan Myers
Malibu Ronrico
 
Tequila: Herradura Patron
Jose Cuervo
 
Cognacs/Brandy: Courvoisier Martell
Hine Paul Masson
Remy Martin
Hennessey
 
Specialty Spirits: Chambord DeKuyper Cordials
Bailey's Irish Cream Jagermeister
Campari TGI Friday's
Hiram Walker Cordials Kahlua
Grand Marnier
 
Wine: Kendall Jackson Inglenook
Almaden Perrier Jouet
Banfi Sebastiani
Beringer Stags Leap
Caymus Sterling
Chateau Lafite Veuve Clicquot
Rothschild Rosemount
Gundlach Bundschu Ravenswood
Penfolds Columbia Crest
Hess Collection Chateau St. Michelle
Moet & Chandon Niebaum-Coppola
Dom Perignon
 
Specialty Beer and Other: Goose Island Sierra Nevada
Grolsch Hooper's Hooch
K Cider Seagram's Coolers
Seagram's Smooth
 
Non-Alcohol: Perrier Stewart's
Daily's Nantucket Nectars
San Pellegrino

- - 6 -

         NWS has entered into written distribution agreements with several of its principal suppliers that generally may be extended on an annual basis but are terminable upon 30 days or 60 days written notice to NWS. NWS has entered into various long-term agreements with certain suppliers that are disclosed in the financial statements. In addition, NWS has informal arrangements with many of its suppliers whereby NWS distributes the suppliers’ products pursuant to purchase orders without written distribution agreements. Although the written agreements provide NWS with the non-exclusive right to distribute the suppliers’ products in a particular state, in practice the suppliers have generally selected a distributor to be the exclusive distributor of specified products in each state. In each of Indiana and Michigan, NWS is presently acting as the exclusive distributor with respect to virtually all of the products it distributes.

        NWS has entered into binding agreements to purchase products with certain of its suppliers in Indiana and Michigan. The following figures represent approximate aggregate case sales and net sales from suppliers with which the Company entered into such agreements in fiscal 2003 and brands for which the Company owns the distribution rights in Illinois:

Case sales:   11,416,000 
Net sales: $284,000,000 

Related Operations

        In addition to its core alcohol-based beverage distribution operations, NWS has conducted related beverage operations through a division, Cameron Springs Water Company, and through NWS’ U.S. Beverage operations. Cameron Springs, a bottled water supplier in Indiana, was sold to Perrier Group for approximately $10.4 million in cash, which was in excess of net book value as of June 2000. U.S. Beverage commenced operations as a division of NWS in March 1997 to market and sell imported, specialty and microbrewed beers and specialty malt products nationally. The brand distribution contracts related to the U.S. Beverage operations are held by an entity, in which NWS-Illinois has 100% voting control. In select markets, NWS sells and distributes premium cigars primarily as a complement to NWS’ distribution of fine wines and spirits.

        In April 2000, U.S. Beverage entered into an agreement with the Goose Island Brewing Company by which U.S. Beverage became the exclusive sales and marketing firm for the Goose Island brand throughout the United States. On January 2, 2002 U.S. Beverage entered into a distribution contract with Grolsch International, BV as the exclusive importer, seller and marketer of Grolsch products within the United States. Commencing April 1, 2002, U.S. Beverage became the exclusive marketer and distributor of Seagram’s Coolers.



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Customers

        Most states, including Indiana, Illinois and Michigan, require wine and spirits retailers to purchase alcohol-based beverages from licensed distributors. Suppliers in these states may not legally sell directly to retail customers. NWS’ customers fall into two broad categories depending on where the alcohol-based beverage ultimately will be consumed: on-premise and off-premise. Off-premise customers include package liquor stores, grocery stores, drug stores and mass merchandisers. On-premise customers include hotels, restaurants and bars, and similar establishments. NWS currently serves over 36,000 retail locations in Indiana, Illinois and Michigan. No single customer represented more than 5.4% of NWS’ 2003 total revenue. As is customary in the industry, NWS’ products are generally purchased under standard purchase orders and not under long-term supply contracts. As a result, backlog is not meaningful in the wholesale distribution industry.

        The following table summarizes NWS’ customer base for NWS-Illinois, NWS-Indiana, and NWS-Michigan:

Type of Customer Percentage of
Company 2003 Revenue
Representative Customers


Off-Premise
    Package Stores
        Grocery stores, drug stores and mass merchandisers
38.2%
26.2
Gold Standard and Cap'n Cork
Kroger, Dominicks, Marsh,
American Stores (Osco), Walgreens,
CVS, Sam's Club, Meijer
7-Eleven, White Hen, Village
    Other
            Percent of total
 8.6
73.0%
 

On-Premise
    Restaurants and Bars
21.4 Charlie Trotter's, Hard RockCafe,
House of Blues, Mortons,
Lettuce Entertain U,
Levy, Ruth's Chris,
    Hotels, Entertainment 2.5
Four Seasons, Hyatt, Hilton,
the United Center
    Other 3.1
Crooked Stick Golf Course,
American Legion
            Percent of total 27.0%
 

        Management believes that the number and diversity of NWS’ customers and the nature of NWS’ business strengthens NWS’ liquidity. Indiana has a 15-day credit law beyond which retail customers are restricted from buying alcohol-based beverages from any distributor in the market. Illinois has a similar 30-day credit law. Typically, NWS’ bad debt expenses are incurred less than 30 days after shipment since the credit laws prohibit extension of terms. Average bad debt expense for the past five years has been less than 0.10% of revenue.

Marketing and Sales

        Brand Management.     NWS was one of the first distributors to recognize the benefits of a dedicated approach to brand management and separating it from sales execution. Our approach has contributed to our success. Suppliers appreciate and depend upon the local expertise and understanding of the intricacies of the market. Our brand managers, through interaction with our sales teams and analysis of the competitive landscape, adjust suppliers’ national brand strategies to plans that work in our respective states.



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        Sales Teams.    NWS sales organizational design is predicated upon category knowledge and expertise, trade channel knowledge and effectiveness, and geographic coverage. Through its marketing and sales force, NWS acts as the field marketing and merchandising arm of its suppliers by maintaining regular contact with NWS’ off-premise and on-premise customers. NWS provides its customers with a wide variety of services in addition to order taking, merchandising, and delivery. These services include item selection and SKU optimization using space and financial tools, fact-based business presentations to capitalize on fair share, consumer pull-through marketing programs and communicating business-building solutions.

        Sales, Marketing and Information Systems.    Our investment in technology in the areas of sales and marketing is a critical factor in our success and customer satisfaction. NWS is generally recognized as an industry innovator and leader in MIS in the wine and spirits distribution tier. Our proprietary sales system manages sales data to the SKU level in all retail accounts we service (approximately 36,000) and is refreshed nightly based on deliveries. This system provides our brand teams the necessary information to develop targeted, effective brand plans. Moreover, our sales managers depend on the information to monitor and control retail execution within their sales teams. Most recently we have moved this information to the Internet to allow for greater speed and accessibility to management, retail, and supplier partners. We have also invested resources to significantly improve our category management expertise, and this has improved our service and effectiveness particularly in the off-premise national and regional chain accounts.

        NWS’ sales force and management is equipped with laptop computers, which expedites order entry and provides instant feedback to customers regarding order activity. NWS provides its customers and suppliers with the ability to directly enter and track orders via electronic data interchange. In addition, NWS’ proprietary information systems provide its sales and marketing personnel, customers and suppliers with access to a database of information regarding the purchase and sale of alcohol-based beverages in specific geographic markets. NWS’ suppliers have immediate access to information regarding product and demographic trends within specific geographic markets and NWS’ customers have access to information regarding popular products or other trends from similarly situated retail locations. Management believes that its management information systems enhance its operating performance and improve its relationships with customers and suppliers.

Warehousing and Distribution

        NWS utilizes a series of three master warehouses, two hyper-terminals and seven cross-docking facilities strategically located throughout Indiana, Illinois and Michigan to store and ship its products pending sale to customers. NWS uses common carriers to transport products from suppliers to its master warehouses. Master warehouses located in Chicago, Indianapolis and Detroit serve as the primary storage facilities for NWS’ inventory. Upon receipt of the product at one of the master warehouses, the products are inspected and stored on pallets or in racks. Temperature-sensitive products, such as fine wines, are stored in temperature-controlled areas of the warehouses. Hyper-terminals located in South Bend, Indiana and Grand Rapids, Michigan stock only high volume products and provide an extension of the master warehouses. NWS strives to optimize inventory levels, taking into account minimum out-of-stock percentages, projected sales, including seasonal demands, periodic supplier shipments to meet supplier sales requirements and working capital requirements.

        NWS’ customers ordinarily receive either next day or second-day delivery. In general, orders are collected during the day for batch routing and order “picking” at night. The Chicago and Detroit master warehouses each use an automated material handling system, including scanners, automated conveyors, dispensers and sorters. Products from the master warehouses are then shuttled nightly to either a hyper-terminal or a cross-docking facility where the orders are consolidated and loaded onto delivery trucks. Cross-docking facilities located in Collinsville, Illinois, Champaign, Illinois, Peoria, Illinois, Evansville, Indiana, and Traverse City, Saginaw and Escanaba, Michigan further extend the service areas of the master warehouses. Orders for delivery out of the various cross-docking facilities are picked in the master warehouses, shipped in during the night, and then transferred onto local delivery trucks for final delivery. NWS owns or leases a total fleet of approximately 322 delivery trucks, consisting of 238 delivery trucks, 15 tractors, 21 trailers, 44 vans and 4 pick-up trucks. To maximize prompt and efficient product delivery, NWS’ fleet is allocated among NWS’ master warehouses, hyper-terminals and cross-docking facilities located throughout Indiana, Illinois and Michigan.

        As a result of a number of factors including state laws and regulations, NWS maintains independent distribution networks in Indiana, Illinois and Michigan. The Indiana distribution network operates with the Indianapolis master warehouse feeding the South Bend hyper-terminal and the Evansville cross-docking facility. The Michigan distribution network operates with the Detroit master warehouse feeding the Grand Rapids hyper-terminal and the cross-docking facilities located in Escanaba, Saginaw and Traverse City. The Illinois distribution network is separated into the metropolitan Chicago area, and all other service areas. The Chicago area is serviced out of the Chicago master warehouse, while the downstate areas are serviced by the smaller cross docking facilities in Champaign, Peoria and Collinsville.



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Competition

        There are significant barriers to entry into the wholesale wine and spirits distribution business. These barriers include established supplier-distributor relationships, specialized distribution equipment such as material handling systems and delivery vehicles, important industry knowledge regarding pricing, inventory management, and distribution logistics. Historically, it is extremely rare for organizations not already engaged as wine and spirits distributors to enter the business. New distributors typically enter existing markets through acquisition.

        The wine and spirits wholesale distribution business is highly competitive. NWS’ primary competition in Illinois includes Judge & Dolph and Southern Wine & Spirits. In Indiana, the only significant competitor is Olinger (a partnership of Glazer and Romano). None of the ten largest United States distributors competes with NWS in Michigan. Distributors compete for new suppliers or brands based on reputation, market share, access to customers and ability to satisfy supplier demands. Competition from larger distributors will likely increase in the future as consolidation among suppliers and distributors continues.

Environmental Matters

        NWS currently owns and leases a number of properties, and historically it has owned and/or leased others. Under applicable environmental laws, NWS may be responsible for remediation of environmental conditions relating to the presence of hazardous substances on such properties. The liability imposed by such laws is often joint and several without regard for whether the property owner or operator knew of, or was responsible for, the presence of such hazardous substances. In addition, the presence of such hazardous substances, or the failure to properly remediate such substances, may adversely affect the property owner’s ability to borrow using the real estate as collateral and to transfer its interest in the real estate. Although NWS is not aware of the presence of hazardous substances requiring remediation, there can be no assurance that releases unknown to NWS have not occurred. Except for blending and bottling of a few of its own brands, NWS does not manufacture any of the wine or spirit products it sells and believes that it has conducted its business in substantial compliance with applicable environmental laws and regulations. Compliance with environmental laws has not had a material effect upon NWS’ capital expenditures, earnings or competitive position.

Employees

        As of March 31, 2003, NWS had approximately 1,430 employees. As indicated in “Business — Recent Developments,” NWS has recently lost business in Illinois but added business in Indiana and Michigan. These developments will likely continue to effect the Company’s workforce in the future. Approximately 148 employees in Michigan and 302 employees in Illinois are represented by labor unions. In Illinois, NWS has relationships with three unions:

 
         (1)         Teamsters Union Local 744, annual agreements expiring March 30, 2004 and March 30, 2005;

 
         (2)         Liquor and Allied Workers Union Local 3, annual agreements expiring September 30, 2004 and October 31, 2004; and

 
         (3)         Teamsters, Chauffeurs & Helpers Union Local 50, expiring August 31, 2004.

        In Michigan, NWS has relationships with four unions:

           (1)         Teamsters Union Local 337, expiring March 4, 2005;

           (2)         Teamsters Union Local 406, expiring March 1, 2005;

           (3)         Teamsters Union Local 299, expiring March 2, 2004; and

           (4)         Teamsters Union Local 486, expiring March 5, 2004.



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        Employees of NWS in Indiana are not represented by any labor unions.

        NWS has not experienced any work stoppages in more than 20 years as a result of labor disputes and considers its employee relations to be good.

Regulatory Considerations

        The manufacturing, importation, distribution and sale of alcohol-based beverages is subject to regulation by the federal government through the Department of the Treasury, Bureau of Alcohol, Tobacco and Firearms (BATF), as well as by state and local regulatory agencies. Suppliers, distributors and retailers must be properly licensed in order to sell alcohol-based beverages.

        In most states, the alcohol-based beverage industry operates within what is commonly referred to as a three-tier system of distribution. The three tiers are identified as follows:

 
(1)
Tier one is comprised of suppliers that produce alcohol-based beverages and/or importers of alcohol-based beverages.

 
(2)
Tier two is comprised of distributors, such as NWS.

 
(3)
Tier three is comprised of retail licensees.

Under this system, suppliers sell to distributors, distributors sell to retailers, and retailers sell to consumers. For the most part, suppliers may not sell to retailers or consumers and distributors may not sell directly to consumers. All states prohibit suppliers or distributors from having an interest in retail licensees. NWS directly and through its affiliates holds federal basic permits and state permits/licenses as a distributor and importer. Also, NWS-Illinois holds out-of-state shipper permits that allow it to ship products from one state to a licensed distributor in any one of the other states.

        NWS is required to have each of its officers, directors and principal stockholders who owns 5% or more of the issued and outstanding stock qualified by federal and state governmental agencies to have an interest in a licensed company. NWS’ officers, directors and principal stockholders have been qualified by BATF and state regulatory agencies to hold licenses/permits as a wholesaler/importer.

        Distributors like NWS face scrutiny in a number of important areas, including initial licensing or permitting and sales and marketing activities with or on behalf of retail customers. The distributors may not give or transfer anything of value to their customers in exchange for business or other consideration. The definition of “value” differs from state to state. NWS participates in significant promotional activities for suppliers and customers. Suppliers also are increasingly asking distributors to be responsible for activities and related costs formerly undertaken by suppliers as suppliers pursue ways to reduce their operating costs. These increased demands will likely challenge distributors, including NWS, which desire to meet the wishes of their suppliers and customers. As a result, NWS regularly provides training and education programming for its sales and marketing personnel.

        NWS believes that it is in compliance with applicable regulations in all material respects. Consistent with industry practice, the sales and marketing activities permitted by distributors for the benefit of tier one suppliers are generally regulated by state licensing authorities, which authorize various trade practice activities by statute, regulation or administrative bulletin. NWS relies on such enforcement guidance, which is subject to change at the discretion of the regulatory authorities, in determining the scope of its permitted sales and marketing activities.

        As part of its regulatory compliance program, NWS is in frequent contact with regulatory agencies so that NWS can: (1) be kept current on regulatory developments affecting NWS; (2) obtain answers from the agencies to questions from company personnel regarding compliance issues; (3) encourage enforcement of applicable laws and regulations on a consistent basis throughout its markets. NWS believes that prompt and consistent enforcement by the regulatory agencies is important and benefits NWS.



- - 11 -

Item 2.    Properties

        NWS’ distribution facilities consist of three warehouses, two hyper-terminals and seven cross-docking facilities. NWS’ corporate headquarters are located in Indianapolis, Indiana.

        The master warehouses, located in Indianapolis, Chicago, and Detroit, serve as the primary storage facilities and regional offices for NWS. The Chicago warehouse contains approximately 650,000 square feet of warehousing space, including a designated temperature controlled area for temperature-sensitive products. The Indianapolis warehouse contains approximately 351,000 square feet of warehousing space, including a designated temperature controlled area for temperature-sensitive products. The Detroit warehouse consists of approximately 238,000 square feet of warehousing space, including a material handling system and eight shipping docks.

         The following chart lists NWS’ warehouses and delivery, production and office facilities:

Location Owned/
Leased
Total
Square
Feet
Principal Function
Indiana Indianapolis Owned 351,000  Master Warehouse/Office
South Bend Owned 76,900  Hyper-Terminal/Office
Evansville Owned 5,800  Cross-Docking Facility
Evansville Owned 2,400  Office
Ft. Wayne Leased 5,500  Office
Crown Point Leased 7,900  Office
Indianapolis Owned 3,500  Office - Leased to Perrier
Indianapolis Owned 15,000  Warehouse - Leased to Perrier
Indianapolis Owned 19,500  Partially leased Office Property
 
Connecticut Stamford Leased 5,700  Office
 
Illinois Chicago Owned 650,000  Master Warehouse/Office
Chicago Leased 1,840  Leased Office Property
Champaign Leased 50,000  Cross-Docking Facility/Office
Peoria Leased 56,000  Cross-Docking Facility/Office
Collinsville Leased 14,200  Cross-Docking Facility/Office
Rockford Leased 5,000  Office
Springfield Leased 1,000  Office
 
Michigan Detroit (Brownstown) Leased 238,000  Master Warehouse/Office
Grand Rapids Leased 100,000  Hyper-Terminal/Office
Escanaba Leased 7,500  Cross-Docking Facility/Office
Saginaw Leased 1,000  Cross-Docking Facility
Traverse City Leased 5,000  Cross-Docking Facility

        NWS’ lease agreements for the Detroit master warehouse and the Grand Rapids hyper-terminal each have a ten-year term, expiring April 20, 2007 and January 31, 2007, respectively, and provide NWS with an option to purchase the properties.

Item 3.    Legal Proceedings

        The Company is a party to various lawsuits and claims arising in the normal course of business. While the ultimate resolution of lawsuits or claims against the Company cannot be predicted with certainty, management is vigorously defending all claims and does not expect that these matters will have a material adverse effect on the financial position or results of operations of the Company.

Item 4.    Submission of Matters to a Vote of Security Holders

      None.



- - 12 -

Part II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

         Market Information.     There is no established trading market for the common stock of NWS.

        Holders.     As of June 20, 2003, the number of record holders of each of the classes of the Company’s common stock were as follows:

Voting common stock
Non-voting common stock

        Dividends.         The ability of the Company to pay dividends to its shareholders is restricted by certain covenants contained in the new credit facility as well as certain restrictions contained in the Company’s indentures relating to its senior notes. Subject to these limitations, the Company has historically paid dividends to its shareholders for tax liabilities and for limited other purposes.

         Equity Compensation Plans.    The Company does not have any equity compensation plans.

Item 6.    Selected Consolidated Financial Data

        You should read the following summary historical financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in Item 8 and the schedules accompanying this report.

        Distribution fees include the per case distribution fee for cases of spirits delivered in and on behalf of the State of Michigan, and as such, NWS does not take title to or finance inventory as part of its distribution fee business. Please also note that NWS has elected “S” corporation status under the Internal Revenue Code and consequently, it does not incur liability for federal and state income taxes.

        For purposes of calculating earnings to fixed charges, earnings consist of net income plus fixed charges. Fixed charges consist of interest expense, amortization of debt expense and discount or premium relating to indebtedness and the portion (30%) of rental expense on operating leases which we estimate to be representative of the interest factor attributable to rental expense.



- - 13 -

Years Ended March 31,
(Dollars and cases in thousands, except per case amount)

2003 2002 2001 2000 1999
Statement of Income Data:                              
   Net product sales   $ 689,859   $ 659,594   $ 636,879   $ 603,625   $ 535,355  
   Distribution fees    22,999    21,963    21,573    20,770    17,832  
 
 
 
 
 
   Total revenue    712,858    681,557    658,452    624,395    553,187  
   Cost of products sold    552,833    530,910    513,928    488,444    436,734  
 
 
 
 
 
   Gross profit    160,025    150,647    144,524    135,951    116,453  
   Selling, general and  
      administrative expenses    144,550    131,025    125,034    119,396    104,770  
 
 
 
 
 
   Income from operations    15,475    19,622    19,490    16,555    11,683  
   Interest expense    (9,308 )  (11,934 )  (13,214 )  (13,274 )  (11,355 )
   Other income (expense) (1)    9,622    (228 )  7,849    1,139    341  
 
 
 
 
 
   Net income   $ 15,789   $ 7,460   $ 14,125   $ 4,420   $ 669  
 
 
 
 
 
Other Financial Data:  
   EBITDA (2)   $ 34,704   $ 27,669   $ 36,229   $ 26,599   $ 20,398  
   EBITDA margin    4.9 %  4.1 %  5.5 %  4.3 %  3.7 %
   Net income margin    2.2 %  1.1 %  2.1 %  0.7 %  0.1 %
   Cash provided by  
      operating activities    14,656    22,030    7,357    16,648    6,013  
   Cash provided (used)  
      by investing activities    (2,489 )  (5,307 )  2,717    (7,715 )  (20,846 )
   Cash provided (used)  
      by financing activities    (18,082 )  (9,082 )  (9,539 )  (7,282 )  15,371  
   Depreciation and amortization    9,607    8,275    8,890    8,905    8,374  
   Capital expenditures (3)    2,337    4,332    6,083    6,672    7,858  
   Ratio of earnings to  
      fixed charges    2.2 x  1.5 x  1.9 x  1.3 x  1.1 x
Operating Statistics:  
   Product Sales Operations  
   Cases shipped (spirits  
      and wine)    6,295    6,351    6,425    6,394    6,182  
   Gross profit margin    19.9 %  19.5 %  19.3 %  19.1 %  18.4 %
   Fee Operations  
   Cases shipped (spirits)    2,549    2,721    2,684    2,786    2,731  
   Distribution fee per case   $7.60 $ 7.48   $ 7.32   $ 6.50   $6.50 

                               
As of March 31,
(in thousands)

2003 2002 2001 2000 1999
   Balance Sheet Data  
      Cash   $ 5,820   $ 11,735   $ 4,094   $ 3,559   $ 1,908  
      Total assets    203,708    201,405    192,290    188,197    178,868  
      Total debt    98,303    109,805    110,571    112,471    117,222  
      Total long-term  
       liabilities    110,677    111,678    110,487    111,571    116,559  
      Stockholders' equity    27,854    23,095    24,669    18,183    16,266  


- - 14 -

NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA

  (1)
The increase in Other income (expense) in 2003 and 2001 resulted from Vendor settlement income and Gain on sale of bottled water division, respectively.

  (2)
EBITDA is defined as net income plus interest expense, depreciation and amortization.

 
EBITDA is a non-GAAP financial measure within the meaning of Regulation G. EBITDA is presented because it is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of debt service capability. Management uses EBITDA to set targets and monitor and assess financial performance. EBITDA is not intended to represent cash flows for the periods presented, nor has it been presented as an alternative to net income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance and cash flow prepared in accordance with generally accepted accounting principles.

 
The most comparable GAAP measure for EBITDA is net income. Following is a reconciliation between net income and EBITDA for the fiscal years 1999 through 2003:

Years Ended March 31
(in thousands)
2003 2002 2001 2000 1999
Net Income     $ 15,789   $ 7,460   $ 14,125   $ 4,420   $ 669  
   Interest expense    9,308    11,934    13,214    13,274    11,355  
     Depreciation    7,188    6,561    7,046    7,270    6,967  
     Amortization    2,419    1,714    1,844    1,635    1,407  
 
 
 
 
 
 
             EBITDA   $ 34,704   $ 27,669   $ 36,229   $ 26,599   $ 20,398  
 
 
 
 
 
 

 
The EBITDA information reflected herein may not be comparable to similarly titled measures used by other companies.

 
(3)        The breakdown of our capital expenditures by significant project is set forth below.

Years Ended March 31
(in thousands)
2003 2002 2001 2000 1999
Business expansion     $140   $ 1,144   $2,374   $3,112   $4,856  
Information systems    1,121    1,418    1,750    970    1,281  
Equipment    1,076    1,770    1,959    2,590    1,721  
 
 
 
 
 
 
   $ 2,337   $ 4,332   $6,083   $6,672   $7,858  
 
 
 
 
 
 



- - 15 -

Item 7.    Management's Discussion And Analysis Of Financial Condition And Results Of Operations

         You should read the following discussion in conjunction with “Selected Consolidated Financial Data” and NWS’ historical consolidated financial statements and the accompanying notes included elsewhere in this Form 10-K. Unless otherwise indicated, all references to years are to NWS’ fiscal year ended March 31.

Disclosure Regarding Forward-Looking Statements

        This Form 10-K, including, but not limited to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology, such as “may,” “intend,” “will,” “expect,” “anticipate,” “should,” “plans to,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. In particular, any statement, express or implied, concerning future operating results or the ability to generate revenues, income or cash flow to service the Company’s debt are forward-looking statements. Although the Company believes that the expectations will prove to have been correct. All forward-looking statements are expressly qualified by such cautionary statements, and the Company undertakes no obligation to update such forward-looking statements.

Overview

        National Wine & Sprits, Inc. (the “Company”) is one of the largest distributors of wine and spirits in the United States. Substantially all of the Company’s current operations are in Illinois, Indiana, Michigan, Kentucky, and from U.S. Beverage, L.L.C. (USB), the Company’s national import, craft and specialty beer marketing and distribution business. The Company’s reported revenues include net product sales in Illinois, Indiana, Michigan, and from USB, with distribution fees from the Michigan distribution operation.

        EBITDA is used throughout this Item as a financial indicator. Each reference to EBITDA herein is qualified by reference to, and should be read in conjunction with this paragraph and the following two paragraphs and the reconciliation below. EBITDA, as used herein, is defined as net income plus interest expense, depreciation and amortization. EBITDA should not be construed as an alternative to income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.

        EBITDA is a non-GAAP financial measure within the meaning of Regulation G. EBITDA is presented because it is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of debt service capability. Management uses EBITDA to set targets and monitor and assess financial performance. EBITDA is not intended to represent cash flows for the periods presented, nor has it been presented as an alternative to net income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance and cash flow prepared in accordance with generally accepted accounting principles.

        The most comparable GAAP measure for EBITDA is net income. Following is a reconciliation between net income and EBITDA for the fiscal years 1999 through 2003:

Years Ended March 31
(in thousands)
2003 2002 2001 2000 1999
Net Income     $ 15,789   $ 7,460   $ 14,125   $ 4,420   $ 669  
    Interest expense    9,308    11,934    13,214    13,274    11,355  
     Depreciation    7,188    6,561    7,046    7,270    6,967  
     Amortization    2,419    1,714    1,844    1,635    1,407  
 
 
 
 
 
 
                 EBITDA   $ 34,704   $ 27,669   $ 36,229   $ 26,599   $ 20,398  
 
 
 
 
 
 


- - 16 -

        The EBITDA information reflected herein may not be comparable to similarly titled measures used by other companies.

        For the year ended March 31, 2003, net income was $15.8 million versus $7.5 million for the prior year period, while EBITDA was $34.7 million, versus $27.7 million for the prior year period. The increase in net income was primarily attributable to a vendor settlement payment of $9.2 million and net gains of $2.0 million from discounted repurchases of the Company’s senior notes. Although the increased volume from the Company’s United States Beverage division contributed to the increased sales for the annual period ended March 31, 2003, net income and EBITDA were offset by decreased sales volume and lower profitability due to the loss of the Pernod and Diageo brands in certain markets.

        The Company received a decision from Diageo during the quarter ended March 31, 2003 concerning distribution rights for Illinois. Diageo and Schieffelin & Somerset (S&S) had been evaluating distributor proposals since March 2002 as a part of their ongoing state-by-state effort to consolidate distribution rights of existing brands and brands they acquired from Seagram in 2001. The Company was informed by Diageo that it was not chosen as the exclusive Diageo distributor for the State of Illinois and that the Company’s Illinois distribution rights would terminate on February 24, 2003. Revenue for the affected Diageo brands in Illinois for the year ended March 31, 2003 was approximately $75 million, and total Diageo cases shipped were approximately 0.5 million.  For the same annual period, distribution of these Diageo brands in Illinois contributed approximately $14 million to the gross profit of the Company. As part of the settlement of all claims arising out of the Diageo settlement in Illinois, Diageo paid $9.2 million to the Company.

        The Company also was notified by two other major suppliers, Future Brands and Canandaigua Wine Company, that brand distribution rights for the State of Illinois were being terminated. These decisions represented a continuation of a state-by-state consolidation and realignment of brands by suppliers following decisions by Diageo. The terminations by Future Brands and Canandaigua Wine Company were effective April 30, 2003 and March 31, 2003, respectively. Revenue for the affected brands in Illinois for the year ended March 31, 2003 was approximately $113 million, and total cases shipped were approximately 1.6 million. For the same annual period, these two suppliers contributed approximately $22 million to the gross profit of the Company.

        On January 30, 2003, the Company entered into an agreement in principle to form a strategic alliance with Glazer’s Wholesale Drug Company (“Glazer”) for the purpose of distributing alcohol-based beverages in the State of Illinois. On February 27, 2003, the Company and Glazer entered into a management services agreement under which Glazer would provide management assistance and consulting services in Illinois. A separate contribution agreement was signed on March 25, 2003, which provided that the parties may agree in the future to conduct operations in Illinois through a new entity to be equally owned by NWS-Illinois and Glazer.

        The Company was notified on February 18, 2003 that it had been selected as the exclusive distributor of Diageo spirits and wine brands in Indiana. NWS Indiana currently distributes Diageo products on an exclusive basis, and this decision extends the arrangement for seven years. The Company does not currently represent the majority of S&S products in Indiana. Decisions by S&S concerning distribution rights for Indiana have not been announced.

        The Company also was chosen as the exclusive broker and distribution agent of Diageo and S&S spirits brands and as the exclusive distributor of Diageo’s low proof mixed spirits drinks in Michigan. This decision provides additional volume for the Company’s Michigan operation since S&S products were not previously distributed by the Company in Michigan.

Outlook

        The Company’s outlook for fiscal 2004 is for lower profit and EBITDA levels due to the loss of the brands in the Illinois market, as compared to the prior fiscal year. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”

        As consolidations and supplier realignments continue within the Illinois market, the Company has analyzed its operations in Illinois and has taken steps to appropriately size its workforce in relation to its customers’ and suppliers’ needs. As it adjusts the size and scope of its Illinois operations, the Company will continue to concentrate on building customer and supplier relationships and maintaining the infrastructure necessary to operate its Illinois statewide business with lower costs and increased efficiencies. The Company has also discontinued warehousing operations in its Champaign, Illinois and Peoria, Illinois facilities in order to reduce costs, but it continues to use those locations as cross-docking and office facilities. Continuing efforts are also being made to replace lost revenue in Illinois.



- - 17 -

        Stable to increasing revenue and EBITDA in the Indiana, Michigan, and USB operations are currently expected to mitigate the loss of revenue in the Illinois market for fiscal 2004. Additionally, the Company will continue to benefit in the near term from the collection of accounts receivable and inventory liquidation related to lost distribution rights in Illinois. Representatives of Glazer and the Company also continue to pursue new business opportunities in Illinois. At the same time, the size and scope of the Illinois business will be the subject of on-going analysis. The Company and Glazer are both committed to the profitability of the Illinois operation given Glazer’s agreement to fund one-half of operating losses as defined in the management services agreement between Glazer and the Company. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”

        The Company will utilize the positive cash flow from the downsizing of the Company’s Illinois operations, proceeds from the vendor settlement payment, borrowings under its line of credit and existing cash to fund operating costs, interest expense, and possibly further senior note repurchases. By reducing the Company’s interest expense through open market repurchases of senior notes, aggressive cost reduction initiatives in its Illinois business, and stable to increasing earnings and cash flow from Indiana, Michigan, and USB businesses, the Company expects to maintain adequate earnings and cash flow to fund working capital and debt service needs for the year ending March 31, 2004.

Results of Operations

        The following table includes information regarding total cases shipped by NWS in 2003, 2002 and 2001:

Years ended March 31,
(Cases in Thousands)
2003
2002
2001
Cases Percent
Change
Cases Percent
Change
Cases
Wine (product sales operations)      2,934    5 .6%  2,778    (8 .4)%  3,032  
Spirits (product sales operations)    3,361    (1 .1)%  3,399    0 .2%  3,393  
Spirits (distribution fee operations)    2,549    (6 .3)%  2,721    1 .4%  2,684  
 
   
   
 
      Total wine and spirits    8,844    (0 .6)%  8,898    (2 .3)%  9,109  
Other    8,933    73 .6%  5,146    2 .5%  5,021  
 
   
   
 
      Total    17,777    26 .6%  14,044    (0 .6)%  14,130  
 
   
   
 

Case sales of K Cider were reported as wine case sales through March 31, 2002. Case sales of K Cider subsequent to that date have been recorded as other case sales. The reclassification of case sales of K Cider reduced wine case sales and increased other case sales by 174,000 for the 12 months ended March 31, 2002.

         U.S. Beverage’s results are included in the other category for the current year and prior years.

Fiscal 2003 Compared with Fiscal 2002

Revenue

        Total product revenue increased $30.3 million, or 4.6%, to $689.9 million for the year ended March 31, 2003 versus $659.6 million for the prior year period. The revenue increase for the year ended March 31, 2003 as compared to the prior year was primarily due to increased sales by the Company’s USB division. USB commenced nationwide distribution of Grolsch beers and Seagram’s Coolers in January 2002 and April 2002 respectively. Case and dollar volume of wine in the product sales divisions remained stable; increasing 5.6% and 2.4%, respectively, during the current annual period ended March 31, 2003 over the prior year period. Spirits case and dollar volume in the product sales divisions declined 1.1% and 3.8%, respectively, primarily due to the loss of certain distribution rights in the Illinois market. Fee revenue for the year ended March 31, 2003 increased 4.7% on lower case sales from the comparable prior annual period. The Company was able to increase fee revenue due to a $0.16 per case fee increase approved by the State of Michigan for 2002 and greater brokerage fee revenue for the year ended March 31, 2003 as compared to the prior year period.



- - 18 -

Gross Profit

        Gross margin on product sales increased $8.3 million, or 6.5% for the year ended March 31, 2003 over the prior year period. Gross profit percentage on product sales increased to 19.9% for the year ended March 31, 2003 versus 19.5% for the comparable prior year period. Both the increase in gross margin dollars and percentage were primarily the result of the USB operations during the year ended March 31, 2003, which was offset somewhat by declines in the gross margin dollars and percentage in other product sales markets. The Company’s Illinois and Indiana gross profit margins were under pressure during fiscal 2003 due to the intensified marketing efforts from competing distributors during the period of uncertainty concerning product line representation.

Operating Expenses

        Total operating expenses increased 10.3% to $144.6 million for the year ended March 31, 2003 from $131.0 million for the prior year period. Increased selling expenses and administrative support of the USB division were primarily responsible for the total operating expense increase from the prior year period.

        Warehouse and delivery expenses remained very stable, increasing by $0.2 million during the current year period over the prior year period. Reduced case volumes in the Illinois and Michigan markets resulted in stable operational costs. The reduced volume has allowed for savings in personnel, offset by increases in wage rates and other operational costs.

        Selling expenses increased primarily due to additional advertising, wages, and related travel expenses incurred by the Company’s USB division during the year ended March 31, 2003 from the prior year period. These additional expenditures are directly related to the additional volume created by the nationwide sales of Grolsch, Seagram’s Coolers and a product launch in the spring of 2003. Wage increases and additional promotional costs in the Indiana and Illinois markets also contributed to the increased selling expense.

        Administrative expense increased $2.7 million for year ended March 31, 2003 from the prior year period. Increased administrative costs related to the USB division for wages, benefits, and amortization of distributor rights were primarily responsible for the increase from the prior year’s comparable period. Increased costs for casualty insurance, professional fees, and health care, across all divisions were responsible for the remaining administrative expense increase.

Income From Operations

        Operating income was $15.5 million for the year ended March 31, 2003, compared to $19.6 million for the prior year period. The decline in revenue and resulting decrease in operating income from the Company’s Illinois business was primarily responsible for the decrease in operating income, which more than offset the increased operating income from the USB operations.

Interest Expense

        Interest expense declined $2.6 million, or 22.0% to $9.3 million for the year ended March 31, 2003 from the prior year period. Reduced revolving credit balances during the year ended March, 31, 2003, the decline in the prime rate upon which the Company’s revolving line of credit is based and gains from the discounted repurchases of the Company's senior notes were primarily responsible for the decreased expense. As of March 31, 2003 the appicable interest rate on the revolving line of credit was 4.5%. The Company repurchased $17.9 million of its senior notes on the open market during the quarter ended March 31, 2003 at 86% of face value and expensed associated unamortized debt issuance costs resulting in the $2.0 million gain. The open market repurchases of $17.9 million of senior notes had a minimal effect on cash interest expense for the year ended March 31, 2003, as the purchases were completed during March, 2003.

Other Income

        Other income increased $9.9 million, primarily from a vendor settlement payment of $9.2 million. The Company received $6.0 million of the vendor settlement payment as of March 31, 2003, and received $3.2 million on April 15, 2003. The Company’s share of losses from eSkye Solutions, Inc. was $1.2 million less during the year ended March 31, 2003 than the prior year period.



- - 19 -

Net Income

        Net income of $15.8 million for the year ended March 31, 2003 was $8.3 million greater than the prior year period. The increase in income from the Company’s vendor settlement payment, gain from repurchasing its senior notes, and increased USB profitability, was partially offset by the decline in income from the Illinois business.

EBITDA

        For financial analysis purposes only, the Company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ended March 31, 2003 was $34.7 million as compared to $27.7 million for the prior year’s comparable reporting period. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”

Fiscal 2002 Compared with Fiscal 2001

        Revenue.     The Company reported product sales for the year ended March 31, 2002 of $659.6 million, an increase of $22.7 million, or 3.6% over the prior year period. The increase was primarily the result of continued consumer preference for premium-priced goods in both the spirits and wine categories. The revenue growth was primarily from the spirits category, which experienced a 2.6% increase in revenue on flat case sales for the current fiscal year as compared to the prior annual period. Revenue from wine sales remained stable, increasing 0.4% for the current fiscal year on slightly lower case sales as compared to the prior annual period. The case sales decline was primarily the result of the Indiana market, which did not represent the Sutter Home line during the most recent fiscal year, which adversely affected case sales by 115,000 as compared to the prior annual period. Distribution fee revenue remained stable at $22.0 million for the year ended March 31, 2002, compared to $21.6 million for the prior annual period. A rate increase authorized by the State of Michigan of $0.16 per case was effective February 1, 2002.

        Gross Profit.    Gross profit dollars on product sales increased $5.7 million for the year ended March 31, 2002, an increase of 4.7% from the prior year period. Gross profit percentage on product sales was 19.5% for the year ended March 31, 2002 versus 19.3% for the prior year period. The increase in gross margin dollars were primarily from increased revenue in the Illinois market and increased margin percentage on stable revenue for the Indiana market.

        Operating Expenses.    Total operating expenses for the year ended March 31, 2002 increased $6.0 million, or 4.8% over the operating expenses for the year ended March 31, 2001. The Company had stable warehouse and delivery costs, while experiencing higher costs for professional fees, sales and marketing wages, and casualty and health insurance.

         Warehouse and delivery expenses were essentially even with the prior year’s amounts, decreasing 0.1% or $0.1 million for the year ended March 31, 2002. Total warehouse and delivery expenses, as a percentage of total revenue, declined slightly to 5.8% during the current year period as compared to 6.0% for the prior annual period. The decrease was primarily due to the savings experienced in the Indiana market from lower case sales of water and non-alcoholic products, along with construction of more efficient warehousing facilities.

        Selling expenses increased $1.1 million to $46.8 million for the year ended March 31, 2002 as compared to the prior year period. Additional sales and marketing costs, including staff and wage increases were primarily responsible for the greater selling expenses.

        Total administrative expense increased $4.9 million or 12.3% for the year ended March 31, 2002 versus the prior annual period. Increases in health & welfare benefits, casualty and workman’s compensation insurance, and professional fees were primarily responsible for the increase from the prior annual period. The Company has experienced higher costs for employee’s health care throughout the current fiscal year, both in the partially self funded plan, and by increases in multi-employer fully insured plans that cover bargaining unit employees. The Company renewed its property and casualty insurance in December, 2001 and expects to report increased costs for the current policy period due to increased rates on facilities, and excess liability coverage. Professional fees have increased from the comparable prior annual period due to costs related to the implementation of enhanced internal control procedures and the change of auditors from the prior year.

        Income from Operations.    Total operating income increased $0.1 million, or 0.1% for the year ended March 31, 2002, over the prior annual period. The slight increase in operating income was primarily due to the increased gross profit dollars and reduced operating expenses by the Indiana market for the year ended March 31, 2002 as compared to the prior annual period.



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        Interest Expense.     Interest expense decreased $1.3 million or 9.7% for the year ended March 31, 2002 compared to the prior year. The Company was able to take advantage of LIBOR pricing, which reduced the Company’s rate relative to prime based pricing on its revolving line of credit. The Company’s reduction in its average borrowings on the revolving line of credit and the reductions in the prime rate were primarily responsible for the reduced expense for the year ended March 31, 2002, compared to the prior annual period. The Company’s revolver rate was 4.75% at March 31, 2002 and was 8.5% at March 2001.

        Other Income.    Other income decreased $8.1 million from the comparable annual period, primarily due to the $7.5 million gain from the sale of the bottled water division in June 2000, increased equity losses and impairment in value from the investment in eSkye, and reduced interest income due to reductions in balances of the shareholder notes in NWSC.

         Net Income. Net income decreased $6.7 million for the year ended March 31, 2002, as compared to the prior annual period. The decrease was primarily due to the gain from the sale of the bottled water division of $7.5 million during the previous annual period. Net income, excluding the gain from the sale of the bottled water division, increased 13.0% or $0.9 million for the year ended March 31, 2002, as compared to the prior annual period.

        For financial analysis purposes only, the Company’s earnings before interest, taxes, depreciation and amortization (EBITDA) for the year ended March 31, 2002 was $27.7 million, a decrease of $8.6 million, or 23.6% as compared to the prior annual period. The decrease was primarily due to the gain from the sale of the bottled water division of $7.5 million during the previous annual period. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”

Liquidity and Capital Resources

        The Company’s primary cash requirements have been to fund accounts receivable and inventories for the product markets in Illinois, Indiana, Michigan, and its U.S. Beverage operations. The Company has historically satisfied its cash requirements principally through cash flow from operations, trade terms, bank borrowings and existing cash balances.

        On March 31, 2003 the Company entered into a new credit agreement with LaSalle Bank N.A., as lender and agent, and National City Bank of Indiana, that provides a revolving line of credit for borrowings of up to $40.0 million, including standby or commercial letters of credit of up to $5.0 million, through April 1, 2008. The line of credit borrowings are collateralized by and based upon eligible accounts receivable and inventories, as defined, and are guaranteed by the Company’s subsidiaries. Interest is payable monthly at the LIBOR rate or the higher of the prime lending rate or the federal funds rate, plus a margin percentage. The Company’s revolver rate of interest was 4.5% at March 31, 2003.

        At March 31, 2003, the Company had $4.0 million of outstanding advances on its $40.0 million revolving credit facility and $4.5 million of letters of credit outstanding, resulting in availability of $30.5 million. The Company anticipates that the collateral base for the revolving credit facility will provide adequate availability to fund operations and working capital needs during fiscal 2004.

        The Company generated $14.7 million in net cash from operating activities for the year ended March 31, 2003 as compared to proceeds of $22.0 million for the prior year period. This $7.4 million variance was primarily due to the Illinois business’ payment of current obligations that were not offset by reductions in inventories or receivables. The Company expects net proceeds from the reduction of these Illinois receivables and inventories of approximately $20 to $25 million during fiscal 2004, which will offset the temporary increase in working capital needs that Illinois required during fiscal 2003. Cash provided by net income and adjustments for depreciation and amortization were $22.9 million for the year ended March 31, 2003, as compared to $16.6 million for the prior year period.

        Net cash used by investing activities was $2.5 million for the year ended March 31, 2003, a decrease of $2.8 million from the comparable prior year period. The decreased use of cash, as compared to the prior year’s comparable period, was primarily due to reduced capital expenditures of $2.0 million and increased distributions received from Commonwealth Wine & Spirits, LLC of $0.9 million. The Company reduced its capital expenditures during fiscal 2003 due to the uncertainty surrounding supplier consolidations. The Company intends to continue the reduced level of capital expenditures during fiscal 2004 at maintenance levels between $2 million and $2.5 million.



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        Net cash used by financing activities increased by $9.0 million for the year ended March 31, 2003 as compared to the prior year period. Purchases of the Company’s senior notes in the open market were primarily responsible for the increased use of funds by financing activities. The Company purchased $17.9 million of its senior notes at approximately 86% of face during fiscal 2003. The Company may continue to selectively pursue repurchase opportunities in the open market during fiscal 2004. The revolving credit facility allows up to $20 million of debt repurchases subsequent to March 31, 2003, if after giving effect to the purchase, there is $15 million of availability under the $40 million revolving credit facility. Outstanding advances on the revolving credit facility were $4.0 million at March 31, 2004, which was used for working capital needs. The Company will utilize the positive cash flow from the downsizing of Illinois operations, proceeds from the vendor settlement payment, existing cash and its credit facility to fund operations and possible additional senior note repurchases during fiscal 2004. The Company’s distributions to stockholders increased by $0.9 million for the year ended March 31, 2003 as compared to the prior year period. Distributions for the year ended March 31, 2003 were used by the shareholders for income tax estimates of $5.8 million and to repay the Company’s shareholder receivable of $2.7 million. Other uses of shareholder distributions were to purchase the equity interests of a subsidiary’s minority shareholder for $0.3 million and provide funds to a minority shareholder of $0.6 million. The Company expects shareholder distributions to be reduced during fiscal 2004 due to reduced tax liabilities. Shareholder distributions other than for tax liabilities are limited by the revolving credit facility and indenture.

        Total assets increased to $203.7 million at March 31, 2003, a $2.3 million increase from March 31, 2002. The increase in assets and other liabilities were primarily due to the acquisition of distribution rights for brands represented by NWS Indiana and USB. Distribution rights of $12.6 million were acquired that had deferred payment terms, of which $1.6 million was paid as of March 31, 2003. Cash balances decreased $5.9 million during the year ended March 31, 2003 due to funding of working capital and shareholder distributions. Accounts receivable balances at March 31, 2003 were $5.7 million lower than the March 31, 2002 balances, primarily from the reduced volume in the Illinois market. Total debt of $98.3 million at March 31, 2003 as compared to March 31, 2002 decreased due to the Company’s repurchase of $17.9 million of its senior notes on the open market. Notes payable to stockholders increased by $2.4 million due to the offset of the shareholder receivable against the shareholder payable at March 31, 2002. Equity increased to $27.9 million at March 31, 2003 as compared to March 31, 2002 due to net income of $15.8 million less shareholder distributions of $9.4 million and an increase in unrecognized net pension loss of $1.6 million.

        The Company expects to maintain adequate cash balances and revolving credit facility availability to satisfy the Company’s anticipated working capital and debt service requirements during fiscal 2004.

Other

        As a matter of policy, the Company plans to review and evaluate all professional services firms every three to four years. This review will include but is not limited to legal, audit and information systems services.

Inflation

        Inflation has not had a significant impact on the Company’s operations but there can be no assurance that inflation will not have a negative effect on the Company’s financial condition, results of operations or debt service capabilities in the future.

Environmental Matters

         The Company currently owns and leases a number of properties, and historically it has owned and/or leased others. Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions relating to the presence of certain hazardous substances on such properties. The liability imposed by such laws is often joint and several without regard for whether the property owner or operator knew of, or was responsible for, the presence of such hazardous substances. In addition, the presence of such hazardous substances, or the failure to properly remediate such substances, may adversely affect the property owner’s ability to borrow using the real estate as collateral and to transfer its interest in the real estate. Although the Company is not aware of the presence of hazardous substances requiring remediation, there can be no assurance that releases unknown to the Company have not occurred. Except for blending and bottling of a few of the Company’s private label brands, the Company does not manufacture any of the wine or spirit products it sells and believes that it has conducted its business in substantial compliance with applicable environmental laws and regulations. Compliance with environmental laws has not had a material effect upon NWS’ capital expenditures, earnings or competitive position.



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Critical Accounting Policies

        The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting periods.

         The Company continually evaluates its accounting policies and estimates it uses to prepare the consolidated financial statements.  In general, management’s estimates are based on historical experience, on information from third party professionals and on various other assumptions that are believed to be reasonable under the facts and circumstances.  Actual results could differ from those estimates made by management.

        The Company believes its critical accounting policies and estimates, as reviewed and discussed with the Audit Committee of the Board of Directors, include accounting for impairment of long-lived assets, accounts receivable valuation, inventory valuation, vendor allowances, and pensions.

        Impairment of Long-lived Assets.    The Company evaluates long-lived assets and intangibles subject to amortization whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  In performing the review of recoverability, the Company estimates future cash flows expected to result from the use of the asset and its eventual disposition.  The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments.  The time periods for estimating future cash flows is often lengthy, which increases the sensitivity to assumptions made.  Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes.  The Company considers the probability of possible outcomes in determining the best estimate of future cash flows.

        Receivables and Credit Policies.    The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected.  Management individually reviews all accounts receivable balances and creates an allowance for doubtful accounts based on the credit worthiness of  specific accounts and an estimate of other uncollectible accounts based on historical performance.

        Vendor Allowances Received.    The Company records vendor allowances and discounts in accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. The Company receives allowances from vendors as a result of purchasing and promoting their products. Vendor allowances provided as a reimbursement of specific, incremental, and identifiable costs incurred to promote a vendor's products are recorded as an expense reduction when the cost is incurred. All other vendor allowances, including vendor allowances received in excess of the Company's cost to promote a vendor's product, or vendor allowances directly related to purchase of a vendor's product are initially deferred. The deferred amounts are then recorded as a reduction of cost of good sold when the related product is sold.

        Defined Benefit Pension Plan.    The most significant element in determining the Company’s pension income (cost) in accordance with SFAS No. 87 is the expected return on plan assets.  In 2003, the Company assumed that the expected long-term rate of return on plan assets would be 8.5%.  The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years.  This produces the expected return on plan assets that is included in pension income (cost).  The difference between this expected return and the actual return on plan assets is deferred.  The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension income (cost). Over the long term, the Company’s pension plan assets have earned in excess of 9.5%. However, the plan assets have lost an average of 14.9% per year during the last two years.  Should this trend continue, the Company would be required to reconsider its assumed expected rate of return on plan assets.  If the Company were to lower this rate, future pension cost would increase.

        At the end of each year, the Company determines the discount rate to be used to calculate the present value of plan liabilities.  The discount rate is an estimate of the current interest rate at which the pension liabilities could be effectively settled at the end of the year.  In estimating this rate, the Company uses the preceding November’s Moody’s AA Corporate Bond Index rounded down to the nearest ¼ of a percentage point.  At March 31, 2003, the Company determined this rate to be 6.5%, a decrease of 50 basis points from the rate used at March 31, 2002.  Changes in discount rates over the past three years have not materially affected pension income (cost), and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, have been deferred, in accordance with SFAS No. 87.



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        The significant declines in the financial markets over the past two years coupled with the decline in interest rates have caused the Company’s accumulated pension obligation to exceed the fair value of the related plan assets.  As a result, in 2003 the Company recorded an increase to accrued pension liability and a non-cash charge to equity of approximately $1.1 million.  This charge may be reversed in future periods if market conditions improve or interest rates rise.

        For the year ended March 31, 2003, the Company recognized consolidated pretax pension cost of $0.5 million, up from $0.3 million in 2002.  The Company currently expects that the consolidated pension cost for 2004 will not be materially different from 2003.  The Company’s required minimum amount of 2004 contributions will not exceed actual contributions made in 2003.  However, the Company may elect to increase the level of contributions in 2004 over 2003 levels based on a number of factors, including performance of pension investments, changes in interest rates, and changes in workforce compensation.

Aggregate Contractual Commitments

        The following table sets forth NWS’ contractual obligations for the periods set forth as of March 31, 2003:

Payments Due by Period
Contractual Obligations
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
Long-term debt obligations $  98,303,000  ---  ---  ---  $  98,303,000 
Operating lease obligations 13,059,000  3,635,000  5,883,000  2,857,000  684,000 
Distribution rights
   obligations 12,690,000  2,329,000  3,657,000  3,329,000  3,375,000 
Guaranteed minimum 2,722,000  2,722,000  ---  ---  --- 
   royalties
Deferred pension and other liabilities(1) 698,000  698,000  ---  ---  --- 
  $127,472,000  $9,384,000  $9,540,000  $6,186,000  $102,362,000 

(1)
The amounts for deferred pension and other liabilities include only those amounts due within fiscal 2004, as future amounts are not estimable at this time.

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company adopted the new rules on accounting for goodwill and other intangible assets effective April 1, 2002. Under SFAS No. 142, goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value. In calculating the impairment charge, the fair values of the reporting units were estimated using a discounted cash flow methodology. The Company performed the required impairment tests of goodwill and indefinite lived intangibles as of April 1, 2002 and March 31, 2003 and found them not to be impaired.

In August 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. Statement 144 also addresses the accounting for expected disposals of long-lived assets. The Company adopted Statement 144 during the first quarter of fiscal 2003 and, based on current circumstances, it has not had a material effect on the Company's results of operations or its financial position.

In April 2002 the Financial Accounting Standards Board issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions as well as addresses the classifications of gains and losses on debt extinguishment. Accordingly, the Company classified its gains from repurchases of its long-term debt in interest expense on the Consolidated Statement of Income.



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In June 2002, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, effective for exit or disposal activities that are initiated after December 31, 2002. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Although the Company was engaged in an employee reduction at March 31, 2003, the associated costs from the adoption of this standard did not have a material impact on its financial statements.

The Company adopted the Emerging Issues Task Force Issue 02-16: Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor for arrangements either modified or created after December 31, 2002. This statement reached a consensus that cash consideration represents a reimbursement of costs incurred by the customer to sell the vendor’s products and should be characterized as a reduction of that cost when recognized in the customer’s income statement if the cash consideration represents a reimbursement of a specific, incremental, identifiable cost incurred by the customer in selling the vendor’s products or services. If the amount of cash consideration paid by the vendor exceeds the cost being reimbursed, that excess amount should be characterized in the customer’s income statement as a reduction of cost of sales when recognized in the customer’s income statement. The Company has reviewed its accounting policies and methods and concluded that the recording of cash consideration received from vendors were recorded in accordance with the statement.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of certain guarantees, a guarantor must recognize a liability for the fair value of the obligation assumed under the guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements regarding certain guarantees and product warranties. The recognition provisions of National Wine & Spirits, Inc. FIN 45 is effective for guarantees issued or modified after December 31, 2002. The Company implemented the recognition provisions of FIN 45 in January 2003 there has been no material effect on the Company’s financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) Consolidation of Variable Interest Entities. The term “variable interest is defined in FIN 46 as “contractual, ownership or other pecuniary interest in an entity that change with changes in the entity’s net asset value.” Variable interest are investments or other interest that will absorb a portion of an entity’s expected losses if they occur or receive portions of the entity’s expected residual returns if they occur. The Company does not expect the recognition provisions of FIN 46 to have a material impact on the Company’s financial position or results of operations.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

        The Company uses long-term debt as a primary source of capital in its business. The following table presents the principal cash repayments and related weighted average interest rates by maturity date for the Company’s long-term fixed-rate debt and other types of long-term debt at March 31, 2003:

2003 2004 2005 2006 2007 Thereafter Total Fair Value
Fixed $    --- $    --- $    --- $    --- $    --- $   89,975,000  $   89,975,000  $   80,978,000 
Avg. Rate       ---       ---       ---       ---       --- 10.125% 10.125%
Variable $    --- $    --- $    --- $    --- $    --- $   8,328,000  $   8,328,000  $   8,328,000 
Avg. Rate       ---       ---       ---       ---       --- 4.38% 4.38%

        The Company is exposed to fluctuations in interest rate risk as a result of its variable rate debt. The Company’s objectives in managing its exposure to changes in interest rates are to limit the effect of interest rate changes on earnings and cash flows and to minimize the amount of borrowings under the Company’s revolving line of credit. This approach to managing interest rate risk does not consider the changes in the Company’s competitive environment indirectly related to changes in interest rates and management’s responses to these changes.



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Item 8.    Financial Statements and Supplementary Data

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
National Wine & Spirits, Inc.

We have audited the accompanying consolidated balance sheet of National Wine & Spirits, Inc. and subsidiaries as of March 31, 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended. Our audit also included the 2003 financial statement schedule listed in the Index at Item 16. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 2003 financial statements and financial statement schedules based on our audit. The financial statements and financial statement schedule as of March 31, 2002, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and stated that such 2002 financial statement schedule, when considered in relation to the 2002 basic financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein, in their report dated May 21, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2003 consolidated financial statements present fairly, in all material respects, the financial position of National Wine & Spirits, Inc. and subsidiaries as of March 31, 2003, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2003 financial statement schedule, when considered in relation to the 2003 basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2003 the Company changed its method of accounting for goodwill and other intangible assets.

As discussed above, the financial statements of National Wine & Spirits, Inc. and subsidiaries as of March 31, 2002, and for the year then ended, were audited by other auditors who have ceased operations. As described in Note 8, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which was adopted by the Company as of April 1, 2002. Our audit procedures with respect to the disclosures in Note 8 with respect to 2002 included (1) comparing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense recognized in those periods related to goodwill and intangible assets that are no longer being amortized as a result of initially applying SFAS 142 to the Company's underlying analysis obtained from management, and (2) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income. In our opinion, the disclosures for 2002 in Note 8 are appropriate. Also, the 2002 financial statements have been reclassified to include additional disclosures relating to the accounts receivable vendor and distribution rights obligations as described in Note 1. Our audit procedures with respect to the 2002 disclosures in Note 1 included (1) comparing the previously reported prepaid expenses and deferred pension liability to previously issued financial statements, (2) comparing the accounts receivable vendor and distribution rights obligations to the Company's underlying analysis obtained from management, and (3) testing the mathematical accuracy of the underlying analysis. In our opinion, such have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2002 financial statements of the Company other than with respect to such reclassifications and accordingly, we do not express an opinion or any form of assurance on the 2002 financial statements taken as a whole.


DELOITTE & TOUCHE LLP

Indianapolis, Indiana

June 27, 2003



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THE FOLLOWING IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
National Wine & Spirits, Inc.

We have audited the accompanying consolidated balance sheet of National Wine & Spirits, Inc. (an Indiana Corporation) and subsidiaries as of March 31, 2002 and the related consolidated statement of income, stockholders’ equity and cash flows for the year then ended. These consolidated financial statements and schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Wine & Spirits, Inc., as of March 31, 2002 and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a) is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not a required part of the basic consolidated financial statements. The information as of and for the year ended March 31, 2002 contained in this schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.



  ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
May 21, 2002.


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REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
National Wine & Spirits, Inc.

We have audited the accompanying consolidated statements of income, stockholders’ equity and cash flows of National Wine & Spirits, Inc. for the year ended March 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 16 (a) for the year ended March 31, 2001. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of National Wine & Spirits, Inc. for the year ended March 31, 2001 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein for the year ended March 31, 2001.



  Ernst & Young LLP
Indianapolis, Indiana
June 26, 2001, except for
Note 2 as to which the
date is December 28, 2001.


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National Wine & Spirits, Inc.
Consolidated Balance Sheets

March 31
2003
2002
Assets            
Current assets:  
     Cash and cash equivalents   $ 5,820,000   $ 11,735,000  
     Accounts receivable:  
         Trade, less allowance for doubtful accounts  
                  of $1,274,000 and $1,291,000    31,888,000    37,557,000  
         Vendor, less allowance for doubtful accounts  
                  of $211,000 and $0    11,369,000    4,059,000  
     Inventory    82,982,000    81,940,000  
     Prepaid expenses    4,301,000    3,307,000  
 

Total current assets    136,360,000    138,598,000  
Property and equipment, net    36,498,000    41,440,000  
Other assets:  
     Notes receivable    513,000    462,000  
     Cash surrender value of life insurance    3,815,000    3,368,000  
     Investment in Commonwealth Wine & Spirits, LLC    5,637,000    6,611,000  
     Investment in eSkye Solutions, Inc.    ---    160,000  
     Intangible assets, net of amortization    18,328,000    8,091,000  
     Goodwill    1,246,000    1,251,000  
     Deferred pension costs    715,000    1,198,000  
     Deposits and other    596,000    226,000  
 

Total other assets    30,850,000    21,367,000  
 

Total assets   $ 203,708,000   $ 201,405,000  
 

 
Liabilities And Stockholders' Equity  
Current liabilities:  
     Accounts payable   $ 39,550,000   $ 40,795,000  
     Accrued payroll and payroll taxes    7,486,000    7,676,000  
     Excise taxes payable    4,503,000    6,053,000  
     Other accrued expenses    13,638,000    12,108,000  
Total current liabilities    65,177,000    66,632,000  
Deferred pension liability    3,005,000    1,873,000  
Distribution rights obligations    9,369,000    ---  
Long-term debt    98,303,000    109,805,000  
 

Total liabilities    175,854,000    178,310,000  
Stockholders' equity:  
     Voting common stock, $.01 par value. 200,000 shares  
                  authorized, 104,520 shares issued  
                  and outstanding    1,000    1,000  
     Nonvoting common stock, $.01 par value  
                  20,000,000 shares authorized, 5,226,001  
                  shares issued and outstanding shares    53,000    53,000  
     Additional paid-in capital    25,009,000    25,009,000  
     Retained earnings (deficit)    5,081,000    (1,293,000 )
     Accumulated other comprehensive
             income-unrecognized net pension loss
 

     (2,290,000 )  (675,000 )
 

Total stockholders' equity    27,854,000    23,095,000  
 

Total liabilities and stockholders' equity   $ 203,708,000   $ 201,405,000  
 

See accompanying notes.

- - 29 -

National Wine & Spirits, Inc.
Consolidated Statements of Income


Years Ended March 31
2003
2002
2001
Net product sales     $ 689,859,000   $ 659,594,000   $ 636,879,000  
Distribution fees    22,999,000    21,963,000    21,573,000  
 
 
 
 
Total revenue    712,858,000    681,557,000    658,452,000  
Cost of products sold    552,833,000    530,910,000    513,928,000  
 
 
 
 
Gross profit    160,025,000    150,647,000    144,524,000  
Selling, general and administrative expenses:  
     Warehouse and delivery    39,833,000    39,610,000    39,657,000  
     Selling    57,452,000    46,840,000    45,691,000  
     Administrative    47,265,000    44,575,000    39,686,000  
 
 
 
 
     144,550,000    131,025,000    125,034,000  
 
 
 
 
 
Income from operations    15,475,000    19,622,000    19,490,000  
 
Interest expense:  
     Related parties    (197,000 )  (258,000 )  (405,000 )
     Third parties    (11,110,000 )  (11,676,000 )  (12,809,000 )
     Gain from repurchase of long term debt    1,999,000    ---    ---  
 
 
 
 
     (9,308,000 )  (11,934,000 )  (13,214,000 )
 
 
 
 
     Vendor settlement income    9,200,000    ---    ---  
     Gain on sale of bottled water division    ---    ---    7,524,000  
     Interest income    152,000    286,000    738,000  
     Rental and other income    118,000    390,000    59,000  
     Equity in income of Commonwealth Wine & Spirits, LLC    312,000    407,000    315,000  
     Equity in losses of eSkye Solutions, Inc.    (160,000 )  (1,311,000 )  (787,000 )
 
 
 
 
Total other income (expense)    9,622,000    (228,000 )  7,849,000  
 
 
 
 
Net income   $ 15,789,000   $ 7,460,000   $ 14,125,000  
 
 
 
 


See accompanying notes.



- - 30 -

National Wine & Spirits, Inc.
Consolidated Statements of Stockholders’ Equity


  $.01 Par Value
           Common Stock           
Voting     Non-Voting
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income
Notes
Receivable
from
Stockholders
Total
Stockholders'
Equity
Balance at April 1, 2000     $ 1,000   $ 53,000   $ 25,009,000   $ (3,768,000 ) $ ---   $ (3,112,000 ) $ 18,183,000  
 
   Net income    ---    ---    ---    14,125,000    ---    ---    14,125,000  
   Decrease in notes  
     receivable from  
     stockholders, net    ---    ---    ---    ---    ---    2,942,000    2,942,000  
   Distributions to  
     stockholders    ---    ---    ---    (10,581,000 )  ---    ---    (10,581,000 )
 
Balance at March 31, 2001    1,000    53,000    25,009,000    (224,000 )  ---    (170,000 )  24,669,000  
 
   Net income    ---    ---    ---    7,460,000    ---    ---    7,460,000  
   Unrecognized net  
     pension loss    ---    ---    ---    ---    (675,000 )  ---    (675,000 )
   
   Comprehensive Income                            6,785,000  
   Decrease in notes  
     receivable from  
     stockholders, net    ---    ---    ---    ---    ---    170,000    170,000  
   Distributions to  
     stockholders    ---    ---    ---    (8,529,000 )  ---    ---    (8,529,000 )
 
Balance at March 31, 2002    1,000    53,000    25,009,000    (1,293,000 )  (675,000 )  ---    23,095,000  
   Net income    ---    ---    ---    15,789,000    ---    ---    15,789,000  
   Unrecognized net  
     pension loss    ---    ---    ---    ---    (1,615,000 )  ---    (1,615,000 )
 
 
   Comprehensive Income                            14,174,000  
   Distributions to  
     stockholders    ---    ---    ---    (9,415,000 )  ---    ---    (9,415,000 )
 
Balance at March 31, 2003   $ 1,000   $ 53,000   $ 25,009,000   $ 5,081,000   $ (2,290,000 ) $ ---   $ 27,854,000  
 
 

See accompanying notes.



- - 31 -

National Wine & Spirits, Inc.
Consolidated Statements of Cash Flows


Year Ended March 31
2003
2002
2001
Operating activities:                
Net income   $ 15,789,000   $ 7,460,000   $ 14,125,000  
Adjustments to reconcile net income to net cash provided by  
operating activities:  
    Depreciation of property and equipment    7,188,000    6,561,000    7,046,000  
    Amortization of intangible assets    2,419,000    1,714,000    1,844,000  
    Equity in losses of eSkye Solutions, Inc.    160,000    1,311,000    787,000  
    Equity in earnings of Commonwealth Wine & Spirits, LLC    (312,000 )  (407,000 )  (315,000 )
    Provision for bad debt expense    329,000    552,000    599,000  
    (Gain) loss on repurchase of long term debt    (1,999,000 )  32,000    ---  
    Gain on sales of assets    (274,000 )  (47,000 )  (7,835,000 )
    Increase in cash surrender value of life insurance    (447,000 )  (547,000 )  (552,000 )
    Changes in operating assets and liabilities  
       Accounts receivable    (1,970,000 )  (1,731,000 )  2,307,000  
       Inventories    (1,042,000 )  (2,324,000 )  (9,310,000 )
       Prepaid expenses    (994,000 )  (512,000 )  (677,000 )
       Deposits and other    (788,000 )  (101,000 )  56,000  
       Accounts payable    (1,245,000 )  5,056,000    (2,196,000 )
       Accrued expenses and taxes    (2,158,000 )  5,013,000    1,478,000  
 
Net cash and cash equivalents provided by operating  
activities    14,656,000    22,030,000    7,357,000  
 
Investing activities:  
Purchases of property and equipment    (2,337,000 )  (4,332,000 )  (6,083,000 )
Purchases of intangible assets    (2,170,000 )  (1,841,000 )  (1,156,000 )
Proceeds from sale of property and equipment    365,000    112,000    10,860,000  
Investment in eSkye Solutions, Inc.    ---    ---    (2,013,000 )
Distributions from Commonwealth Wine & Spirits, LLC    1,286,000    405,000    778,000  
Collections on notes receivable    367,000    349,000    331,000  
 
Net cash and cash equivalents (used) provided by  
investing activities    (2,489,000 )  (5,307,000 )  2,717,000  
 
Financing activities:  
Proceeds from line of credit borrowings    54,250,000    146,900,000    149,250,000  
Principal payments on line of credit borrowings    (50,250,000 )  (146,900,000 )  (150,250,000 )
Principal payments on long-term debt, including purchases of senior notes    (15,317,000 )  (2,653,000 )  (900,000 )
Proceeds of borrowings from stockholder    197,000    258,000    284,000  
Repayments on borrowings from stockholders    (175,000 )  (253,000 )  (191,000 )
Receipts on notes receivable from stockholders and others    2,628,000    2,095,000    2,849,000  
Distributions to stockholders    (9,415,000 )  (8,529,000 )  (10,581,000 )
 
Net cash and cash equivalents used by financing activities    (18,082,000 )  (9,082,000 )  (9,539,000 )
 
Net increase (decrease) in cash and cash equivalents    (5,915,000 )  7,641,000    535,000  
Cash and cash equivalents, beginning of year    11,735,000    4,094,000    3,559,000  
 
Cash and cash equivalents, end of year   $ 5,820,000   $ 11,735,000   $ 4,094,000  
 

See accompanying notes.

- - 32 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
March 31, 2003


1.         Nature of Business and Summary of Significant Accounting Policies

Nature of Business and Principles of Consolidation

National Wine & Spirits, Inc. (NWS or the Company), an S-Corporation, is a holding company which operates primarily in the wine and liquor wholesale distribution business. Based in Indianapolis, National Wine & Spirits Corporation (NWSC) is a wholesale distributor of liquor and wines throughout Indiana and also operates a division for the distribution of cigars and accessories. Based in Chicago, NWS-Illinois, LLC (NWS-LLC) is a wholesale distributor of liquor, wines, and beer throughout Illinois. NWS Michigan, Inc. (NWSM) and National Wine & Spirits, LLC (NWSM-LLC) are distributors of liquor and non-alcoholic products throughout Michigan. NWSM distributes products as an Authorized Distribution Agent (ADA) for the State of Michigan and derives revenue from distribution fees. Accordingly, NWSM’s results represent the entire “All Other” segment as described in Note 14. Based in Connecticut, U.S. Beverage, LLC (USB) distributes and markets import and craft beer along with malt based products throughout the United States.

The consolidated financial statements include the accounts of NWS, NWSC, NWS-LLC, NWSM, NWSM-LLC, and USB, all of which NWS wholly owns or owns 100% of the voting stock. All significant intercompany accounts and transactions have been eliminated from the consolidated financial statements. Substantially all revenues result from the sale of liquor, beer and wine or distribution fees therefrom. NWS performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management 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.

Fair Value of Financial Instruments

The Company’s cash, accounts receivable, accounts payable and certain other accrued liabilities are all short-term in nature and the carrying amounts approximate fair value. Long-term notes receivable and payable, except for the Company’s senior notes payable, have primarily variable interest rates, thus their carrying amounts approximate fair value. The fair value of the Company’s senior notes payable has been determined on the basis of the specific securities issued and outstanding and is estimated at $80,978,000 at March 31, 2003.

Cash and Cash Equivalents

For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash balances in bank deposit accounts which, at times, may exceed federally insured limits. The Company has experienced no such losses in these accounts.

Receivables and Credit Policies

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payments generally within 15 to 30 days from the invoice date.



- - 33 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


1.         Nature of Business and Summary of Significant Accounting Policies(continued)

The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and creates an allowance for doubtful accounts based on the credit worthiness of specific accounts and an estimate of other uncollectible accounts based on historical performance and current economic conditions.

Inventory

Substantially all inventory is stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market and primarily consists of packaged beer, wine, liquor, cigars and accessories.

Advertising Costs

Advertising costs are charged to operations when incurred. Advertising expense was $10,602,000, $3,610,000 and $4,767,000 in 2003, 2002 and 2001, respectively.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using primarily the straight-line method over their expected useful lives as follows:

Buildings and improvements 10-40 years
Furniture and equipment 3-10 years
Warehouse equipment 7-10 years
Automobiles and trucks 5-7 years

Intangible Assets

Intangible assets with definite lives are amortized by the straight-line method (which, for loan acquisition costs, also approximates the yield method) over the terms of the agreements or their estimated useful lives, which range from two to twenty years.

Certain distribution rights are classified as indefinite-lived intangible assets. Accordingly, effective April 1, 2002, these assets are no longer amortized but are tested for impairment annually.

Goodwill

Goodwill consists of costs in excess of the net assets acquired in connection with an acquisition in April, 1999. Prior to April, 2002, goodwill was amortized using the straight-line method over 15 years. Effective April 1, 2002, the company adopted Statements of Financial Accounting Standards ("SFAS") No. 142, Accounting for Goodwill and Other Intangible Assets. As such, the Company no longer amortizes goodwill, but instead tests for impairment at least annually.



- - 34 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


1.         Nature of Business and Summary of Significant Accounting Policies(continued)

Long-lived Assets

The carrying value of long-lived assets is reviewed by management when indicators of impairment are present. If this review indicates that the carrying value may be impaired then the impaired amount will be written off. Impairment is determined by comparison of the carrying amount of the asset to the net undiscounted cash flows expected to be generated by the related asset group. An impairment loss is measured by the amount which the carrying amount of the asset group exceeds its fair value.

Income Taxes

There is no provision for federal or state income taxes reflected in the financial statements because the stockholders have consented to NWS’ election to be taxed as an S corporation under the applicable provisions of the Internal Revenue Code. NWS’ income is taxable directly to its stockholders.

Revenue Recognition

NWSC, NWS-LLC, NWSM-LLC, and USB purchase inventory items for resale to customers and are liable for payment to the suppliers, as well as collecting payment from customers. NWSM receives a fixed fee per case of liquor distributed for the State of Michigan (distribution fees) which is also responsible for payments to suppliers. All revenue is recognized at the time of shipment. All Michigan shipments are cash on delivery.

Net sales and distribution fees are recognized at the time product is shipped which is when title passes. Shipping and handling charged to customers is included in Net Product Sales. For the years ended March 31, 2003, 2002, and 2001, the Company incurred delivery expenses of $16,342,000, $16,533,000, and $16,474,000, respectively, which are included in warehouse and delivery expenses in the accompanying Consolidated Statements of Income.

Payments to Customers

The Company records certain payments to customers as a reduction of revenue in accordance with EITF 01-09: Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Product). The Company recorded $8,925,000, $2,029,000 and $2,361,000 of consideration paid to customers as a reduction of revenue in the Consolidated Statements of Income for the years ended March 31, 2003, 2002 and 2001, respectively.

Vendor Allowances Received

The Company records vendor allowances and discounts in the income statement in accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. The Company receives allowances from vendors as a result of purchasing and promoting their products. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are recorded as an expense reduction when the cost is incurred. All other vendor allowances, including vendor allowances received in excess of the Company’s cost to promote a vendor’s product, or vendor allowances directly related to purchase of a vendor’s product are initially deferred. The deferred amounts are then recorded as a reduction of cost of good sold when the related product is sold.



- - 35 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


1.         Nature of Business and Summary of Significant Accounting Policies(continued)

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company adopted the new rules on accounting for goodwill and other intangible assets effective April 1, 2002. Under SFAS No. 142, goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value. In calculating the impairment charge, the fair values of the reporting units were estimated using a discounted cash flow methodology. The Company performed the required impairment tests of goodwill and indefinite lived intangibles as of April 1, 2002 and March 31, 2003 and found them not to be impaired.

In August 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. Statement 144 also addresses the accounting for expected disposals of long-lived assets. The Company adopted Statement 144 during the first quarter of fiscal 2003 and, based on current circumstances, it has not had a material effect on the Company's results of operations or its financial position.

In April 2002 the Financial Accounting Standards Board issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions as well as addresses the classifications of gains and losses on debt extinguishment. Accordingly, the Company classified its gains from repurchases of its long-term debt in interest expense on the Consolidated Statement of Income.



- - 36 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


1.         Nature of Business and Summary of Significant Accounting Policies(continued)

In June 2002, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, effective for exit or disposal activities that are initiated after December 31, 2002. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Although the Company was engaged in an employee reduction at March 31, 2003, the associated costs from the adoption of this standard did not have a material impact on its financial statements.

The Company adopted the Emerging Issues Task Force Issue 02-16: Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor for arrangements either modified or created after December 31, 2002. This statement reached a consensus that cash consideration represents a reimbursement of costs incurred by the customer to sell the vendor’s products and should be characterized as a reduction of that cost when recognized in the customer’s income statement if the cash consideration represents a reimbursement of a specific, incremental, identifiable cost incurred by the customer in selling the vendor’s products or services. If the amount of cash consideration paid by the vendor exceeds the cost being reimbursed, that excess amount should be characterized in the customer’s income statement as a reduction of cost of sales when recognized in the customer’s income statement. The Company has reviewed its accounting policies and methods and concluded that the recording of cash consideration received from vendors were recorded in accordance with the statement.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of certain guarantees, a guarantor must recognize a liability for the fair value of the obligation assumed under the guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements regarding certain guarantees and product warranties. The recognition provisions of National Wine & Spirits, Inc. FIN 45 is effective for guarantees issued or modified after December 31, 2002. The Company implemented the recognition provisions of FIN 45 in January 2003 there has been no material effect on the Company’s financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) Consolidation of Variable Interest Entities. The term “variable interest” is defined in FIN 46 as “contractual, ownership or other pecuniary interest in an entity that change with changes in the entity’s net asset value.” Variable interest are investments or other interest that will absorb a portion of an entity’s expected losses if they occur or receive portions of the entity’s expected residual returns if they occur. The Company does not expect the recognition provisions of FIN 46 to have a material impact on the Company’s financial position or results of operations.

Reclassifications

Certain amounts from prior year's financial statement have been reclassified to conform to the current year presentation. The Financial Statements have been reclassified to include additional disclosure relating to accounts receivable vendor and distribution rights obligations.



- - 37 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


2.         Investment in Unconsolidated Subsidiaries

eSkye Solutions, Inc.

Prior to December 28, 2001, the Company has been accounting for its investment in eSkye Solutions, Inc. (eSkye) on the cost method. On December 28, 2001 eSkye redeemed a significant portion of its outstanding preferred stock at a significant discount. Since the Company elected not to participate in this redemption, its voting control increased to over 20% of voting stock. In accordance with Accounting Principles Board Opinion No. 18 The Equity Method of Accounting for Investments in Common Stock (APB 18), the Company adopted retroactively the equity method of accounting. At December 28, 2001, prior period financial information was adjusted to reflect this adoption. In addition, APB 18 also requires the Company to evaluate whether or not an “other than temporary” decline in value of an investment has occurred. As a result of this evaluation, the Company recorded an impairment charge of $530,000 for the year ended March 31, 2002, which is included in “Equity in losses of eSkye Solutions, Inc.” in the Consolidated Statements of Income. In addition, losses applying the equity method were $781,000 for the year ended March 31, 2002, which were included in “Equity in losses of eSkye Solutions, Inc.” in the Consolidated Statements of Income. Losses under the equity method for the year ended March 31, 2003 were in excess of the remaining book value of the investment in eSkye. The Company recorded $160,000 in losses for the year ended March 31, 2003, reducing its investment to $0. At March 31, 2003, the Company's share of eSkye's voting stock was 20.5%.

Commonwealth Wine & Spirits, LLC

In December 1998, NWSC formed a new distributorship in Kentucky (Commonwealth Wine & Spirits, LLC) in partnership with two existing Kentucky-based distributors, The Vertner Smith Company (“Vertner”) and Kentucky Wine & Spirits (“Kentucky W&S”). NWSC has accounted for its investment in Commonwealth Wine & Spirits, LLC using the equity method. Under the terms, NWSC invested $7,500,000 in exchange for a 25% interest in the new company. Vertner and Kentucky W&S equally own the remaining 75%. A portion of NWSC’s initial investment related to a franchise fee paid by NWSC on behalf of the new distributorship. As part of the operating agreement, NWSC’s initial cash distributions from the new distributorship are treated as return of NWSC’s original investment. As a result, the amortization of this franchise fee is allocated 100% to NWSC and is reflected in the Company’s recorded equity in income of Commonwealth Wine & Spirits, LLC in the accompanying consolidated income statement. The Company received distributions of $1,286,000, $405,000 and $778,000 and recorded equity in earnings of $312,000, $407,000 and $315,000 from Commonwealth Wine & Spirits, LLC in 2003, 2002 and 2001 respectively.

Summary financial information for eSkye Solutions, Inc. and Commonwealth Wine & Spirits, LLC is as follows:

Years Ended March 31,
2003
2002
2001
Sales     $ 84,780,000   $ 86,365,000   $ 82,632,000  
Operating loss    (2,444,000 )  (18,076,000 )  (14,742,000 )
Net loss    (134,000 )  (16,132,000 )  (15,043,000 )


March 31,
  2003
  2002
Current assets     $ 20,520,000   $ 25,056,000  
Non-current assets    3,353,000    4,311,000  
Current liabilities    8,069,000    8,545,000  
Non-current liabilities    ---    209,000  
Minority interest    3,000    102,000  
Redeemable stock    21,553,000    20,055,000  


- - 38 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


3.        Sale of Bottled Water Division

Effective June 5, 2000, NWSC sold certain of its licensed brands, trademarks and trade names of its bottled water division for approximately $10,440,000. NWSC received $9,960,000 for the sale of the assets at the sale date, and the balance of $480,000 was received in September 2000. NWSC recognized a gain of $7,524,000 from the sales of the related assets and liabilities.

4.        Inventory

Inventory at March 31 is comprised of the following:

2003
2002
Inventory at FIFO     $ 93,895,000   $ 92,597,000  
Less: LIFO reserve    10,913,000    10,657,000  
 
    $ 82,982,000   $ 81,940,000  
 

If the Company had used the first-in, first-out (FIFO) inventory method, net income would have been $256,000, $896,000 and $1,276,000 greater in 2003, 2002 and 2001, respectively.

5.        Property and Equipment

Property and equipment at March 31 is comprised of the following:

2003
2002
Land and improvements     $ 1,170,000   $ 1,473,000  
Buildings and improvements    31,965,000    31,474,000  
Furniture and equipment    14,294,000    15,256,000  
Warehouse equipment    28,295,000    28,076,000  
Automobiles and trucks    6,383,000    6,327,000  

     82,107,000    82,606,000  
Less: Accumulated depreciation    45,609,000    41,166,000  

    $ 36,498,000   $ 41,440,000  

6.        Supplemental Cash Flow Information

During the year ended March 31, 2003, the Company purchased intangible assets, principally distribution rights, and incurred other liabilities of $12,629,000.

Cash paid for interest was $11,657,000, $11,754,000 and $13,212,000 in 2003, 2002 and 2001, respectively.



- - 39 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


7.        Intangible Assets

Intangible assets at March 31, is comprised of the following:

2003
2002
Intangible Assets
Subject to
Amortization
Weighted
Average Life
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Distribution rights      7   $ 15,676,000   $ 1,683,000   $ 5,975,000   $ 2,000,000  
Loan acquisition costs    10    4,716,000    1,890,000    5,752,000    2,013,000  
Non-compete agreements    5    200,000    153,000    200,000    112,000  
 




      Total    7   $ 20,592,000   $ 3,726,000   $ 11,927,000   $ 4,125,000  
 




Intangible Assets
Subject to
Amortization
  Carrying
Amount
  Carrying
Amount
 
Distribution rights          $ 1,462,000       $ 289,000      
   
 
 

Consolidated amortization expense related to intangible assets, excluding goodwill and other intangible assets with indefinite lives for 2003, 2002, and 2001 was $2,419,000, $1,374,000 and $1,492,000, respectively.

The estimated amortization expense for each of the next five years is as follows:

2004   $ 3,652,000  
2005    2,836,000  
2006    2,752,000  
2007    2,665,000  
2008    1,878,000  
 
    $13,783,000  
 

8.        Goodwill

The following is a summary of the changes in goodwill during the years ended March 31:

2003
2002
Goodwill, beginning of year     $ 1,251,000   $ 1,355,000  
Less:  Amortization    ---    104,000  
Less:  Write-off of goodwill    5,000    ---  
Goodwill, end of year   $ 1,246,000   $ 1,251,000  
 


- - 40 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


8.         Goodwill(continued)

The following financial data illustrates pro forma earnings if goodwill and distribution rights with indefinite lives had not been amortized for 2003, 2002 and 2001:

Year ending March 31
2003
2002
2001
Net income, as reported     $ 15,789,000   $ 7,460,000   $ 14,l25,000
Addback amortization from distribution  
      rights with indefinite lives    ---    236,000    245,000  
Addback goodwill amortization    ---    104,000    107,000  
 
Adjusted net income, excluding goodwill  
     amortization and amortization from  
     distribution rights with indefinite lives   $ 15,789,000   $ 7,800,000   $ 14,477,000  
 

9.        Debt

Long-term debt at March 31 is comprised of the following:

2003
2002
Senior notes payable (A)     $ 89,975,000   $ 107,875,000        
Bank revolving line of credit (B)    4,000,000    ---  
Notes payable to stockholders, net (see Note 13)    4,328,000    1,930,000  

     98,303,000  109,805,000
Less:  current maturities    ---    ---     
    $98,303,000 $109,805,000     


(A)
On January 25, 1999, the Company issued $110,000,000 of unsecured senior notes with a maturity of January 15, 2009. Interest on the senior notes is 10.125% and is payable semiannually. These senior notes are guaranteed by the Company’s subsidiaries. The guarantors are either wholly owned or the Company owns 100% of the voting stock and there are no non-guarantor subsidiaries. The guarantees are full, unconditional and joint and several. NWS is a holding company and has no independent assets or operations.

 
The bond indenture restricts the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends, engage in mergers or consolidations, make capital expenditures and otherwise restricts corporate activities.

 
On or after January 15, 2004, the Company may redeem some or all of the senior notes at any time at stated redemption prices plus accrued interest and liquidated damages. Notwithstanding the foregoing, during the first 36 months after January 20, 1999, the Company may redeem up to 33% of the aggregate principal amount of the senior notes at a redemption price of 110.125%, plus accrued interest and liquidated damages, with the net cash proceeds of one or more public offerings of common stock of the Company.



- - 41 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


9.         Debt(continued)

 
The Company purchased $2,125,000 of its senior notes on the open market on September 28, 2001. The notes were purchased for $2,082,500 plus accrued interest of $46,617. Related unamortized issuance costs of $74,391 were written off due to the purchase of the senior notes. The Company initially utilized its revolving credit facility to fund the purchase of the senior notes. The net loss on the purchase was insignificant.

 
The Company purchased $17,900,000 of its senior notes on the open market in the fourth quarter of fiscal year 2003. The notes were purchased for $15,317,000 plus accrued interest of $275,000. Related unamortized issuance costs of $584,000 were written off due to the purchase of the senior notes. The net gain on the purchase of $1,999,000 is included in interest expense.

 
The Company purchased $9,646,000 of its senior notes on the open market during the quarter ended June 30, 2003. The notes were purchased for $8,681,000 plus accrued interest of $305,000.

(B)
On March 31, 2003, NWS entered into a credit agreement with LaSalle Bank National Association, as lender and agent, and National City Bank of Indiana, that provides a revolving line of credit for borrowings of up to $40 million, including standby or commercial letters of credit of up to $5 million, through April 1, 2008. As of March 31, 2003 the applicable interest rate on the revolving line of credit was 4.5%. Commercial letters of credit of $4.5 million were issued for the self insured portion of NWS’ casualty insurance policies. Line of credit borrowings are collaterialized by and based upon eligible accounts receivable and inventories, as defined, and are guaranteed by NWS’ subsidiaries. Interest is payable monthly at the LIBOR rate or the higher of the prime lending rate or the federal funds rate, plus a margin percentage. As of March 31, 2003 the applicable interest rate on the revolving line of credit was 4.5%.

 
In addition, the agreement places restrictions on the Company and its subsidiaries regarding additional indebtedness, dividends, mergers or consolidations and capital expenditures. Further, the Company must maintain certain interest coverage and funded debt coverage ratios, with which the Company was in compliance at March 31, 2003.

Principal payments due on debt at March 31, 2003 are as follows:

2004     $---  
2005    ---  
2006    ---  
2007    ---  
2008    ---  
Thereafter    98,303,000  
 
    $ 98,303,000  
 

10.        Common Stock

The Company has two authorized classes of capital stock: voting $0.01 par value common shares and nonvoting $0.01 par value common shares. Both classes of stock have the same relative rights, performance limitations and restrictions, except that nonvoting shares are not entitled to vote on any matters submitted to a vote of the stockholders, except as provided by law.



- - 42 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


11.        Commitments

The Company leases office and warehouse space under noncancellable operating leases ranging from two to ten years, some of which include renewal and purchase options and escalation clauses, expiring on various dates through 2011. The Company also leases certain trucks and equipment pursuant to noncancellable operating leases with terms ranging from three to seven years. Future minimum rent payments as of March 31, 2003 are as follows:

2004     $ 3,635,000  
2005    3,136,000  
2006    2,747,000  
2007    2,426,000  
2008    431,000  
Thereafter    684,000  
 
    $ 13,059,000  
 

Rent expense was $4,747,000, $4,800,000 and $4,738,000 in 2003, 2002 and 2001, respectively.

The Company has future obligations for guaranteed minimum royalty payments related to certain distribution contracts. Existing agreements require minimum royalty payments of approximately $2,700,000 for fiscal year 2004. Because the Company believes that actual royalty payments will exceed the guaranteed minimum, royalty payments are recorded in cost of sales as royalties become payable. As of March 31, 2003, the minimum royalty payment of $3,100,000 for fiscal year 2003 had been satisfied.

12.        Employee Benefit Plans

The Company sponsors a defined benefit pension plan covering substantially all of its warehousemen and drivers. The Company makes contributions to the plan based on amounts permitted by law.

The components of net periodic pension cost of the defined benefit plan are as follows for the years ended March 31:

2003
2002
2001
Service cost-benefits earned during the year     $ 347,000   $ 263,000   $ 231,000  
Interest on projected benefit obligation    340,000    288,000    255,000  
Expected return on plan assets    (314,000 )  (305,000 )  (337,000 )
Amortization of unrecognized net transition asset    20,000    20,000    20,000  
Amortization of loss (gain)    34,000    ---    (40,000 )
Amortization of prior service cost    53,000    53,000    35,000  
 
Net periodic pension cost   $ 480,000   $ 319,000   $ 164,000  
 


- - 43 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


12.         Employee Benefit Plans(continued)

The change in the projected benefit obligation, plan assets, funded status and amounts recognized in the accompanying consolidated balance sheets at March 31, 2003 and 2002 for the defined benefit pension plan are as follows:

2003
2002
Change in projected benefit obligation:            
   Benefit obligation at beginning of year   $ 4,962,000   $ 3,802,000  
     Service cost    347,000    263,000  
     Interest cost    340,000    288,000  
     Actuarial changes    577,000    807,000  
     Benefits paid    (214,000 )  (198,000 )
 
   Benefit obligation at end of year   $ 6,012,000   $ 4,962,000  
 

Change in plan assets:            
   Fair value of plan assets at beginning of year   $ 3,587,000   $ 3,552,000  
   Actual loss on plan assets    (347,000 )  (345,000 )
   Company contributions    747,000    578,000  
   Benefits paid    (214,000 )  (198,000 )
 
   Fair value of plan assets at end of year   $ 3,773,000   $ 3,587,000  
 

Funded status of the plan (under-funded)     $ (2,239,000 ) $ (1,375,000 )
Unrecognized net actuarial gain    2,291,000    1,086,000  
Unrecognized prior service cost    647,000    700,000  
Unrecognized transition obligation    67,000    87,000  
 
Prepaid benefit cost   $ 766,000   $ 498,000  
 
Weighted-average assumptions:  
   Discount rate    6.50 %  7.00 %
   Expected return on plan assets    8.50 %  8.50 %
Balance Sheet Classification:  
    Prepaid benefit cost   $(766,000 ) $(498,000 )
   Noncurrent deferred additional liability   $ 3,005,000   $ 1,873,000  
 
   Minimum liability   $ 2,239,000   $ 1,375,000  
 
    $ 715,000   $ 1,198,000  
   Deferred pension costs (intangible asset)  
   Accumulated other comprehensive income -  
      unrecognized net pension loss   $ 2,290,000   $ 675,000  


- - 44 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


12.         Employee Benefit Plans(continued)

As of March 31, 2003 and 2002, the Company has reflected in their financial statements an additional minimum pension liability of $3,005,000 and $1,873,000, respectively. This minimum liability represents the excess of the unfunded accumulated benefit obligation over the fair market value of plan assets as of the measurement date. As the additional liability exceeded the intangible asset, the excess is held in the financial statements in Accumulated Other Comprehensive Income at $2,290,000 and $675,000 as of March 31, 2003 and 2002, respectively. An intangible asset of $715,000 and $1,198,000 was reflected in the Company’s consolidated balance sheet at March 31, 2003 and 2002, respectively. The change in the pension liability at March 31, 2003 as compared to the liability at March 31, 2002 was primarily caused by the difference in the actual return on assets compared to the expected return on assets and the 0.50% decrease in the discount rate assumption.

It is the Company’s policy to make contributions to the plan sufficient to meet the funding requirements of applicable laws and regulations, plus such additional amounts as deemed appropriate.

The Company also sponsors a defined contribution benefit plan for substantially all employees not covered by the defined benefit plan. Contributions to the plan are made at the discretion of the Company and may not exceed 5% of a participant’s compensation. The Company recorded $1,598,000, $1,411,000 and $1,215,000 of expense for the defined contribution plan in 2003, 2002 and 2001, respectively.

NWS-LLC contributes to union-sponsored multi-employer pension plans, which provide for contributions based on a specified rate per labor hour. Union employees constitute approximately 53% of NWS-LLC’s workforce and 53% of NWSM’s workforce. Contributions charged to expense were $757,000, $665,000 and $588,000 in 2003, 2002 and 2001, respectively. Information as to NWS-LLC’s portion of accumulated plan benefits and plan net assets is not currently available. Under the Employee Retirement Income Security Act of 1974 as amended, an employer upon withdrawal from a multi-employer plan is required to continue funding its proportionate share of the plan’s unfunded vested benefits. NWS-LLC has no intention of withdrawing from the plans.

13.        Related Party Transactions

NWSC had notes receivable from its two stockholders totaling $2,628,000 at March 31, 2002. The notes earned interest at the prime lending rate and were paid in full during September 2002. Interest income earned was $62,000, $222,000 and $635,000 in 2003, 2002, and 2001, respectively. Proceeds of the notes were used by the stockholders to purchase additional capital stock of NWSC and to make loans to NWS-LLC.

Effective July 31, 1998, the Company and its stockholders executed new notes payable to stockholders to provide for a legal right of offset against the notes receivable from stockholders. The notes payable outstanding as of March 31, 2002 were offset with corresponding notes receivable and reflected in long-term-debt in the accompanying Consolidated Balance Sheet. The total of the subordinated notes payable was $4,328,000 and $4,558,000 at March 31, 2003 and 2002, respectively with the principal balance due in 2009. These notes bear interest at the prime lending rate. Interest expense on these notes was $197,000, $258,000 and $405,000 in 2003, 2002, and 2001, respectively. The Company pays eSkye fees for computer services. NWS paid $150,000, $49,000, and $42,000 during the years ended March 31, 2003, 2002, and 2001, respectively.

The Company paid $117,000, $218,000 and $230,000 in 2003, 2002, and 2001 respectively for consulting fees to a minority stockholder of NWS-LLC.

A Director of the Company is the Chairman and Chief Executive Officer of eSkye. The Company received 6,000,000 shares of common stock in eSkye upon inception, representing founders stock. The Company accounts for its investment in eSkye using the equity method. The Company's investment in convertible preferred stock of eSkye totaled $2,513,000.

NWS leases facilities and certain office equipment to eSkye under the terms of a three-year operating lease. NWS received rent from eSkye of $137,000, $270,000 and $262,000 during the years ended March 31, 2003, 2002 and 2001, respectively. The Company pays eSkye fees for computer services. NWS paid $150,000, $49,000, and, $42,000 during the years ended March 31, 2003, 2002 and 2001, respectively.



- - 45 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


14.        Segment Reporting

The Company’s reportable segments are business units that engage in product sales and all other activities. The majority of the all other activities relate to distribution fee operations. The Company evaluates performance and allocates resources based on these segments. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1.

2003
2002
2001
Revenue from external customers                
     Product sales   $ 689,859,000   $ 659,594,000   $ 636,879,000  
     All other    22,999,000    21,963,000    21,573,000  
Interest expense  
     Product sales    7,654,000    10,309,000    11,599,000  
     All other    1,654,000    1,625,000    1,615,000  
Depreciation expense  
     Product sales    5,212,000    4,505,000    4,941,000  
     All other    1,976,000    2,056,000    2,105,000  
Amortization expense  
     Product sales    2,245,000    1,170,000    1,300,000  
     All other    174,000    544,000    544,000  
Equity in earnings of Commonwealth Wine & Spirits, LLC    
     Product sales    312,000    407,000    315,000  
       All other    ---    ---    ---  
Equity in losses of eSkye Solutions, Inc.  
     Product sales    (160,000 )  (1,311,000 )  (787,000 )
     All other    ---    ---    ---  
Segment income (loss)  
     Product sales    17,111,000    9,155,000    16,111,000  
     All other    (1,322,000 )  (1,695,000 )  (1,986,000 )
Segment assets  
     Product sales    193,757,000    190,585,000    180,383,000  
     All other    9,951,000    10,820,000    11,907,000  
Investments in equity method investees  
     Product sales    5,637,000    6,771,000    8,080,000  
     All other    ---    ---    ---  
Expenditures on long-lived assets  
     Product sales    4,449,000    5,142,000    7,117,000  
     All other    58,000    1,031,000    122,000  

15.        Concentration of Risk

Products purchased from four suppliers amounted to approximately 59%, 62% and 66% of all purchases in 2003, 2002 and 2001, respectively.

16.        Litigation

The Company is a party to various lawsuits and claims arising in the normal course of business. While the ultimate resolution of lawsuits or claims against the Company cannot be predicted with certainty, management is vigorously defending all claims and does not expect that these matters will have a material adverse effect on the financial position or results of operations of the Company.



- - 46 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


17.        Vendor Distribution Agreements

During the year ended March 31, 2003, NWSC entered into distribution contracts with two vendors, both on an exclusive basis for their respective products distributed in Indiana. Total payments of $11,625,000 are required for these agreements, and $11,375,000 is unpaid as of March 31, 2003. Payments are required on a quarterly basis through June 30, 2010. NWSC has imputed interest the obligations at 4.5% and recorded a discount on the obligation which reduced the related intangible asset by $1,624,000. These assets will be amortized over the life of their respective contracts.

Future cash payments for all of the Company’s distribution rights obligations for the years ended March 31 are as follows:

2004     $ 2,079,000  
2005    2,079,000  
2006    1,829,000  
2007    1,829,000  
2008    1,500,000  
Thereafter    3,374,000  
 
 
Total distribution rights obligations    12,690,000  
Imputed interest    (1,624,000 )
 
Present value of minimum distribution rights payments    11,066,000  
Current portion    (1,697,000 )
 
Long-term distribution rights obligation   $9,369,000  
 

During the year ended March 31, 2003 the Company was notified by three major vendors that brand distribution rights for NWS-LLC were terminated. Revenue for the affected brands for the year ended March 31, 2003 was approximately $188 million. For the same annual period, these three vendors contributed approximately $36 million to the gross profit of the Company.

The Company, as part of a vendor settlement at NWS-LLC, entered into a settlement agreement in February 2003 whereby the vendor paid $9.2 million to the Company for termination of distribution rights.

18.        Management Services Agreement

During the quarter ended March 31, 2003, NWS-LLC entered into a Management Services Agreement with a nationwide wholesaler of wine and spirits. Both parties would cooperate in the business of distributing wine and spirits in the state of Illinois (the Business). As part of that relationship, NWS-LLC and the other wholesaler would share equally in the profits and losses of the Business. In addition, the parties entered into a separate Contribution Agreement in which the parties would agree that, at any time after January 31, 2004, the other wholesaler would have the right to require the formation of a new company to be owned fifty percent by NWS-LLC and fifty percent by the other wholesaler. At that time, the other wholesaler would contribute cash to the new entity in an amount equal to fifty percent of the net book value.



- - 47 -

National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
(continued)


19.        Quarterly Data (Unaudited)

The following table sets forth certain quarterly income statement information of the Company for the fiscal years ended March 31, 2003, 2002 and 2001:

  2003
(Dollars in thousands)                             Q1     Q2     Q3     Q4   Total
 
Total revenue       182,732     175,536     214,872     139,718     712,858  
Gross profit    43,163    39,444    44,917    32,501    160,025  
Selling, general and administrative expenses    36,130    36,099    36,710    35,611    144,550  
Income from operations    7,033    3,345    8,207    (3,110 )  15,475  
Interest expense    2,819    2,828    2,845    816    9,308  
Other income (expense)    180    114    200    9,128    9,622  
Net income    4,394    631    5,562    5,202    15,789  

  2002
(Dollars in thousands)                             Q1     Q2     Q3     Q4   Total
 
Total revenue       166,639     157,457     209,030     148,431     681,557  
Gross profit   37,467    35,115    44,941    33,124     150,647
Selling, general and administrative expenses    32,075    31,484    33,128    34,338    131,025  
Income from operations    5,392    3,631    11,813    (1,214 )  19,622  
Interest expense    3,004    3,047    2,957    2,926    11,934  
Other income (expense)    (15 )  (85 )  (32 )  (96 )  (228 )
Net income    2,373    499    8,824    (4,236 )  7,460  

  2001
(Dollars in thousands)                             Q1     Q2     Q3     Q4   Total
 
Total revenue    162,187    156,618    201,732    137,915    658,452  
Gross profit   37,059    34,468    43,986    29,011    144,524  
Selling, general and administrative expenses    31,108    31,495    32,445    29,986    125,034  
Income from operations    5,951    2,973    11,541    (975 )  19,490  
Interest expense    3,248    3,364    3,468    3,134    13,214  
Other income (expense)    7,524    173    310    (158 )  7,849  
Net income    10,227    (218 )  8,383    (4,267 )  14,125  



- - 48 -

Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On December 10, 2001, the Audit Committee of the Board of Directors of NWS dismissed Ernst & Young LLP (“Ernst & Young”), the independent accountant who was previously engaged to audit NWS’ financial statements for fiscal 2001. On June 11, 2002, the Board of Directors of NWS dismissed Arthur Andersen LLP (“Andersen”), the independent accountant who was engaged to audit the Company’s financial statements for fiscal 2002. None of the reports of Ernst & Young or Andersen for the years ended March 31, 2001 and 2002 contained an adverse opinion or a disclaimer of opinion, and they were not qualified or modified as to uncertainty, audit scope or accounting principles. During those periods, there were no disagreements with either of Ernst & Young or Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

Part III

Item 10.        Directors & Executive Officers of the Registrant

Directors and Executive Officers

The following table sets forth information concerning the directors and executive officers of NWS as of June 30, 2003:

Name  Age Position
James E. LaCrosse    70   Chairman, President, Chief Executive Officer, Chief
Financial Officer and Director
Catherine M. LaCrosse    36   Vice President of Sales-Indiana Fine Wine Division and Director  
John J. Baker    33   Chief Operating Officer and Secretary  
Gregory J. Mauloff    51   Corporate Executive Vice President, Sales & Marketing  
J. Smoke Wallin    36   Executive Vice President and Director  
James R. Beck    59   Director  
Patrick J. Hurrle    53   Vice President and General Manager, NWS-Indiana  
Joseph J. Fisch    54   President, U.S. Beverage  
Mitchell T. Stoltz    49   Director  
Norma M. Johnston    74   Director  
William M. Cockrum    65   Director  
Vaughn D. Bryson    64   Director  
Patrick A. Trefun    43   Corporate Controller and Treasurer  


- - 49 -

        James E. LaCrosse has served as Chairman, President, Chief Executive Officer and a Director of NWS since December, 1998. He assumed the responsibilities of Chief Financial Officer in May, 2000. Previously, Mr. LaCrosse served as Chairman and Director NWS-Indiana since its formation in 1973, and prior to 1973 was employed by various companies in a financial capacity. Mr. LaCrosse received an MBA from Harvard Business School in 1961 and a BA in economics from Wesleyan University in 1957.

        Catherine M. LaCrosse has served as Director of NWS since December 1998 and is currently Vice President of Sales of the Indiana Fine Wine Division. Ms. LaCrosse joined NWS in 1991 and has served in various sales and marketing positions in NWS-Indiana, NWS-Illinois and NWS-Michigan. Ms. LaCrosse received a BA in history from Indiana University in 1990. She is Mr. LaCrosse’s daughter.

        John J. Baker has served as Chief Operating Officer and Treasurer since 2001. Mr. Baker joined the Company in 1993 and has also held positions as Executive Vice President, Director of Corporate Logistics, Director of Purchasing, and Operations Specialist. Prior to that, he served as a Financial Analyst for Comdata Corporation and Freight Forwarding Assistant for A.W. Fenton Company. Mr. Baker received an MBA in operations from Vanderbilt University-Owen School of Management in 1994 and a BS in economics and international business from Miami University in 1992.

        Gregory J. Mauloff has been Corporate Executive Vice President of Sales and Marketing since April 2003. Prior to that he was President of the Illinois operations and Executive Vice President of the Beer Division. He joined the company in 1991. Other experience includes Vice President of Sales, Heublein Spirits, and Division Manager, E.J. Gallo Wines. He received a BS in business administration from Norbert College in 1973.

        J. Smoke Wallin has served as Executive Vice President and a Director of NWS since December, 1998. He served as Chief Financial Officer from December 1998 until April 2000. Mr. Wallin joined NWS in 1988 and served as Executive Vice President, Corporate Group, from 1993 to 1998. He received an MBA in finance, marketing and operations from Vanderbilt University-Owen School of Management in 1993 and a BS in economics from Cornell University in 1989. Mr. Wallin is Mr. LaCrosse’s son-in-law.

        James R. Beck has served as Director of NWS since December 1998 and as President of NWS-Indiana from 1992 to July 2002 when he retired. Mr. Beck joined NWS in 1972 and has served in various positions, including Executive Vice President of Sales for 14 years prior to being named President of NWS-Indiana. He has been a Director of NWS since December, 1998. Mr. Beck received a BS in education from Ball State University in 1968.

        Patrick J. Hurrle is currently Vice President and General Manager of NWS-Indiana and joined the company in 1972. Other positions he has held in the Indiana operation include Vice President of Wine Sales, Wines Sales Manager and Merchandiser. Mr. Hurrle graduated in 1972 from Indiana University with a BS in marketing.

        Joseph J. Fisch has served as President and CEO of U.S. Beverage, a premium import/craft and specialty beer marketer and sales company, based in Stamford, Connecticut, since its inception in 1997. His previous experience with Joseph E. Seagram Corporation from 1971 through 1996 includes Market Research Analyst; Vice President and Division Manager, General Wine & Spirits Company; Vice President/General Manager, eastern region, House of Seagram; Vice President/General Manager, House of Seagram; President, Seagram Beverage Company He received a BS in business administration and marketing from Bowling Green University, Ohio, in 1971.

        Mitchell T. Stoltz has served as Director of NWS since December 1998. Mr. Stoltz served as President of NWS-Illinois from 1995 to April 2001, at which time he resigned from that position but continues as a Director of NWS. Prior to becoming President, he served as Executive Vice President of Sales and Marketing for NWS-Illinois. Before joining NWS in 1992, Mr. Stoltz served as Vice President and General Manager for Magnolia Marketing Company and as President for Admiral Wine Company. Mr. Stoltz received an M.M. from Northwestern University Kellogg Graduate School of Management in 1985 and a BA in business from Notre Dame University in 1976.



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        Norma M. Johnston has been a Director of NWS-Indiana since 1976, and a Director of NWS since December, 1998. Mrs. Johnston served as Secretary of NWS-Indiana from 1976 to 1998.

        William M. Cockrum has served as Director of NWS since July 1999. He has been an Adjunct Professor of Finance in the UCLA Anderson School of Business since 1985, teaching entrepreneurial finance, business ethics and investment management. Mr. Cockrum was recognized as top entrepreneurial professor in the nation by Business Week magazine in 1996. Prior to joining UCLA, he spent 25 years in investment banking, serving as a corporate officer at Becker Paribas, Inc. until it was acquired by Merrill Lynch in 1984. Mr. Cockrum received an MBA in finance and marketing from Harvard Business School in 1961 and a BA in economics from DePauw University in 1959.

        Vaughn D. Bryson has served as Director of NWS since July 1999. He serves on the boards of several public companies, particularly in the biotech industry. Mr. Bryson retired as Vice Chairman in 1996 from Vector Securities International (now Prudent Vector). Prior to that, he worked for Eli Lilly and Company from 1961 to 1993 serving as President and CEO from 1991 to 1993, Executive Vice President from 1986 to 1990, and Board Member from 1984 to 1993. Mr. Bryson is a member of the board of directors of Atherogenics Inc., Amylin Pharmaceuticals Inc., Chiron Corp. and Quintiles Transnational Corporation. Mr. Bryson is a graduate of the Stanford Sloan Program, Stanford Graduate School of Business in 1967 and received a BS in pharmacy from the University of North Carolina in 1960.

        Patrick A. Trefun, CPA, has served as Corporate Controller and Treasurer since 2001. Mr. Trefun previously served as controller of NWS-Indiana. He began working in the industry in 1982 as an accountant and later controller for General Liquors, Inc., which was purchased by NWS in 1987 at which time he joined the Company. Mr. Trefun received a BS in business administration with a concentration in accounting from Indiana University in 1982.

         The eight individuals who comprise NWS’ senior management team have an average of over 22 years of experience in the alcohol-based beverage industry and 16.5 years of experience with NWS.

Audit Committee

        The audit committee of NWS is comprised of Mr. William Cockrum and Mr. Vaughn Bryson, each of whom is independent of NWS.

Item 11.        Executive Compensation

Compensation of Directors

        Only outside directors of NWS receive compensation per year for serving as directors. Each outside director received $60,000 for the fiscal year ended March 31, 2003 for serving on the board.



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Executive Compensation

        The following table sets forth the compensation paid by NWS to James E. LaCrosse, Chief Executive Officer, and to each of the four most highly compensated executive officers of NWS for fiscal 2003, 2002 and 2001:

Summary Compensation Table


                                                                                                                         Annual Compensation                                                            
Name and Principal Position  Year Salary Bonus Other Annual
Compensation(3)
   All Other
Compensation(3)
James E. LaCrosse     2003     $ 407,000   $ -0-   $ 6,465   $ 276,073 (2)
   Chairman, President, Chief    2002    407,000    249,000    6,772    219,864 (2)
   Financial Officer, and CEO   2001    407,000    249,000    2,168    233,114 (2)
 
Joseph J. Fisch   2003    275,000    117,500    -0-  5,481
   President/CEO, U.S. Beverage   2002    225,000    60,000    -0-  4,500
    2001    250,000  35,000  -0-  5,000        
 
Gregory Mauloff   2003    234,615    75,000    1,371    31,356 (5)
   Corporate Executive Vice-President of   2002    173,327    50,000    738    8,567  
   Sales & Marketing   2001    166,922  20,000  -0-  8,346        
 
Patrick J. Hurrle   2003    169,550    150,000    1,122    8,497  
   President, NWS-Indiana   2002    128,750    40,000    997    7,065  
    2001    125,000  30,000  959  7,142        
 
James R. Beck   2003    233,801    -0-  2,332  44,969 (4)
   Director & Consultant   2002    194,212    275,000    2,407    9,039  
   (Formerly President, NWS Indiana)   2001    157,627    200,000    1,114    6,940  


(1)
Includes 2003 employer 401(k) Plan contributions in the following amounts: Mr. LaCrosse, $10,000, Mr. Beck, $4,456, Mr. Mauloff, $11,181; Mr. Hurrle, $8,497; Mr. Fisch, $5,481. Includes 2002 employer 401(k) Plan contributions in the following amounts: Mr. LaCrosse, $8,500; Mr. Beck, $9,039; Mr. Mauloff, $8,567; Mr. Hurrle, $7,065; and Mr. Fisch, $4,500. Includes 2001 employer 401(k) Plan contributions in the following amounts: Mr. LaCrosse, $8,000; Mr. Beck, $6,940; Mr. Mauloff, $8,346; Mr. Hurrle, $7,142; and Mr. Fisch, $5,000.

(2)
Includes $266,073, $211,364 and $225,114 for fiscal 2003, 2002 and 2001, respectively, of life insurance premiums paid by NWS on behalf of Mr. LaCrosse and for the benefit of the LaCrosse family trust for estate planning purposes. NWS expects the premiums paid on behalf of Mr. LaCrosse in the future will remain at their current annual rate. Upon the death of Mr. LaCrosse or termination of the life insurance policies, NWS is entitled to repayment out of the proceeds of the policies of all premiums paid on behalf of Mr. LaCrosse for the benefit of the LaCrosse family trust since the inception of the policy in 1994.

(3)
Represents personal use of a company supplied automobile.

(4)
Includes $40,000 for fiscal 2003 outside director’s fees, and $513 for life insurance premiums paid by NWS on the behalf of Mr. Beck. Mr. Beck retired from active employment on July 15, 2002, and has remained with the company as a director and consultant.

(5)
Includes items having a value of $20,175 received by Mr. Mauloff as sales incentive pay.

Compensation Committee Interlocks and Insider Participation

        The compensation committee is comprised of Mr. Vaughn Bryson, Mr. William Cockrum, Ms. Catherine LaCrosse and Mr. Jim LaCrosse. There are no interlocking compensation committee relationships between NWS and any other entity.



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Item 12.        Security Ownership of Certain Beneficial Owners and Management

         NWS has two authorized classes of capital stock, voting common stock and non-voting common stock. The following table sets forth the beneficial ownership of NWS’ voting common stock:

  (1)
By each person known by NWS to beneficially own 5% or more of NWS’ voting common stock, and

  (2)
By all executive officers and directors of NWS as a group.

        Except for Mr. LaCrosse and Mrs. Johnston, who have sole voting and investment power with respect to their voting common stock, no other executive officer or director owns any shares of NWS’ voting common stock.

Name and Address Number of
   Shares
Percent  
James E. LaCrosse
     700 West Morris Street  
     Indianapolis, Indiana 46225    86,520    83 %
Norma M. Johnston  
     700 West Morris Street  
     Indianapolis, Indiana 46225    18,000    17 %
All executive officers and directors as a group  
     (11 persons)    104,520    100 %

        The stockholders of NWS have entered into stockholder agreements with each other and NWS. Such agreements contain restrictions relating to transfers of stock and provide for rights to purchase and sell stock of each corporation, among other matters. In particular, the stockholder agreement with NWS governs the transferability of Mrs. Johnston’s stock in NWS. The LaCrosse family is obligated to purchase Mrs. Johnston’s stock at her death or during her lifetime should she decide to sell. NWS becomes obligated to purchase only if the LaCrosse family refuses or fails to purchase. The LaCrosse family and NWS also have the right to purchase Mrs. Johnston’s stock at the death of Mr. LaCrosse. Any obligation of NWS to purchase the stock owned by Mrs. Johnston is subject to the terms of the indenture and the new credit facility. No right to purchase stock owned by Mr. LaCrosse or a trust for the benefit of his family exists in favor of Mrs. Johnston.

         The stockholders have also agreed not to take any action or effect any transfer that would cause NWS or any of its subsidiaries to fail to qualify as an S corporation or other pass-through entity for federal income tax purposes. In addition, the stockholders have entered into a tax indemnification agreement whereby they have agreed to indemnify NWS and its subsidiaries for any loss that may arise in the event NWS or any of its subsidiaries should fail to maintain its pass-through status.

        The LaCrosse family and NWS own life insurance policies on behalf of Mrs. Johnston in face amount of $4.0 million and $0.5 million, respectively.

Item 13.        Certain Relationships and Related Transactions

        J. Smoke Wallin, a Director of the Company, is the Chairman and Chief Executive Officer of eSkye Solutions, Inc. The Company received 1,500,000 shares of common stock in eSkye Solutions Inc. upon inception, representing founders stock. eSkye Solutions, Inc. subsequently issued a 4 to 1 split, thus 6,000,000 shares are currently held by NWS. The Company accounts for its investment in eSkye Solutions, Inc. using the equity method. In October, 1999, the Company invested $500,000 in convertible preferred stock of eSkye Solutions, Inc. The Company invested an additional $2,012,500 in convertible preferred stock in May 2000.



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        NWS leases facilities and certain office equipment to eSkye Solutions, Inc. under the terms of a three-year operating lease. NWS received rent from eSkye Solutions, Inc. of $137,000, $270,000 and $262,000 during the years ended March 31, 2003, 2002 and 2001, respectively. The Company pays eSkye fees for computer services. NWS paid $150,000, $49,000, and $42,000 during the years ended March 31, 2003, 2002, and 2001, respectively. The Company pays eSkye fees for computer services. NWS paid $150,000, $49,000, and $42,000 for computer services during the years ended March 31, 2003, 2002, and 2001, respectively.

        From time to time, NWS-Indiana has loaned money to its principal shareholders, James E. LaCrosse and Norma M. Johnston, the primary purpose of which was to provide the necessary funds to finance start-up expenses and working capital needs of NWS-Illinois, an affiliated company owned prior to the reorganization by Mr. LaCrosse, Mrs. Johnston and Martin H. Bart. As of March 31, 2001, total indebtedness of Mr. LaCrosse and Mrs. Johnston to NWS-Indiana was $4.7 million. The indebtedness was retired in September 2001 and 2002 through distributions. The proceeds of the loans were provided by Mr. LaCrosse and Mrs. Johnston to NWS-Illinois in the form of loans or additional capital contributions. This indebtedness to Mr. LaCrosse and Mrs. Johnston of $4.5 million, which matures in 2009, is subordinated to the senior notes and the credit facility, and bears interest at 8.0% (prime rate at March 31, 2001).

        On July 27, 1998, Mr. LaCrosse transferred substantially all of his non-voting stock to a family trust for estate-planning purposes. As part of this transfer and in addition to normal distributions for tax purposes, NWS distributed $3.6 million to Mr. LaCrosse, the family trust, and Mrs. Johnston in the annual period ended March 31, 2001. These distributions were made within the terms and conditions contained in the Company’s indenture governing its senior notes (including the limitation on restricted payments) and the credit facility. The family trust remitted these funds to Mr. LaCrosse in repayment of indebtedness for the non-voting stock that was purchased on July 27, 1998. Mr. LaCrosse and Mrs. Johnston then remitted $3.6 million to NWS-Indiana to reduce their indebtedness described above.

        NWS-Indiana and NWS-Illinois have operated as S corporations under the Internal Revenue Code of 1986 (Code), and their respective subsidiaries have all operated as qualified subchapter S subsidiaries under the Code or other similarly taxed pass-through entities (the “S Corp. Businesses”). NWS has elected to be treated as an S corporation under the Code and has elected or will elect for each of its subsidiaries to be treated as qualified subchapter S subsidiaries. The S Corp. Businesses have not been subject to tax on their respective net taxable incomes, and the shareholders of the S Corp. Businesses have been directly subject to tax on their respective proportionate shares of such net taxable income. NWS-Indiana and NWS-Illinois have historically made cash distributions to Mr. LaCrosse, Mrs. Johnston and Mr. Bart in amounts equal to or greater than their respective tax obligations related to the S Corp. Businesses. The aggregate amount of these distributions during 2003, 2002 and 2001 were $9.4 million, $8.5 million and $10.6 million, respectively. The terms of the senior notes and the credit facility permit NWS to make distributions to shareholders with respect to their tax liabilities subject to certain conditions and limitations.

         Mr. Martin Bart is a minority shareholder of NWS-Illinois. NWS-Illinois paid a company owned by Mr. Bart approximately $0.1 million, $0.2 million and $0.2 million during each of fiscal years 2003, 2002 and 2001, respectively, for certain consulting services provided by Mr. Bart to NWS-Illinois. In addition, NWS owns a condominium in which Mr. Bart formerly resided, and he reimbursed NWS $3,500 per month to reside in the NWS-owned condominium. During 1998, NWS-Indiana entered into a five-year non-compete agreement with James Beck, president of NWS-Indiana and a Director of NWS, under which Mr. Beck was paid $0.3 million by the Company. NWS-Indiana obtained certain inventory and other property related to the wholesale cigar distribution business previously operated by Mr. Beck.

        NWS pays “split-dollar” insurance premiums on seven insurance policies with a fair value of $15.4 million on the lives of Mr. LaCrosse and Mrs. Johnston. See Item 11-Executive Compensation. NWS is entitled to receive reimbursement for all premiums paid out of the proceeds of these policies upon the death of Mr. LaCrosse and Mrs. Johnston. Premiums paid by NWS were $328,000 for each of the annual periods ended March 31, 2003, 2002 and 2001. The LaCrosse Family Trust is the beneficiary of those policies.



- - 54 -

Item 14.        Controls and Procedures

        Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, and the Company’s Corporate Controller, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer, and the Company’s Corporate Controller, concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

Item 15.        Principal Accountant Fees and Services

        Audit Fees  Aggregate fees billed by Deloitte & Touche in connection with the audit of the 2003 financial statements and review of financial statements included in NWS’ Forms 10-Q for 2003 totaled $241,207. Aggregate fees billed by Andersen in connection with the audit of the 2002 financial statements and review of financial statements included in NWS’ Forms 10-Q for 2002 totaled $263,829, some of which was paid in fiscal 2003.

        Audit Related Fees  The Company has paid no fees to Deloitte & Touche for audit related services. Aggregate fees billed by Andersen for audit related services in 2002 were $106,222. Those services consisted of an assessment of NWS’ internal controls.

        The Company paid no fees to the principal accountant for tax services or other services in fiscal 2002 or 2003.



- - 55 -

PART IV

Item 16.         Exhibits, Financial Statement Schedules and Reports on Form 8-K

  (a) Documents filed as part of this Report.

  1. Financial Statements

    Page(s) in
this Report
 
  Reports of Independent Auditors 26-28
 
  Consolidated balance sheets — March 31, 2003 & 2002 29 
 
  Consolidated statements of income — Years ended March 31, 2003, 2002 & 2001 30 
 
  Consolidated statements of stockholders' equity — Years ended March 31, 2003, 2002 & 2001 31 
 
  Consolidated statements of cash flows — Years ended March 31, 2003, 2002 & 2001 32 
 
  Notes to consolidated financial statements 33-48

  2. Financial Statement Schedule

  Schedule II - Valuation & Qualifying Accounts & Reserves 57

 
Schedules other than those listed above are omitted as they are not required, or not applicable, or the information is shown in the Notes to the Consolidated Financial Statements.

  3. Exhibits

 
See the Index to Exhibits on pages 59 and 60 of this Form 10-K, which is incorporated by reference herein.

  (b) Reports on Form 8-K.                                                                                 Item.

    Form 8-K dated January 3, 2003 Item 5
    Form 8-K dated February 3, 2003 Item 5
    Form 8-K dated February 20, 2003 Item 5
    Form 8-K dated March 4, 2003 Item 9



- - 56 -

NATIONAL WINE & SPIRITS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES


  Additions
Description
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions
Balance at
End
of Period
Year ended March 31, 2003                        
Deducted from asset account:  
       Allowance for doubtful accounts   $ 1,291,000   $ 329,000   $ ---   $ 346,000 (1) $ 1,274,000  
       LIFO reserve    10,657,000    256,000    ---   $ ---   $ 10,913,000  
 




                                   Total   $ 11,948,000   $ 585,000   $ ---   $ 346,000   $ 12,187,000  
 




Year ended March 31, 2002  
Deducted from asset account:  
       Allowance for doubtful accounts   $ 1,737,000   $ 552,000   $ ---   $ 998,000 (1) $ 1,291,000  
       LIFO reserve    9,761,000    896,000    ---   $ ---    10,657,000  
 




                                   Total   $ 11,498,000   $ 1,448,000   $ ---   $ 998,000   $ 11,948,000  
 




Year ended March 31, 2001  
Deducted from asset account:  
       Allowance for doubtful accounts   $ 1,412,000   $ 599,000   $ ---   $ 274,000 (1) $ 1,737,000  
        LIFO reserve    8,485,000    1,276,000    ---    ---    9,761,000  
 




                                   Total   $ 9,897,000   $ 1,875,000   $ ---   $ 274,000   $ 11,498,000  
 






(1) Uncollectible accounts written off, net of recoveries.

(Remainder of page intentionally left blank.)



- - 57 -

SIGNATURES


        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on July 1, 2003.

  NATIONAL WINE & SPIRITS, INC.


By:  /s/  James E. LaCrosse
James E. LaCrosse,
Chairman, President,
Chief Executive Officer, and
Chief Financial Officer

        Pursuant to the requirements of the Securities Act, this Annual Report on Form 10-K has been signed on the 1st day of July, 2003 by the following persons in the capacities indicated:


SIGNATURE   TITLE


/s/  James E. LaCrosse
James E. LaCrosse
  Chairman, President, Chief Executive Officer (Principal Executive Officer), and Chief Financial Officer

/s/  J. Smoke Wallin
J. Smoke Wallin
  Director, Executive Vice President, and Secretary

/s/  James R. Beck
James R. Beck
  Director


Mitchell T. Stoltz
  Director


William Cockrum
  Director

/s/  Norma M. Johnston
Norma M. Johnston
  Director

/s/  Vaughn D. Bryson
Vaughn D. Bryson
  Director

/s/  Catherine M. LaCrosse
Catherine M. LaCrosse
  Director


- - 58 -

INDEX TO EXHIBITS


Exhibit No.
Description

3.1
Amended and Restated Articles of Incorporation of National Wine & Spirits, Inc. (Incorporated by reference to exhibit 3.1 to the Company's annual report Form 10K for the year ended March 31, 2000.)

3.2
Amended and Restated Bylaws of National Wine & Spirits, Inc. (Incorporated by reference to exhibit 3.2 to the Company's annual report Form 10K for the year ended March 31, 2000.)

3.3
Articles of Incorporation of National Wine & Spirits Corporation (incorporated by reference Exhibit 3.3 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).

3.4
Bylaws of National Wine & Spirits Corporation (incorporated by reference Exhibit 3.4 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).

3.5
Articles of Incorporation of NWS, Inc. (incorporated by reference Exhibit 3.5 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).

3.6
Bylaws of NWS, Inc. (incorporated by reference Exhibit 3.6 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).

3.7
Articles of Incorporation of NWS Michigan, Inc. (incorporated by reference Exhibit 3.7 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).

3.8
Bylaws of NWS Michigan, Inc. (incorporated by reference Exhibit 3.8 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).

3.9
Articles of Organization of NWS-Illinois, LLC (incorporated by reference Exhibit 3.9 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).

3.10
Operating Agreement of NWS-Illinois, LLC (incorporated by reference Exhibit 3.10 to the Company's Registration Statement no. 333-74589 on Form S-4, filed May 13, 1999).

4.1
Indenture relating to the Exchange Notes, dated as of January 25, 1999 among National Wine & Spirits, Inc., the Subsidiary Guarantors and Norwest Bank Minnesota, N.A., as trustee (including cross-reference sheet regarding sections 310 through 318(a) of the Trust Indenture Act) (incorporated by reference Exhibit (4b) to the Company's Registration Statement no. 333-74589 on Form S-4, filed March 17, 1999).

4.2
A/B Exchange Registration Rights Agreement, dated as of January 25, 1999, among National Wine & Spirits, Inc., the Subsidiary Guarantors and the Initial Purchasers (incorporated by reference Exhibit 4(b) to the Company's Registration Statement no. 333-74589 on Form S-4, filed March 17, 1999).

4.3
Form of Exchange Notes (including related Subsidiary Guarantors) (incorporated by reference Exhibit 4(c) to the Company's Registration Statement no. 333-74589 on Form S-4, filed March 17, 1999).

4.4
Guaranty entered into as of January 25, 1999 by all Subsidiary Guarantors (incorporated by reference Exhibit 4(d) to the Company's Registration Statement no. 333-74589 on Form S-4, filed March 17, 1999).



- - 59 -

Exhibit No.
Description

10.1
Purchase Agreement, dated January 20, 1999, among National Wine & Spirits, Inc., the Subsidiary Guarantors and the Initial Purchasers (incorporated by reference to Exhibit 10(a) to the Company's Registration Statement no. 333-74589 on Form S-4, filed March 17, 1999).

10.2
Credit Agreement, dated as of March 31, 2003, among National Wine & Spirits, Inc., LaSalle Bank National Association, National City Bank of Indiana and LaSalle Bank National Association, as agent.

12
Statement regarding computation of ratios.

21
List of subsidiaries (incorporated by reference Exhibit 21 to the Company's Registration Statement no. 333-74589 on Form S-4, filed March 17, 1999).

99.1
Forward - Looking Statements.

99.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

99.3
Letter to SEC regarding representations of Arthur Andersen LLP (incorporated by reference to Exhibit 99.2 to the Company's Annual Report on Form 10-K filed May 24, 2002).



- - 60 -

EX-10.2 3 nwsexhibit102.htm Credit Agreement - Exhibit 10.2

EXHIBIT 10.2

EXECUTION COPY



CREDIT AGREEMENT

dated as of March 31, 2003

among

NATIONAL WINE & SPIRITS, INC.

AND

LASALLE BANK NATIONAL ASSOCIATION
NATIONAL CITY BANK OF INDIANA

and

LASALLE BANK NATIONAL ASSOCIATION, as Agent

Table of Contents


ARTICLE I:    DEFINITIONS 1
  1.1 Certain Definitions 1
  1.2 Other Definitions; Rules of Construction 16

ARTICLE II:    THE COMMITMENTS AND THE ADVANCES 17
  2.1 Commitment of the Banks 17
  2.2 Termination, Reduction and Increases of Commitments 17
  2.3 Fees 18
  2.4 Disbursement of Advances 19
  2.5 Conditions for First Disbursement 23
  2.6 Further Conditions for Disbursements 25
  2.7 Subsequent Elections as to Loans 26
  2.8 Limitation of Requests and Elections 26
  2.9 Minimum Amounts; Limitation on Number of Loans; Etc. 27
  2.10 Borrowing Base Adjustments 27
  2.11 Security and Collateral 27

ARTICLE III:    PAYMENTS AND PREPAYMENTS OF ADVANCES 28
  3.1 Principal Payments and Prepayments 28
  3.2 Interest Payments 28
  3.3 Letter of Credit Reimbursement Payments 28
  3.4 Payment Method 31
  3.5 No Setoff or Deduction 32
  3.6 Payment on Non-Business Day; Payment Computations 32
  3.7 Additional Costs 32
  3.8 Illegality and Impossibility 33
  3.9 Indemnification 34

ARTICLE IV:    REPRESENTATIONS AND WARRANTIES 34
  4.1 Existence and Power 34
  4.2 Authority 35
  4.3 Binding Effect 35
  4.4 Restricted and Unrestricted Subsidiaries 35
  4.5 Litigation 35
  4.6 Financial Condition 36
  4.7 Corporate Restructuring and Future Financial Statements 36
  4.8 Use of Advances 36
  4.9 Consents, Etc. 37
  4.10 Taxes 37
  4.11 Title to Properties 37
  4.12 Borrowing Base 37
  4.13 ERISA 38
  4.14 Disclosure 38
  4.15 No Default 38

Table of Contents
(continued)


ARTICLE V:    COVENANTS 38
  5.1 Affirmative Covenants 38
  5.2 Negative Covenants 44

ARTICLE VI:    DEFAULT 51
  6.1 Events of Default 51
  6.2 Remedies 54

ARTICLE VII:    THE AGENT AND THE BANKS 55
  7.1 Appointment and Authorization 55
  7.2 Agent and Affiliates 55
  7.3 Scope of Agent's Duties 55
  7.4 Reliance by Agent 56
  7.5 Default 56
  7.6 Liability of Agent 56
  7.7 Nonreliance on Agent and Other Banks 57
  7.8 Indemnification 57
  7.9 Successor Agent 58
  7.10 Sharing of Payments 58

ARTICLE VIII:    MISCELLANEOUS 59
  8.1 Amendments, Etc. 59
  8.2 Notices 60
  8.3 No Waiver By Conduct; Remedies Cumulative 61
  8.4 Reliance on and Survival of Various Provisions 61
  8.5 Expenses; Indemnification 61
  8.6 Successors and Assigns 63
  8.7 Counterparts and Telefacsimile Signatures 67
  8.8 Governing Law 67
  8.9 Table of Contents and Headings 67
  8.10 Construction of Certain Provisions 67
  8.11 Integration and Severability 67
  8.12 Independence of Covenants 68
  8.13 Interest Rate Limitation 68
  8.14 Waiver of Jury Trial 68
EXHIBITS

  Exhibit A Borrowing Base Certificate
  Exhibit B Intercompamy Note
  Exhibit C Note
  Exhibit D Pledge Agreement
  Exhibit E Security Agreement
  Exhibit F Guaranty
  Exhibit G Legal Opinion
  Exhibit H Assignment and Acceptance


SCHEDULES

  Schedule 2.5(K) Debt to be Repaid
  Schedule 4.4 Restricted and Unrestricted Subsidiaries
  Schedule 4.5 Litigation
  Schedule 5.2(D) Indebtedness
  Schedule 5.2(E) Liens
  Schedule 5.2(J) Capital Leases
  Schedule 5.2(K) Investments

        THIS CREDIT AGREEMENT, dated as of March 31, 2003 (this “Agreement”), is by and among NATIONAL WINE & SPIRITS, INC., an Indiana corporation (the “Company”), the Banks set forth on the signature pages hereof (collectively, the “Banks” and individually, a “Bank”) and LASALLE BANK NATIONAL ASSOCIATION, as agent for the Banks (in such capacity, the “Agent”).

INTRODUCTION

        The Company desires to obtain a revolving credit facility, including letters of credit, in the aggregate principal amount of $40,000,000, in order to provide funds and other financial accommodations for working capital and its other general corporate purposes, and the Banks are willing to establish such a credit facility in favor of the Company on the terms and conditions herein set forth.

        In consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows:

ARTICLE I:   DEFINITIONS

        1.1     Certain Definitions. As used herein the following terms shall have the following respective meanings:

        “Adjusted Base Rate” shall mean the per annum rate equal to the sum of (a) the Applicable Margin plus (b) the greater of (i) the Base Rate in effect from time to time, and (ii) the sum of one-half of one percent (1/2 of 1%) per annum plus the Federal Funds Rate in effect from time to time; which Adjusted Base Rate shall change simultaneously with any change in such Base Rate or Federal Funds Rate, as the case may be.

        “Adjusted Base Rate Loan” shall mean any Loan which bears interest at the Adjusted Base Rate.

        “Advance” shall mean any Loan and any Letter of Credit Advance.

        “Affiliate”, when used with respect to any Person shall mean any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. For purposes of this definition “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), with respect to any Person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise.

        “Aggregate Commitment” means the aggregate of the Commitments of all the Banks, as may be adjusted from time to time pursuant to the terms hereof. The initial Aggregate Commitment is Forty Million and 00/100 Dollars ($40,000,000).



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        “Applicable Margin” shall mean for any date with respect to any Adjusted Base Rate Loan, Eurodollar Rate Loan, or commitment fee, as the case may be, the applicable percentage set forth in the applicable column of the table below for, in the case of Loans, the Borrowing Base level in effect on such date, based upon the Interest Coverage Ratio as determined as of the end of each fiscal quarter, commencing with the March 31, 2003 fiscal quarter, for the period of the four fiscal quarters then ending, as adjusted on the tenth Business Day following receipt by the Agent of the Company’s financial statements for such fiscal quarter, or fiscal year, as the case may be, and remaining in effect until the next change to be effected pursuant to this definition, provided that if any Event of Default has occurred and is continuing, the Interest Coverage Ratio as of the end of the most recently ended fiscal quarter shall, for the purposes of this definition, be deemed to be less than 2.00:1.00; provided, further that during the period from the Effective Date through and including the tenth Business Day following receipt by the Agent of the Company’s financial statements for the fiscal quarter ending on March 31, 2003, the Applicable Margin shall be determined from Tier IV. In the table below, the abbreviation “bps” means “basis points”. Each basis point is equal to 0.01% per annum.

Applicable Margin (in bps)
80% A/R + 60% Inv. 75% A/R + 55% Inv. 70% A/R + 50% Inv.
Tier Interest Coverage Ratio ABR Eurodollar ABR Eurodollar ABR Eurodollar Commitment Fee
I › 3.50:1.00 175  150  125  35 
II › 3.00 3.50:1.00 25  200  175  150  40 
III › 2.50 3.00:1.00 50  225  25  200  175  40 
IV ‹ 2.00 2.50:1.00 75  250  50  225  25  200  45 
V 2.00:1.00 100  275  75  250  50  225  50 

        “Asset Sale” shall mean (i) the sale, lease, conveyance or other disposition of any assets or rights other than sales of inventory in the ordinary course of business consistent with past practices and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company’s Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1,000,000 or (b) for net proceeds in excess of $1,000,000, but excluding a transfer of assets by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted Subsidiary.



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        “Base Rate” shall mean the per annum rate announced by the Agent from time to time as its “base rate” or its “prime rate” (it being acknowledged that such announced rate may not necessarily be the lowest rate charged by the Agent to any of its customers); which Base Rate shall change simultaneously with any change in such announced rate.

        “Borrowing”shall mean the aggregation of Advances, including each Letter of Credit issuance, of the Banks to be made to the Company, or continuations and conversions of any Loans, made pursuant to Article II on a single date and, in the case of any Loans, for a single Interest Period, which Borrowings may be classified for purposes of this Agreement by reference to the type of Loans or the type of Advance comprising the related Borrowing, e.g., a “Eurodollar Rate Borrowing” is a Borrowing comprised of Eurodollar Rate Loans and a “Letter of Credit Borrowing” is an Advance comprised of a single Letter of Credit.

        “Borrowing Base” shall mean, as of any date, one of the following three levels: (1) the sum of (a) an amount equal to 80% of the value of Eligible Accounts Receivable plus (b) an amount equal to 60% of the value of Eligible Inventory; or (2) the sum of (a) an amount equal to 75% of the value of Eligible Accounts Receivable plus (b) an amount equal to 55% of the value of Eligible Inventory; or (3) the sum of (a) 70% of the value of Eligible Accounts Receivable plus (b) 50% of the value of Eligible Inventory, as selected by the Company as follows: The initial Borrowing Base shall be the level described in (3) above. The Company may change the Borrowing Base level by submitting written notice of its selection of a different Borrowing Base level to the Agent. The change in the Borrowing Base level shall be effective ten (10) Business Days following receipt by the Agent of the request to change. The Company may not change the Borrowing Base level more than four (4) times in any twelve (12) month period, nor more frequently than once in a sixty (60) day period without the written consent of the Agent.

        “Borrowing Base Certificate” for any date shall mean an appropriately completed report as of such date in substantially the form of Exhibit A hereto, certified as true and correct as of such date by a duly authorized officer of the Company.

        “Business Day” shall mean a day other than a Saturday, Sunday or other day on which banks in Chicago, Illinois are not open to the public for carrying on substantially all of their banking functions.

        “Capital Lease” of any Person shall mean any lease which, in accordance with Generally Accepted Accounting Principles, is or should be capitalized on the books of such Person.

        “Capital Stock” shall mean (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership (whether general or limited) or membership interests and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.



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        “Code”shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations thereunder.

        “Commitment”shall mean, with respect to each Bank, the commitment of each such Bank to make Loans and to participate in Letter of Credit Advances made through the Agent pursuant to Section 2.1, in amounts not exceeding in aggregate principal amount outstanding at any time the respective commitment amounts for each such Bank set forth next to the name of each such Bank in the signature pages hereof, as such amounts may be adjusted from time to time pursuant to Section 2.2.

        “Company Shareholder Note Receivable” shall mean any promissory note receivable due to NWS-Indiana on the date of this Agreement from any shareholder of the Company.

        “Consolidated” has the meaning accorded under Generally Accepted Accounting Principles.

        “Consolidated Cash Flow” shall mean, with respect to the Company and its Restricted Subsidiaries for any period, their Consolidated Net Income for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) (A) as to any Person that is an S-Corporation or substantially similar pass through entity for Federal income tax purposes, the amount of all distributions for such period made for the payment of taxes attributable to such Person’s income, and (B) as to any Person that is not an S-Corporation or substantially similar pass-through entity for Federal income tax purposes, any provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) consolidated interest expense of the Company and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers’ acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period other than debt issuance costs) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of the Company and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, plus (v) LIFO expense, plus (vi) prepayment penalties associated with the prepayment of Indebtedness with the proceeds of the Senior Unsecured Debt to the extent any such expense was deducted in computing such Consolidated Net Income, minus (vii) non-cash items increasing such Consolidated Net Income for such period including, without limitation, LIFO income, and capitalized interest on Indebtedness owed to the Company or any Restricted Subsidiary by any owner of its Capital Stock, and minus (viii) an amount equal to any extraordinary gain plus any net gain realized in connection with an Asset Sale to the extent such gains were included in computing such Consolidated Net Income, in each case, on a Consolidated basis and determined in accordance with Generally Accepted Accounting Principles.



- - 4 -

        “Consolidated Net Income” shall mean, with respect to the Company and its Restricted Subsidiaries for any period, the aggregate of their Net Income for such period, on a Consolidated basis, determined in accordance with Generally Accepted Accounting Principles, reduced, as to any Person that is an S-Corporation or substantially similar pass-through entity for Federal income tax purposes, by the amount of distributions for such period made for the payment of taxes attributable to such Person’s income.

        “Contingent Liabilities” of any Person shall mean, as of any date, all obligations of such Person or of others for which such Person is contingently liable, as obligor, guarantor, surety, accommodation party, partner or in any other capacity, or in respect of which obligations such Person assures a creditor against loss or agrees to take any action to prevent any such loss (other than endorsements of negotiable instruments for collection in the ordinary course of business), including without limitation all reimbursement obligations of such Person in respect of any letters of credit, surety bonds or similar obligations (including, without limitation, bankers acceptances) and all obligations of such Person to advance funds to, or to purchase assets, property or services from, any other Person in order to maintain the financial condition of such other Person.

        “Contractual Obligation” shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.

        “Default”shall mean any event or condition which might become an Event of Default with notice or lapse of time or both.

        “Dollars”and “$” shall mean the lawful money of the United States of America.

        “Effective Date” shall mean March 31, 2003.



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        “Eligible Accounts Receivable” shall mean, as of any date, those trade accounts receivable owned by the Company and the Guarantors which are payable in Dollars and in which the Company and the Guarantors have granted to the Agent for the benefit of the Banks and the Agent a first-priority perfected security interest pursuant to the Security Agreements, valued at the face amount thereof less sales, excise or similar taxes and less returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed, but shall not include any such account receivable (a) that is not a bona fide existing obligation created by the sale and actual delivery of inventory, goods or other property or the furnishing of services or other good and sufficient consideration to customers of the Company and the Guarantors in the ordinary course of business, (b) that is more than 45 days past due or, in the case of an account receivable owed to the U.S. Beverage division of NWS-Illinois and in the case of an account receivable owed by a Person located in Illinois, that is more than 60 days past due, (c) that is subject to any dispute, contra-account, defense, offset or counterclaim or any Lien (except those in favor of the Agent for the benefit of the Banks under the Security Documents), or the inventory, goods, property, services or other consideration of which such account receivable constitutes proceeds is subject to any such Lien, (d) in respect of which the inventory, goods, property, services or other consideration have been rejected or the amount is in dispute, (e) that is due from any Affiliate or Subsidiary of the Company, (f) that has been classified by the Company or a Guarantor as doubtful or has otherwise failed to meet established or customary credit standards of the Company or a Guarantor, (g) that is payable by any Person located outside the United States (which shall not be deemed to include any territories of the United States) and is not supported by letters of credit issued to the Agent by commercial banks, and in form and substance, acceptable to the Agent, (h) with respect to which any representation or warranty contained in Section 4.12 is incorrect at any time, (i) that is payable by the United States or any of its departments, agencies or instrumentalities or by any state or other governmental entity, (j) that is payable by any Person as to which 50% or more of the aggregate amount of such accounts receivable payable by such Person to the Company and the Guarantors do not otherwise constitute Eligible Accounts Receivable, (k) that is payable by any Person that is the subject of any proceeding seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up or reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property, or that is not generally paying its debts as they become due or has admitted in writing its inability to pay its debts generally or has made a general assignment for the benefit of creditors, (l) that is evidenced by a promissory note or other instrument, (m) that is subordinate or junior in right or priority of payment to any other obligation or claim, or (n) that for any other reason is at any time reasonably deemed by the Agent to be ineligible.



- - 6 -

        “Eligible Inventory” shall mean, as of any date, that inventory owned by the Company and the Guarantors that constitutes raw materials or finished goods in which the Company and the Guarantors have granted to the Agent for the benefit of the Banks a first-priority perfected security interest pursuant to the Security Agreements, valued at the lower of cost or market on a LIFO basis without deduction for any LIFO reserve, except for bottled water, which is valued on a FIFO basis, but shall not include any such inventory (a) that does not constitute raw materials or finished goods readily salable or usable in the business of the Company and the Guarantors (b) that is located outside the United States (which shall not be deemed to include any territories of the United States), (c) that is subject to, or any accounts or other proceeds resulting from the sale or other disposition thereof could be subject to, any Lien (except those in favor of the Banks and the Agent under the Security Documents or any other Lien that shall have been waived and/or subordinated on terms and conditions reasonably acceptable to the Agent), including any sale on approval or sale or return transaction or any consignment, (d) that is not in the possession of the Company or a Guarantor (unless it is in the possession of a bailee which has issued warehouse receipts therefor that have been delivered to the Agent), (e) that is held for lease or is the subject of any lease, (f) that is subject to any trademark, trade name or licensing arrangement, or any law, rule or regulation, that could limit or impair the ability of the Banks and the Agent to promptly exercise all rights of the Banks and the Agent under the Security Documents, (g) if such inventory is located on premises not owned by the Company or a Guarantor and the landlord or other owner of such premises shall not have waived its distraint, lien and similar rights with respect to such inventory and shall not have agreed to permit the Banks and the Agent to enter such premises pursuant to a waiver and agreement of such Person in favor of and in form and substance acceptable to the Banks and the Agent, (h) with respect to which any insurance proceeds are not payable to the Banks and the Agent as a loss payee or are payable to any loss payee other than the Banks and the Agent or the Company or a Guarantor, (i) with respect to which warehouse receipts have been issued but have not been delivered to the Agent, or (j) that for any other reason is at any time reasonably deemed by the Agent to be ineligible.

        “Environmental Laws” at any date shall mean all provisions of law, statutes, ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders, awards and standards promulgated by the government of the United States of America or any foreign government or by any state, province, municipality or other political subdivision thereof or therein, or by any court, agency, instrumentality, regulatory authority or commission of any of the foregoing concerning the protection of, or regulating the discharge of substances into, the environment.

        “Equity Interests” shall mean Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).

        “ERISA”shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations thereunder.

        “ERISA Affiliate” shall mean, with respect to any Person, any trade or business (whether or not incorporated) which, together with such Person or any Subsidiary of such Person, would be treated as a single employer under Section 414 of the Code and the regulations promulgated thereunder.

        “Eurodollar Business Day” shall mean, with respect to any Eurodollar Rate Loan, a day which is both a Business Day and a day on which dealings in Dollar deposits are carried out in the London interbank market.

        “Eurodollar Interest Period” shall mean, with respect to any Eurodollar Rate Loan, the period commencing on the day such Eurodollar Rate Loan is made or converted to a Eurodollar Rate Loan and ending on the day which is one, two or three months thereafter, as the Company may elect under Section 2.4 or 2.7, and each subsequent period commencing on the last day of the immediately preceding Eurodollar Interest Period and ending on the day which is one, two or three months thereafter, as the Company may elect under Section 2.4 or 2.7, provided, however, that (a) any Eurodollar Interest Period which commences on the last Eurodollar Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Eurodollar Business Day of the appropriate subsequent calendar month, (b) each Eurodollar Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall end on the next succeeding Eurodollar Business Day or, if such next succeeding Eurodollar Business Day falls in the next succeeding calendar month, on the next preceding Eurodollar Business Day, and (c) no Eurodollar Interest Period which would end after the Termination Date shall be permitted.



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        “Eurodollar Rate” shall mean, with respect to any Eurodollar Rate Loan and the related Eurodollar Interest Period, the per annum rate that is equal to the sum of:

 
         (a)        the Applicable Margin, plus

 
         (b)        the rate per annum obtained by dividing (i) the per annum rate of interest at which deposits in Dollars in an amount comparable to the principal balance of such Eurodollar Rate Loan and for a period equal to the relevant Eurodollar Interest Period are offered in the London Interbank Eurodollar market at approximately 11:00 a.m. (London time) two Eurodollar Business Days prior to the commencement of such Eurodollar Interest Period, as displayed in Bloomberg Financial Markets system, or other authoritative source elected by the Agent in its sole discretion by (ii) a number determined by subtracting from 1.00 the maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System (or any successor agency thereto) for Eurocurrency liabilities, such rate to remain fixed for such Eurodollar Interest Period;

all as conclusively determined by the Agent, absent manifest error, and such sum to be rounded up, if necessary, to the nearest whole multiple of one one-hundredth of one percent (1/100 of 1%).

        “Eurodollar Rate Loan” shall mean any Loan which bears interest at the Eurodollar Rate.

        “Event of Default” shall mean any of the events or conditions described in Section 6.1.

        “Federal Funds Rate” shall mean the per annum rate that is equal to the average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published by the Federal Reserve Bank of New York for such day, or, if such rate is not so published for any day, the average of the quotations for such rates received by the Agent from three federal funds brokers of recognized standing selected by the Agent in its discretion; all as conclusively determined by the Agent, such sum to be rounded up, if necessary, to the nearest whole multiple of one one-hundredth of one percent (1/100 of 1%), which Federal Funds Rate shall change simultaneously with any change in such published or quoted rates.

        “Funded Debt” as of any date, shall mean without duplication all interest-bearing Indebtedness including but not limited to the capitalized portion of all Capital Lease obligations, all as determined for the Company and its Restricted Subsidiaries on a Consolidated basis.

        “Funded Debt Coverage Ratio” shall mean the ratio of Funded Debt as of the end of any fiscal quarter of the Company to Consolidated Cash Flow for the period of the four fiscal quarters ending at the end of such fiscal quarter. In the event that a Restricted Subsidiary shall have been acquired during such period, the Consolidated Cash Flow used for this ratio shall include the results of operations of such Restricted Subsidiary for such period.

        “Generally Accepted Accounting Principles” shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, as in effect from time to time.

        “Glazer’s Transactions” means the transactions described in the letter of intend dated January 30, 2003 between the Company, NWS-Illinois, LLC and Glazier’s Wholesale Drug Company, Inc., a copy of which letter has been delivered to the Agent and the Banks prior to the Effective Date.

        “Guaranty”shall mean that certain Irrevocable Guaranty Agreement (and any and all supplements thereto) executed from time to time by each Guarantor, in favor of the Agent for the benefit of the Agent and the Banks, in substantially the form of Exhibit F attached hereto, as amended, restated, supplemented or otherwise modified from time to time.

        “Guarantors”shall mean NWS-Indiana, NWS-Illinois, NWS-Illinois, LLC, NWS Michigan, Inc. United States Beverage, L.L.C., National Wine & Spirits, LLC, and R. M. Gilligan, Inc., and each Person that enters into a Guaranty pursuant to Section 5.1(G)(ii).

        “Hazardous Materials” includes, without limitation, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances or related materials defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901, et seq.) and in the regulations adopted and publications promulgated pursuant thereto, or any other federal, state or local government law, ordinance, rule or regulation.



- - 8 -

        “Hedging Obligations” shall mean, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates.

        “Indebtedness” of any Person shall mean, as of any date, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person as lessee under any Capital Lease, (c) all obligations which are secured by any Lien existing on any asset or property of such Person whether or not the obligation secured thereby shall have been assumed by such Person (to the extent of such Lien if such obligation is not assumed), (d) all obligations of such Person for the unpaid purchase price for goods, property or services acquired by such Person, except for trade accounts payable arising in the ordinary course of business that are not aged more than 45 days after the invoice date, (e) all obligations of such Person to purchase goods, property or services where payment therefor is required regardless of whether delivery of such goods or property or the performance of such services is ever made or tendered (generally referred to as “take or pay contracts”), (f) all reimbursement obligations of such Person in respect of letters of credit and (g) all Off-Balance Sheet Liabilities of such Person.

        “Intercompany Note” shall mean the promissory note of a Subsidiary evidencing Indebtedness of such Subsidiary to the Company, in substantially the form of Exhibit B hereto and “Intercompany Notes” shall mean all such promissory notes of all of the Restricted Subsidiaries, provided that the aggregate principal amount of Intercompany Notes at any time outstanding shall not exceed the aggregate principal amount of the Advances then outstanding.

        “Interest Coverage Ratio” shall mean with respect to the Company and its Restricted Subsidiaries for any period, the ratio of their Consolidated Cash Flow for such period to their Interest Expense for such period. In addition, for purposes of making the computation referred to above, (i) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with Generally Accepted Accounting Principles, and to operations or businesses disposed of prior to the date on which the event for which the calculation of the Interest Coverage Ratio is made (the “Calculation Date”), shall be excluded, and (ii) the Interest Expense attributable to discontinued operations, as determined in accordance with Generally Accepted Accounting Principles, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Interest Expense will not be obligations of the Company or any of its Restricted Subsidiaries following the Calculation Date.

        “Interest Expense” shall mean, with respect to the Company and its Restricted Subsidiaries for any period, the sum, without duplication, of (i) their Consolidated interest expense for such period, whether paid or accrued (including, without limitation, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers’ acceptance financings, and net payments (if any) pursuant to Hedging Obligations, but excluding interest accrued for such period on any NWSI Shareholder Subordinated Note net of the amount of interest received in cash for such period with respect to any Company Shareholder Note Receivable and (ii) their Consolidated interest expense that was capitalized during such period, in each case on a Consolidated basis and in accordance with Generally Accepted Accounting Principles.



- - 9 -

        “Interest Payment Date” shall mean (a) with respect to any Eurodollar Rate Loan, the last day of each Interest Period with respect to such Eurodollar Rate Loan and (b) in all other cases, the last Business Day of each month occurring after the date hereof, commencing with the first such Business Day occurring after the date of this Agreement.

        “Interest Period” shall mean any Eurodollar Interest Period.

        “Investments”of any Person shall mean the purchase or other acquisition of any Capital Stock of or debt securities of or any evidences of Indebtedness of, any other Person, or the making of any loan or the advance of any of its funds or property or the making of any other extension of credit to or the making of any investment or the acquisition of any interest whatsoever in, any other Person, or the incurrence of any Contingent Liability.

        “Letter of Credit” shall mean a standby or commercial letter of credit having a stated expiry date or a date upon which the draft must be reimbursed not later than twelve months after the date of issuance and not later than the fifth Business Day before the Termination Date issued by the Agent on behalf of the Banks for the account of the Company or one of its Restricted Subsidiaries under an application and related documentation acceptable to the Agent requiring, among other things, immediate reimbursement by the Company to the Agent in respect of all drafts or other demand for payment honored thereunder and all expenses paid or incurred by the Agent relative thereto.

        “Letter of Credit Advance” shall mean any issuance of a Letter of Credit under Section 2.4 made pursuant to Section 2.1 in which each Bank acquires a pro rata risk participation pursuant to Section 2.4(D).

        “Letter of Credit Documents” shall have the meaning ascribed thereto in Section 3.3(B).

        “Lien”shall mean any pledge, assignment, hypothecation, mortgage, security interest, deposit arrangement, option, conditional sale or title retaining contract, sale and leaseback transaction, lessor’s or lessee’s interest under any lease, subordination of any claim or right, or any other type of lien, charge, encumbrance, preferential arrangement or other claim or right.



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        “Loan”shall mean any borrowing under Section 2.4 evidenced by the Notes and made pursuant to Section 2.1. Any such Loan or portion thereof may also be denominated as an Adjusted Base Rate Loan or a Eurodollar Rate Loan and such Loans are referred to herein as “types” of Loans.

        “Loan Documents” shall mean, collectively, this Agreement, the Notes, the Security Documents and all agreements, instruments and documents executed pursuant thereto at any time.

        “Material Adverse Effect” shall mean a material adverse effect on (a) the business, assets, operations or condition (financial or otherwise) of the Company and its Restricted Subsidiaries on a consolidated basis, (b) the ability of the Company or any Guarantor to perform its obligations under any Loan Document, (c) the validity of enforceability of any Loan Document or the rights or remedies of the Agent or the Banks under any Loan Document.

        “Multiemployer Plan” shall mean any “multiemployer plan” as defined in Section 4001(a)(3) of ERISA or Section 414(f) of the Code.

        “Net Income” shall mean, for any period, the Consolidated net income (or loss) of the Company and its Restricted Subsidiaries for such period taken as a single accounting period, determined in accordance with Generally Accepted Accounting Principles; provided that in determining Consolidated Net Income there shall be excluded, without duplication: (a) the income of any Person in which any Person other than the Company or a Restricted Subsidiary of the Company has a joint interest or partnership interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or each Restricted Subsidiary by such Person during such period, (b) the proceeds of any insurance policy, (c) gains from the sale, exchange, transfer or other disposition of property or assets not in the ordinary course of business of the Company and its Restricted Subsidiaries and related tax effects in accordance with Generally Accepted Accounting Principles, and (d) any other extraordinary or non-recurring gains of the Company or any of its Restricted Subsidiaries or other income which is not from the continuing operations of the Company and its Restricted Subsidiaries, and related tax effects, in accordance with Generally Accepted Accounting Principles.

        “Non-Recourse Debt” shall mean Indebtedness (i) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor or otherwise), or (c) constitutes the lender and (ii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries.

        “Note”shall mean any promissory note of the Company evidencing the Loans, in substantially the form of Exhibit C hereto as amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement therefor.



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        “NWS-Illinois” shall mean NWS, Inc., an Illinois corporation.

        “NWS-Indiana” shall mean National Wine & Spirits Corporation, an Indiana corporation.

        “NWSI Shareholder Subordinated Note” shall mean any note payable to any shareholder of the Company by NWS-Illinois, NWS-Illinois, LLC or the Company that is outstanding on the date of this Agreement and (i) matures on or after January 15, 2009, (ii) does not require payment of cash interest or redemption prior to maturity, and (iii) that is Subordinated Debt.

        “Off-Balance Sheet Liability” of a Person means (i) any repurchase obligation or liability of such Person or any of its Subsidiaries with respect to accounts or notes receivable sold by such Person or any of its Subsidiaries (calculated to include the unrecovered investment of purchasers or transferees of accounts or any other obligation of such Person or such transferor to purchasers/transferees of interests in accounts or notes receivable or the agent for such purchasers/transferees), (ii) any liability under any sale and leaseback transaction which is not a Capital Lease, (iii) any liability under any financing lease or so-called “synthetic lease” or “tax ownership operating lease” transaction entered into by such Person, or (iv) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the consolidated balance sheets of such Person, but excluding from this definition all operating leases.

        “Overdue Rate” shall mean (a) in respect of principal of Adjusted Base Rate Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Adjusted Base Rate, (b) in respect of principal of Eurodollar Rate Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the per annum rate in effect thereon until the end of the then current Interest Period for such Loan and, thereafter, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Adjusted Base Rate, and (c) in respect of other amounts payable by the Company hereunder (other than interest), a per annum rate that is equal to the sum of three percent (3%) per annum plus the Adjusted Base Rate.

        “PBGC” shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.

        “Permitted Liens” shall mean Liens permitted by Section 5.2(E) hereof.

        “Person” shall include an individual, a corporation, an association, a partnership, a trust or estate, a joint stock company, a limited liability company, an unincorporated organization, a joint venture, a trade or business (whether or not incorporated), a government (foreign or domestic) and any agency or political subdivision thereof, or any other entity.



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        “Plan” shall mean, with respect to any Person, any pension plan (including a Multiemployer Plan) subject to Title IV of ERISA or to the minimum funding standards of Section 412 of the Code which has been established or maintained by such Person, any Subsidiary of such Person or any ERISA Affiliate, or by any other Person if such Person, any Subsidiary of such Person or any ERISA Affiliate could have liability with respect to such pension plan.

        “Pledge Agreement” shall mean each pledge agreement entered into by the Company in favor of the Agent for the benefit of the Banks pursuant to this Agreement in substantially the form of Exhibit D hereto, as amended or modified from time to time.

        “Prohibited Transaction” shall mean any transaction involving any Plan which is proscribed by Section 406 of ERISA or Section 4975 of the Code.

        “Reportable Event” shall mean a reportable event as described in Section 4043(b) of ERISA including those events as to which the thirty (30) day notice period is waived under Part 2615 of the regulations promulgated by the PBGC under ERISA.

        “Required Banks” shall mean Banks holding not less than (i) fifty-one percent (51%) of the aggregate principal amount of the Advances then outstanding or (ii) fifty-one percent (51%) of the Aggregate Commitment if no Advances are then outstanding; provided that if any Bank shall hold fifty-one percent (51%) or more of the aggregate principal amount of the Advances (or if no Advances are then outstanding, fifty-one percent (51%) or more of the Aggregate Commitment), “Required Banks” shall mean such Bank plus one additional Bank.

        “Requirement of Law” shall mean as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

        “Restricted Payment” shall mean with respect to the Company or any Restricted Subsidiary, any dividend, payment or other distribution in respect of any class of its Capital Stock or any dividend, payment or distribution in connection with the redemption, purchase, retirement or other acquisition, directly or indirectly, of any shares of its Capital Stock other than such dividends, payments or other distributions to the extent payable solely in shares of the Capital Stock of the Company or to the extent payable to the Company by a Restricted Subsidiary of the Company.

        “Restricted Subsidiary” of a Person shall mean any Subsidiary of the referent Person that is not an Unrestricted Subsidiary.

        “Security Agreement” shall mean each security agreement entered into by the Company or any Guarantor for the benefit of the Agent and the Banks pursuant to this Agreement in substantially the form of Exhibit E hereto, as amended or modified from time to time.



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        “Security Documents” shall mean, collectively, the Pledge Agreement, the Security Agreements, and the Guaranty and all other related agreements and documents, including financing statements and similar documents, delivered pursuant to this Agreement or otherwise entered into by any Person to secure the Advances.

        “Senior Unsecured Debt” shall mean the senior unsecured notes due January 15, 2009 issued by the Company on January 25, 1999 in the original aggregate principal amount of $110,000,000.

        “Subordinated Debt” of any Person shall mean, as of any date, that Indebtedness of such Person for borrowed money which is expressly subordinate and junior in right and priority of payment to the Advances and other Indebtedness of such Person to the Banks in manner and by agreement satisfactory in form and substance to the Agent including without limitation maturities, covenants, defaults, rates and fees acceptable to the Agent.

        “Subsidiary”of any Person shall mean any other Person (whether now existing or hereafter organized or acquired) in which (other than directors qualifying shares required by law) at least a majority of the securities or other ownership interests of each class having ordinary voting power or analogous right (other than securities or other ownership interests which have such power or right only by reason of the happening of a contingency), at the time as of which any determination is being made, are owned, beneficially and of record, by such Person or by one or more of the other Restricted Subsidiaries of such Person or by any combination thereof. Unless otherwise specified, reference to “Subsidiary” shall mean a Subsidiary of the Company.

        “Termination Date” shall mean the earlier to occur of (a) April 1, 2008 and (b) the date on which the Commitments shall be terminated pursuant to Section 2.2 or 6.2.

        “Unrestricted Subsidiary” shall mean (i) any Subsidiary of the Company (other than the Guarantors or any successor to any of them) that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of such Board; but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person’s financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Agent by filing with the Agent a certified copy of the resolution of such Board giving effect to such designation and an officers’ certificate certifying that such designation complied with the foregoing conditions and did not violate any covenant of this Agreement. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the indenture with respect to the Senior Unsecured Debt and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under any covenant herein, the Company shall be in default of such covenant). The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant contained in this Agreement, (ii) no Default or Event of Default would be in existence following such designation.



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        “USB-LLC” means United States Beverage, L.L.C., a Illinois limited liability company and a wholly-owned indirect Subsidiary of the Company.

        1.2     Other Definitions; Rules of Construction. As used herein, the terms “Agent”, “Banks”, “Company” and “this Agreement” shall have the respective meanings ascribed thereto in the introductory paragraph of this Agreement, and the term “Guaranteed Obligations” shall have the meaning ascribed thereto in the Guaranty. Such terms, together with the other terms defined in Section 1.1, shall include both the singular and the plural forms thereof and shall be construed accordingly. All computations required hereunder and all financial terms used herein shall be made or construed in accordance with Generally Accepted Accounting Principles unless such principles are inconsistent with the express requirements of this Agreement; provided that, if the Company notifies the Agent that the Company wishes to amend any covenant in Article V to eliminate the effect of any change in Generally Accepted Accounting Principles in the operation of such covenant (or if the Agent notifies the Company that the Required Banks wish to amend Article V for such purpose), then the Company’s compliance with such covenant shall be determined on the basis of Generally Accepted Accounting Principles in effect immediately before the relevant change in Generally Accepted Accounting Principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. Use of the terms “herein”, “hereof”, and “hereunder” shall be deemed references to this Agreement in its entirety and not to the Section or clause in which such term appears. References to “Sections” and “subsections” shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. As used herein, the “knowledge” or “best knowledge” of the Company or any Guarantor, or similar phrases, shall mean the actual knowledge of James E. LaCrosse, Patrick A. Trefun or John J. Baker, and knowledge that any such Person would reasonably be expected to have obtained in the ordinary course exercise of his or her duties and responsibilities regarding such matter.



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ARTICLE II:    THE COMMITMENTS AND THE ADVANCES

        2.1     Commitment of the Banks.

        (A)         Advances. Each Bank agrees, for itself only, subject to the terms and conditions of this Agreement, to make Loans to the Company pursuant to Section 2.4 and Section 3.3 and to participate in Letter of Credit Advances to the Company pursuant to Section 2.4, from time to time from and including the Effective Date to but excluding the Termination Date, not to exceed in aggregate principal amount at any time outstanding the amount determined pursuant to Section 2.1(B).

        (B)         Limitation on Amount of Advances. Notwithstanding anything in this Agreement to the contrary, (i) the aggregate principal amount of the Advances made by any Bank at any time outstanding shall not exceed the amount of its respective Commitment as of the date any such Advance is made, provided, however, that the aggregate principal amount of Letter of Credit Advances outstanding at any time shall not exceed $5,000,000, and (ii) the aggregate principal amount of all Advances at any time outstanding shall not exceed the amount of the Borrowing Base as of the date of the Borrowing Base Certificate dated or next preceding the date any such Advance is made.

        2.2         Termination, Reduction and Increases of Commitments.

        (A)         The Company shall have the right to terminate or reduce the Aggregate Commitment at any time and from time to time at its option, provided that (i) the Company shall give notice of such termination or reduction to the Agent (with sufficient executed copies for each Bank) specifying the amount and effective date thereof, (ii) each partial reduction of the Aggregate Commitment shall be in a minimum amount of $5,000,000 and in an integral multiple of $1,000,000 and shall reduce the Commitments of all of the Banks proportionately in accordance with the respective commitment amounts for each such Bank set forth in the signature pages hereof next to name of each such Bank, (iii) no such termination or reduction shall be permitted with respect to any portion of the Aggregate Commitment as to which a request for an Advance pursuant to Section 2.4 is then pending and (iv) the Aggregate Commitment may not be terminated if any Advances are then outstanding and may not be reduced below the principal amount of Advances then outstanding. The Aggregate Commitment or any portion thereof terminated or reduced pursuant to this Section 2.2, whether optional or mandatory, may not be reinstated.

        (B)         For purposes of this Agreement, a Letter of Credit Advance (i) shall be deemed outstanding in an amount equal to the sum of the maximum amount available to be drawn under the related Letter of Credit on or after the date of determination and on or before the stated expiry date thereof plus the amount of any draws under such Letter of Credit that have not been reimbursed as provided in Section 3.3 and (ii) shall be deemed outstanding at all times on and before such stated expiry date or such earlier date on which all amounts available to be drawn under such Letter of Credit have been fully drawn, and thereafter until all related reimbursement obligations have been paid pursuant to Section 3.3. As provided in Section 3.3, upon each payment made by the Agent in respect of any draft or other demand for payment under any Letter of Credit the amount of any Letter of Credit Advance outstanding immediately prior to such payment shall be automatically reduced by the amount of each Loan deemed advanced in respect of the related reimbursement obligation of the Company.



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         (C)         At any time prior to the Termination Date, the Company may, on the terms set forth below, request that the Aggregate Commitment hereunder be increased to an amount not to exceed $60,000,000; provided, however, that (i) each such request shall be in a minimum amount of at least $10,000,000 and in increments of $5,000,000 in excess thereof, (ii) an increase in the Aggregate Commitment hereunder may only be made at a time when no Default or Unmatured Default shall have occurred and be continuing, and (iii) no Bank’s Commitment shall be increased under this Section 2.2(C) without its consent. In the event of such a requested increase in the Aggregate Commitment, any financial institution which the Company and the Agent invite to become a Bank or to increase its Commitment may set the amount of its Commitment at a level agreed to by the Company and the Agent. In the event that the Company and one or more of the Banks (or other financial institutions) shall agree upon such an increase in the Aggregate Commitment (i) the Company, the Agent and each Bank or other financial institution increasing its Commitment or extending a new Commitment shall enter into an amendment to this Agreement setting forth the amounts of the Commitments, as so increased, providing that the financial institutions extending new Commitments shall be Banks for all purposes under this Agreement, and setting forth such additional provisions as the Agent shall consider reasonably appropriate and (ii) the Company shall furnish a new Note to each financial institution that is extending a new Commitment or increasing its Commitment. No such amendment shall require the approval or consent of any Bank whose Commitment is not being increased. Upon the execution and delivery of such amendment as provided above, and upon satisfaction of such other conditions as the Agent may reasonably specify upon the request of the financial institutions that are extending new Commitments (including, without limitation, the Agent administering the reallocation of any outstanding Loans ratably among the Banks after giving effect to each such increase in the Aggregate Commitment, and the delivery of certificates, evidence of corporate authority and legal opinions on behalf of the Company), this Agreement shall be deemed to be amended accordingly.

        2.3         Fees.

         (A)         The Company agrees to pay to each Bank a commitment fee on the daily average unused amount of its respective Commitment, for the period from the Effective Date to but excluding the Termination Date, at a rate equal to forty-five one-hundredths of one percent (0.45%) per annum during the period ending on the tenth Business Day following the receipt by the Agent of the Company’s financial statements for the fiscal quarter ending on March 31, 2003, and thereafter at a per annum rate equal to the Applicable Margin. Accrued commitment fees shall be payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing on the first such Business Day occurring after the Effective Date, and on the Termination Date.



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         (B)         The Company agrees to pay ratably to the Banks a facility fee in the amount of $135,000. Such facility fee shall be payable on or prior to the Effective Date.

         (C)         On or before the date of issuance of any Letter of Credit, the Company agrees (i) to pay to the Banks in the case of a standby Letter of Credit a fee computed at a per annum rate equal to the Applicable Margin for Eurodollar Rate Loans in effect at the time of issuance of such Letter of Credit for the period from and including such date to and including the stated expiry date of such Letter of Credit, and in the case of a commercial Letter of Credit equal to one-half of one percent (1/2 of 1%), in both cases of the maximum amount available to be drawn under such Letter of Credit, and (ii) to pay an additional fee to the Agent for its own account computed at a per annum rate equal to one-quarter of one percent (1/4 of 1%) on such maximum amount. Such fees are nonrefundable and the Company shall not be entitled to any rebate of any portion thereof if such Letter of Credit does not remain outstanding through its stated expiry date or for any other reason. The Company further agrees to pay to the Agent, on demand, such other customary administrative fees, charges and expenses of the Agent in respect of the issuance, negotiation, acceptance, amendment, transfer and payment of such Letter of Credit or otherwise payable pursuant to the application and related documentation under which such Letter of Credit is issued.

         (D)         The Company agrees to pay to the Agent an agency fee for its services as Agent under this Agreement in such amounts as may from time to time be agreed upon by the Company and the Agent.

        2.4         Disbursement of Advances.

         (A)         The Company shall give the Agent telephonic notice of its request for each Advance not later than 12:00 noon Chicago time (i) three Eurodollar Business Days prior to the date such Advance is requested to be made if such Advance is to be made as a Eurodollar Rate Loan, (ii) five Business Days prior to the date any Letter of Credit Advance is requested to be made, and (iii) on the same Business Day that such Advance is requested to be made in all other cases, which notice shall specify whether a Eurodollar Rate Loan or Adjusted Base Rate Loan or a Letter of Credit Advance is requested and, in the case of each requested Eurodollar Rate Loan, the Interest Period to be initially applicable to such Loan and, in the case of each Letter of Credit Advance, such information as may be necessary for the issuance thereof by the Agent. The Agent, not later than the date of any requested Adjusted Base Rate Loan and not later than the Business Day next succeeding the day such notice is given with respect to a Letter of Credit Advance and not later than the day such notice is given with respect to a Eurodollar Rate Loan, shall provide notice of such requested Advance to each Bank, provided that in the case of Adjusted Base Rate Loans where the Agent elects to settle with the Banks weekly instead of at the time of each such Loan, the Agent shall provide notice of such Loans on the weekly settlement date next following the dates on which they are requested. Subject to the terms and conditions of this Agreement, the proceeds of each such requested Loan shall be made available to the Company by depositing the proceeds thereof in immediately available funds, in an account maintained and designated by the Company at the principal office of the Agent. Subject to the terms and conditions of this Agreement, the Agent shall, on the date any Letter of Credit Advance is requested to be made, issue the related Letter of Credit on behalf of the Banks for the account of the Company. Notwithstanding anything herein to the contrary, the Agent may decline to issue any requested Letter of Credit on the basis that the beneficiary, the purpose of issuance or the terms or the conditions of drawing are unacceptable to it in its reasonable discretion.



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         (B)         Each Bank, on the date any Borrowing in the form of a Loan is requested to be made, or on the date the Agent requests such Bank to make available its share of such Borrowing pursuant to Section 2.4(C), shall make its pro rata share of such Borrowing available in immediately available, freely transferable, cleared funds for disbursement to the Company or application by the Agent to a reduction of its Loans made pursuant to Section 2.4(C), pursuant to the terms and conditions of this Agreement at the principal office of the Agent. Unless the Agent shall have received notice from any Bank prior to the date such Borrowing is requested to be made under this Section 2.4 that such Bank will not make available to the Agent such Bank’s pro rata portion of such Borrowing, the Agent may assume that such Bank has made such portion available to the Agent on the date such Borrowing is requested to be made in accordance with this Section 2.4. If and to the extent such Bank shall not have so made such pro rata portion available to the Agent, the Agent may (but shall not be obligated to) make such amount available to the Company, and such Bank and the Company severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount is made available to the Company by the Agent until the date such amount is repaid to the Agent, at the Federal Funds Rate. If such Bank shall pay such amount to the Agent together with interest, such amount so paid shall constitute a Loan by such Bank as a part of such the related Borrowing for purposes of this Agreement. The failure of any Bank to make its pro rata portion of any such Borrowing available to the Agent shall not relieve any other Bank of its obligations to make available its pro rata portion of such Borrowing on the date such Borrowing is requested to be made, but no Bank shall be responsible for failure of any other Bank to make such pro rata portion available to the Agent on the date of any such Borrowing.



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         (C)         Administrative Convenience Loans.

         (i)         With respect to any Adjusted Base Rate Loan requested on a day other than the day chosen by the Agent for weekly settlements with the Banks, the Agent may elect, for administrative convenience, to make such requested Loan itself and to defer until the next following weekly settlement date notifying the Banks of such requested Loan. Each Bank’s Commitment shall be deemed utilized by an amount equal to such Bank’s pro rata share (based on such Bank’s Commitment) of each such Loan made solely by the Agent for purposes of determining the amount of Advances required to be made by such Bank, but no Bank’s Commitment, other than the Agent’s, shall be deemed utilized for purposes of determining commitment fees under Section 2.3(A). Each Bank shall be absolutely and unconditionally obligated to fund its pro rata share (based on such Bank’s Commitment) of any such Loan or, if applicable, purchase a participating interest in any such Loan pursuant to Section 2.4(C)(ii) and such obligation shall not be affected by any circumstance, including, without limitation, (A) any set-off, counterclaim, recoupment, defense or other right which such Bank has or may have against the Agent or anyone else for any reason whatsoever; (B) the occurrence or continuance of a Default or an Event of Default, subject to Section 2.4(C)(ii); (C) any adverse change in the condition (financial or otherwise) of the Company or any of its Restricted Subsidiaries; (D) any breach of this Agreement by the Company or any of the Guarantors or any other Bank; or (E) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing (including without limitation the Company’s failure to satisfy any conditions contained in Article II or any other provision of this Agreement).

         (ii)         If, for any reason (including without limitation as a result of the occurrence of an Event of Default with respect to the Company pursuant to Section 6.1(H)), Loans may not be made by the Banks as described in Section 2.4(C)(i), then (A) the Company agrees that each Loan not paid pursuant to Section 2.4(C)(i) shall bear interest, payable on demand by the Agent, at the Overdue Rate, and (B) effective on the date each such Loan would otherwise have been made by it, each Bank severally agrees that it shall unconditionally and irrevocably, without regard to the occurrence of any Default or Event of Default, in lieu of deemed disbursement of loans, to the extent of such Bank’s Commitment, purchase a participating interest in each such Loan by paying its participation percentage thereof. Each Bank will immediately transfer to the Agent, in same day funds, the amount of its participation. Each Bank shall share on a pro rata basis (calculated by reference to its Commitment) in any interest which accrues thereon and in all repayments thereof. If and to the extent that any Bank shall not have so made the amount of such participating interest available to the Agent, such Bank and the Company severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by the Agent until the date such amount is paid to the Agent, at (x) in the case of the Company, the interest rate specified above and (y) in the case of such Bank, the Federal Funds Rate.



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         (D)         All Loans made under this Section 2.4 shall be evidenced by the Notes, and all such Loans shall be due and payable and bear interest as provided in Article III. Each Bank is hereby authorized by the Company to record on the schedule attached to the Notes, or in its books and records, the date, amount and type of each Loan and the duration of the related Interest Period (if applicable), the amount of each payment or prepayment of principal thereon, and the other information provided for on such schedule, which schedule or books and records, as the case may be, shall constitute prima facie evidence of the information so recorded, provided, however, that failure of any Bank to record, or any error in recording, any such information shall not relieve the Company of its obligation to repay the outstanding principal amount of the Loans, all accrued interest thereon and other amounts payable with respect thereto in accordance with the terms of the Notes and this Agreement. Subject to the terms and conditions of this Agreement, the Company may borrow Loans under this Section 2.4 and under Section 3.3, prepay Loans pursuant to Section 3.1 and reborrow Loans under this Section 2.4 and under Section 3.3.

         (E)         Nothing in this Agreement shall be construed to require or authorize any Bank to issue any Letter of Credit, it being recognized that the Agent has the sole obligation under this Agreement to issue Letters of Credit on behalf of the Banks, and the Commitment of each Bank with respect to Letter of Credit Advances is expressly conditioned upon the Agent’s performance of such obligations. Upon such issuance by the Agent, each Bank shall automatically acquire a pro rata risk participation interest in such Letter of Credit Advance based on the amount of its respective Commitment. If the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit, the Agent shall provide notice thereof to each Bank on the date such draft or demand is honored unless the Company shall have satisfied its reimbursement obligation under Section 3.3 by payment to the Agent on such date. Each Bank, on such date, shall make its pro rata share of the amount paid by the Agent available in immediately available funds at the principal office of the Agent for the account of the Agent. If and to the extent such Bank shall not have made such pro rata portion available to the Agent, such Bank and the Company severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount was paid by the Agent until such amount is so made available to the Agent for its own account at a per annum rate equal to the Federal Funds Rate. If such Bank shall pay such amount to the Agent together with such interest, such amount so paid shall constitute a Loan by such Bank as part of the Borrowing disbursed in respect of the reimbursement obligation of the Company under Section 3.3 for purposes of this Agreement. The failure of any Bank to make its pro rata portion of any such amount paid by the Agent available to the Agent shall not relieve any other Bank of its obligation to make available its pro rata portion of such amount, but no Bank shall be responsible for failure of any other Bank to make such pro rata portion available to the Agent.



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        2.5         Conditions for First Disbursement. The obligation of the Banks to make the first Advance hereunder is subject to receipt by each Bank and the Agent of the following documents and completion of the following matters, in form and substance satisfactory to each Bank and the Agent:

 
         (A)         Charter Documents. Certificates of recent date of the appropriate authority or official of the Company’s and each Guarantor’s respective state of incorporation or organization (listing all charter documents of the Company and each Guarantor, respectively, on file in that office if such listing is available) and certifying as to the good standing and corporate existence of the Company and each Guarantor that is a corporation, and as to the existence and status of each Guarantor that is a limited liability company, together with copies of such charter documents of the Company and each Guarantor, certified as of a recent date by such authority or official and certified as true and correct as of the Effective Date by a duly authorized officer of the Company;

 
         (B)         By-Laws and Corporate Authorizations. Copies of the by-laws or operating agreement of the Company and each Guarantor together with all authorizing resolutions and evidence of other corporate or limited liability company action taken by the Company and each Guarantor to authorize the execution, delivery and performance by the Company and each Guarantor of this Agreement, the Notes and the Security Documents to which the Company and such Guarantor, respectively, is a party and the consummation by the Company and such Guarantor, respectively, of the transactions contemplated hereby, certified as true and correct as of the Effective Date by a duly authorized officer of the Company and each Guarantor, respectively;

 
         (C)         Incumbency Certificate. Certificates of incumbency of the Company and each Guarantor containing, and attesting to the genuineness of, the signatures of those officers, members or managers authorized to act on behalf of the Company and such Guarantor in connection with this Agreement, the Notes and the Security Documents to which the Company or such Guarantor is a party and the consummation by the Company and such Guarantor of the transactions contemplated hereby, certified as true and correct as of the Effective Date by a duly authorized officer of the Company and each Guarantor;

 
         (D)         This Agreement and Notes. This Agreement duly executed on behalf of each party hereto and the Notes duly executed on behalf of the Company for each Bank;

 
         (E)         Security Documents. The Security Documents duly executed on behalf of the Company and each Guarantor, as the case may be, granting to the Banks and the Agent the collateral and security intended to be provided pursuant to Section 2.11, together with:



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         (i)         Recording, Filing, Etc. Evidence of the recordation, filing and other action (including payment of any applicable taxes or fees) in such jurisdictions as the Agent may deem necessary or appropriate with respect to the Security Documents, including the filing of financing statements and similar documents which the Agent may deem necessary or appropriate to create, preserve or perfect the liens, security interests and other rights intended to be granted to the Banks or the Agent thereunder, together with Uniform Commercial Code record searches in such offices as the Agent may request;

 
         (ii)         Leased Property; Landlord Waivers. A schedule setting forth all real property leased by the Company and each Guarantor in which inventory is located, together with copies of the related leases, certified as true and correct as of the Effective Date by a duly authorized officer of the Company, and an agreement of each landlord under such leases, in form and substance acceptable to the Banks and the Agent, waiving its distraint, lien and similar rights with respect to any property subject to the Security Documents and agreeing to permit the Banks and the Agent to enter such premises in connection therewith;

 
         (iii)         Casualty and Other Insurance. Evidence that the casualty and other insurance required pursuant to Section 5.1(C) of this Agreement and pursuant to each Security Agreement is in full force and effect; and

 
         (iv)         Intercompany Notes and Security Agreements. The original copies of the Intercompany Notes, and copies of security agreements and financing statements given by the Guarantors to the Company granting to the Company security interests in their accounts and inventory, that are expressly made junior to the security interest of the Agent in such assets, and that in the case of such financing statements show the assignment by the Company of its rights as secured party to the Agent;

 
         (F)         Subordination Agreements with respect to Shareholder Subordinated Debt. Subordination agreements executed by James LaCrosse and Norma Johnston subordinating to the Loans all Indebtedness to them for borrowed money of the Company and the Guarantors;

 
         (G)        Subrogation and Contribution Agreement. A subrogation and contribution agreement in form satisfactory to the Agent executed by the Guarantors;

 
         (H)        Legal Opinions. The favorable written opinion of Bose McKinney & Evans LLP, counsel for the Company and each Guarantor in substantially the form of Exhibit G hereto;

 
         (I)         Consents, Approvals, Etc. Copies of all governmental and nongovernmental consents, approvals, authorizations, declarations, registrations or filings, if any, required on the part of the Company or any Guarantor in connection with the execution, delivery and performance of this Agreement, the Notes, the Security Documents or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Agreement, the Notes or any of the Security Documents, certified as true and correct and in full force and effect as of the Effective Date by a duly authorized officer of the Company, or, if none are required, a certificate of such officer to that effect;



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         (J)         Fees. The facility fee described in Section 2.3(B);

 
         (K)         Repayment of Indebtedness. The Company shall have applied the proceeds of Loans under this Agreement to repay all Indebtedness and other obligations outstanding under the Credit Agreement among the Company, certain Guarantors, certain lenders and NBD Bank (now known as Bank One, NA), as Agent, dated January 25, 1999 (the “Existing Credit Agreement”), and other debt described on Schedule 2.5(K) hereof;

 
         (L)         Solvency Certificate. A Solvency Certificate from each of the Company and the Guarantors in a form acceptable to the Agent; and

 
         (M)         Other. Such other documents, and completion of such other matters, as the Agent may reasonably request.

        2.6    Further Conditions for Disbursements. The obligation of the Banks to make any Advance (including the first Advance), or any continuation or conversion under Section 2.7 is further subject to the satisfaction of the following conditions precedent:

 
         (A)         The representations and warranties contained in Article IV hereof and in the Security Documents shall be true and correct on and as of the date such Advance is made (both before and after such Advance is made) as if such representations and warranties were made on and as of such date;

 
         (B)         No Default or Event of Default shall exist or shall have occurred and be continuing on the date such Advance is made (whether before or after such Advance is made);

 
         (C)         The Agent shall have received the latest Borrowing Base Certificate required pursuant to Section 5.1(D)(v) prior to the date such Advance is made; and

 
         (D)         In the case of any Letter of Credit Advance, the Company shall have delivered to the Agent an application for the related Letter of Credit and other related documentation requested by and acceptable to the Agent appropriately completed and duly executed on behalf of the Company.

The Company shall be deemed to have made a representation and warranty to the Banks at the time of the making of, and the continuation or conversion of, each Advance to the effects set forth in clauses (A) and (B) of this Section 2.6. For purposes of this Section 2.6 the representations and warranties contained in Section 4.6 hereof shall be deemed made with respect to both the financial statements referred to therein and the most recent financial statements delivered pursuant to Section 5.1(D)(ii) and (iii).



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        2.7 Subsequent Elections as to Loans.    The Company may elect (a) to continue a Eurodollar Rate Loan, or a portion thereof, as a Eurodollar Rate Loan or (b) may elect to convert a Eurodollar Rate Loan, or a portion thereof, to a Loan of another type or (c) elect to convert an Adjusted Base Rate Loan, or a portion thereof, to a Eurodollar Rate Loan in each case by giving telephonic notice thereof to the Agent not later than 12:00 noon Chicago time four Eurodollar Business Days prior to the date any such continuation of or conversion to a Eurodollar Rate Loan is to be effective and not later than 12:00 noon Chicago time one Business Day prior to the date such continuation or conversion is to be effective in all other cases, provided that an outstanding Eurodollar Rate Loan may only be converted on the last day of the then current Interest Period with respect to such Loan, and provided, further, if a continuation of a Loan as, or a conversion of a Loan to, a Eurodollar Rate Loan is requested, such notice shall also specify the Interest Period to be applicable thereto upon such continuation or conversion. The Agent, not later than the Business Day next succeeding the day such notice is given, shall provide notice of such election to the Banks. If the Company shall not timely deliver such a notice with respect to any outstanding Eurodollar Rate Loan, the Company shall be deemed to have elected to convert such Eurodollar Rate Loan to an Adjusted Base Rate Loan on the last day of the then current Interest Period with respect to such Loan.

        2.8    Limitation of Requests and Elections. Notwithstanding any other provision of this Agreement to the contrary, if, upon receiving a request for a Eurodollar Rate Loan pursuant to Section 2.4, or a request for a continuation of a Eurodollar Rate Loan as a Eurodollar Rate Loan of the then existing type, or a request for a conversion of an Adjusted Base Rate Loan to a Eurodollar Rate Loan pursuant to Section 2.7, (a) in the case of any Eurodollar Rate Loan, deposits in Dollars for periods comparable to the Interest Period elected by the Company are not available to any Bank in the London interbank market, or (b) the Eurodollar Rate will not adequately and fairly reflect the cost to any Bank of making, funding or maintaining the related Eurodollar Rate Loan, or (c) by reason of national or international financial, political or economic conditions or by reason of any applicable law, treaty or other international agreement, rule or regulation (whether domestic or foreign) now or hereafter in effect, or the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any guideline, request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, it is impracticable, unlawful or impossible for, or shall limit or impair the ability of, (i) any Bank to make or fund the relevant Loan or to continue such Loan as a Loan of the then existing type or to convert a Loan to such a Loan or (ii) the Company to make or any Bank to receive any payment under this Agreement at the place specified for payment hereunder or to freely convert any amount paid into Dollars at market rates of exchange or to transfer any amount paid or so converted to the address of its principal office specified in Section 8.2, then the Company shall not be entitled, so long as such circumstances continue, to request a Loan of the affected type pursuant to Section 2.4 or a continuation of or conversion to a Loan of the affected type pursuant to Section 2.7. In the event that such circumstances no longer exist, the Banks shall again consider requests for Loans of the affected type pursuant to Section 2.4, and requests for continuations of and conversions to Loans of the affected type pursuant to Section 2.7.



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        2.9    Minimum Amounts; Limitation on Number of Loans; Etc. Except for (a) Advances which exhaust the entire remaining amount of the Aggregate Commitment, and (b) payments required pursuant to Section 3.1(C) or Section 3.8, each Eurodollar Rate Loan and each continuation of or conversion to a Eurodollar Rate Loan pursuant to Section 2.7 and each prepayment thereof shall be in a minimum amount of $3,000,000 and in an integral multiple of $1,000,000, and each Adjusted Base Rate Loan and each continuation of or conversion to an Adjusted Base Rate Loan shall be in a minimum amount of $250,000 and in an integral multiple of $50,000. The aggregate number of Eurodollar Rate Loans outstanding at any one time under this Agreement may not exceed five.

        2.10    Borrowing Base Adjustments. The Company agrees that if at any time any trade account receivable or any inventory of the Company fails to constitute an Eligible Account Receivable or Eligible Inventory, as the case may be, for any reason, the Agent may, at any time and notwithstanding any prior classification of eligibility, classify such asset or property as ineligible and exclude the same from the computation of the Borrowing Base without in any way impairing the rights of the Banks and the Agent in and to the same under the Security Agreement.

        2.11    Security and Collateral. To secure the payment when due of the Notes and all other obligations of the Company under this Agreement to the Banks and the Agent, the Company shall execute and deliver, or cause to be executed and delivered, to the Banks and the Agent Security Documents granting the following:

 
        (A)         Security interests in all present and future accounts and inventory of the Company;

 
        (B)         Security interests in all present and future accounts and inventory of the Guarantors; and

 
        (C)         Security interests in the Intercompany Notes and in the collateral securing such Intercompany Notes.

        Notwithstanding the foregoing, the collateral shall not include any property to the extent that such grant of a security interest constitutes a breach or default under or results in the termination of or requires any consent not obtained under, any contract, license, agreement, instrument or other document evidencing or giving rise to such property, except to the extent that such applicable law or the term in such contract, license, agreement, instrument or other document or similar agreement providing for such prohibition, breach, default or termination of requiring such consent is ineffective under applicable law.



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ARTICLE III:    PAYMENTS AND PREPAYMENTS OF ADVANCES

        3.1    Principal Payments and Prepayments.

 
        (A)         Unless earlier payment is required under this Agreement, the Company shall pay to the Banks on the Termination Date the entire outstanding principal amount of the Loans.

 
        (B)         The Company may at any time and from time to time prepay all or a portion of the Loans, without premium or penalty, provided that (i) the Company may not prepay any portion of any Loan as to which an election for a continuation of or a conversion to a Eurodollar Rate Loan is pending pursuant to Section 2.4, and (ii) unless earlier payment is required under this Agreement, any Eurodollar Rate Loan may only be prepaid on the last day of the then current Interest Period with respect to such Loan.

 
        (C)         If at any time the aggregate outstanding principal amount of the Advances shall exceed the lesser of Borrowing Base or the Aggregate Commitment, the Company shall forthwith pay to the Agent, for the ratable benefit of the Banks, without demand, an amount not less than the amount of such excess for application to the outstanding principal amount of the Loans, provided that if any such prepayment would be in excess of the outstanding amount of the Loans, the Company shall deliver cash collateral to the Agent to secure the outstanding Letters of Credit in the amount of such excess which is greater than the outstanding Loans and the Company hereby grants to the Agent, for the benefit of the Banks, a first priority lien and security interest in such collateral, and all such cash collateral shall be under the sole and exclusive control of the Agent.

        3.2    Interest Payments. The Company shall pay interest to the Banks on the unpaid principal amount of each Loan, for the period commencing on the date such Loan is made until such Loan is paid in full, on each Interest Payment Date and at maturity (whether at stated maturity, by acceleration or otherwise), and thereafter on demand, at the following rates per annum:

 
        (A)         During such periods that such Loan is an Adjusted Base Rate Loan, the Adjusted Base Rate.

 
        (B)         During such periods that such Loan is a Eurodollar Rate Loan, the Eurodollar Rate applicable to such Loan for each related Eurodollar Interest Period.

Notwithstanding the foregoing paragraphs (A) and (B), the Company shall pay interest on demand by the Agent at the Overdue Rate on the outstanding principal amount of any Loan and any other amount payable by the Company hereunder (other than interest) at any time on or after an Event of Default if required in writing by the Required Banks.



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        3.3    Letter of Credit Reimbursement Payments.

                (A)

 
         (i)         The Company agrees to pay to the Agent, not later than (a) 12:00 noon Chicago time on the day on which the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit if such draft or demand is made prior to 12:00 noon Chicago time on such day and (b) 12:00 noon Chicago time on the next succeeding Business Day after the day on which the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit if such draft or demand is made at or after 12:00 noon Chicago time on any day, in each case, an amount equal to the amount paid by the Agent in respect of such draft or other demand under any such Letter of Credit and all expenses paid or incurred by the Agent relative thereto (the “Reimbursement Amount”). Unless the Company shall have made such payment to the Agent on such day, upon each such payment by the Agent, the Agent shall be deemed to have disbursed to the Company and the Company shall be deemed to have elected to satisfy its reimbursement obligation by, a Loan bearing interest at the Adjusted Base Rate for the account of the Banks in an amount equal to the amount so paid by the Agent in respect of such draft or other demand under such Letter of Credit. Such Loan shall be disbursed notwithstanding any failure to satisfy any conditions for disbursement of any Loan set forth in Article II hereof and, to the extent of the Loan so disbursed, the reimbursement obligation of the Company under this Section 3.3 shall be deemed satisfied; provided, however, that nothing in this Section 3.3 shall be deemed to constitute a waiver of any Default or Event of Default caused by the failure to the conditions for disbursement or otherwise.

 
         (ii)         If, for any reason (including without limitation as a result of the occurrence of an Event of Default with respect to the Company pursuant to Section 6.1(H)), Adjusted Base Rate Loans may not be made by the Banks as described in Section 3.3(A)(i), then (A) the Company agrees that each reimbursement amount not paid pursuant to the first sentence of Section 3.3(A)(i) shall bear interest, payable on demand by the Agent at the interest rate then applicable to Adjusted Base Rate Loans, and (B) effective on the date each such Adjusted Base Rate Loan would otherwise have been made, each Bank severally agrees that it shall unconditionally and irrevocably, without regard to the occurrence of any Default or Event of Default, in lieu of deemed disbursement of loans, to the extent of such Bank’s Commitment, purchase a participating interest in each Reimbursement Amount. Each Bank will immediately transfer to the Agent, in same day funds, the amount of its participation for its own account. Each Bank shall share on a pro rata basis (calculated by reference to its Commitment) in any interest which accrues thereon and in all repayments thereof. If and to the extent that any Bank shall not have so made the amount of such participating interest available to the Agent, such Bank and the Company severally agree to pay to the Agent for its own account forthwith on demand such amount together with interest thereon, for each day from the date of demand by the Agent until the date such amount is paid to the Agent, at (x) in the case of the Company, the interest rate then applicable to Adjusted Base Rate Loans and (y) in the case of such Bank, the Federal Funds Rate.



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         (iii)         Each Bank holding a Commitment shall be obligated, absolutely and unconditionally to make Adjusted Base Rate Loans pursuant to Section 3.3(A)(i), and to purchase and fund participation interests in Letters of Credit pursuant to Section 2.4(D) and 3.3(A)(ii), and such obligation shall not be affected by any circumstance whatsoever, including, without limitation, (i) any set off, counterclaim, recoupment, defense or other right which such Bank or the Company may have against the Agent, the Company or anyone else for any reason whatsoever, (ii) the occurrence of any Event of Default or Default, (iii) any adverse change in the condition (financial or otherwise) of the Company or any of the Guarantors, (iv) any breach of this Agreement or any other Loan Document by the Company, any of the Guarantors, the Agent or any other Bank, or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing, including without limitation any termination or other limitation on the Commitments or any failure to satisfy any conditions precedent to any Advance contained herein or any other provision of this Agreement.

 
         (B)         The reimbursement obligation of the Company under this Section 3.3 shall be absolute, unconditional and irrevocable and shall remain in full force and effect until all obligations of the Company to the Banks hereunder shall have been satisfied, and such obligations of the Company shall not be affected, modified or impaired upon the happening of any event, including without limitation, any of the following, whether or not with notice to, or the consent of, the Company:

 
         (i)         Any lack of validity or enforceability of any Letter of Credit or any documentation relating to any Letter of Credit or to any transaction related in any way to such Letter of Credit (the “Letter of Credit Documents”);

 
         (ii)         Any amendment, modification, waiver, consent, or any substitution, exchange or release of or failure to perfect any interest in collateral or security, with respect to any of the Letter of Credit Documents;

 
         (iii)         The existence of any claim, setoff, defense or other right which the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Persons or entities for whom any such beneficiary or any such transferee may be acting), the Agent or any Bank or any other Person or entity, whether in connection with any of the Letter of Credit Documents, the transactions contemplated herein or therein or any unrelated transactions;



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         (iv)         Any draft or other statement or document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;

 
         (v)         Payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit;

 
         (vi)         Any failure, omission, delay or lack on the part of the Agent or any Bank or any party to any of the Letter of Credit Documents to enforce, assert or exercise any right, power or remedy conferred upon the Agent, any Bank or any such party under this Agreement or any of the Letter of Credit Documents, or any other acts or omissions on the part of the Agent, any Bank or any such party;

 
         (vii)         Any other event or circumstance that would, in the absence of this clause, result in the release or discharge by operation of law or otherwise of the Company from the performance or observance of any obligation, covenant or agreement contained in this Section 3.3.

No setoff, counterclaim, reduction or diminution of any obligation or any defense of any kind or nature which the Company has or may have against the beneficiary of any Letter of Credit shall be available hereunder to the Company against the Agent or any Bank.

        3.4    Payment Method.

 
         (A)         All payments to be made by the Company hereunder will be made to the Agent for the account of the Banks in Dollars and in immediately available funds not later than 12:00 noon Chicago time at the principal office of the Agent specified in Section 8.2. Payments received after 12:00 noon Chicago time at the place for payment shall be deemed to be payments made prior to 12:00 noon Chicago time at the place for payment on the next succeeding Business Day. The Company hereby authorizes the Agent to charge its account with the Agent in order to cause timely payment of amounts due hereunder to be made (subject to sufficient funds being available in such account for that purpose).

 
         (B)         At the time of making each such payment, the Company shall, subject to the other terms and conditions of this Agreement, specify to the Agent that Loan or other obligation of the Company hereunder to which such payment is to be applied. In the event that the Company fails to so specify the relevant obligation or if an Event of Default shall have occurred and be continuing, the Agent may apply such payments as it may determine in its sole discretion.

 
         (C)         On the day such payments are deemed received, the Agent shall remit to the Banks their pro rata shares of such payments in immediately available funds to the Banks at their respective address in the United States specified for notices pursuant to Section 8.2. In the case of payments of principal and interest on any Borrowing, such pro rata shares shall be determined with respect to each such Bank by the ratio which the outstanding principal balance of its Loan included in such Borrowing bears to the outstanding principal balance of the Loans of all of the Banks included in such Borrowing, and in the case of fees paid pursuant to Section 2.3 and other amounts payable hereunder (other than the Agent’s fees payable pursuant to Section 2.3(D) and amounts payable to any Bank under Section 3.7), such pro rata shares shall be determined with respect to each such Bank by the ratio which the Commitment of such Bank bears to the Aggregate Commitment.



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        3.5     No Setoff or Deduction. All payments of principal of and interest on the Loans and other amounts payable by the Company hereunder shall be made by the Company without setoff or counterclaim, and free and clear of, and without deduction or withholding for, or on account of, any present or future taxes, levies, imposts, duties, fees, assessments, or other charges of whatever nature, imposed by any governmental authority, or by any department, agency or other political subdivision or taxing authority.

        3.6    Payment on Non-Business Day; Payment Computations. Except as otherwise provided in this Agreement to the contrary, whenever any installment of principal of, or interest on, any Loan or any other amount due hereunder becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of any installment of principal, interest shall be payable thereon at the rate per annum determined in accordance with this Agreement during such extension. Computations of interest and other amounts due under this Agreement shall be made on the basis of a year of 360 days for the actual number of days elapsed, including the first day but excluding the last day of the relevant period.

        3.7    Additional Costs.

 
         (A)         In the event that any applicable law, treaty or other international agreement, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank or the Agent, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank or the Agent with any guideline, request or directive of any such authority (whether or not having the force of law), shall (a) affect the basis of taxation of payments to any Bank or the Agent of any amounts payable by the Company under this Agreement (other than taxes imposed on the overall net income of any Bank or the Agent, by the jurisdiction, or by any political subdivision or taxing authority of any such jurisdiction, in which any Bank or the Agent, as the case may be, has its principal office), or (b) shall 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 Bank or the Agent, or (c) shall impose any other condition with respect to this Agreement, or any of the Commitments, the Notes or the Loans or any Letter of Credit, and the result of any of the foregoing is to increase the cost to any Bank or the Agent, as the case may be, of making, funding or maintaining any Eurodollar Rate Loan or any Letter of Credit or to reduce the amount of any sum receivable by any Bank or the Agent, as the case may be, thereon, then the Company shall pay to such Bank or the Agent, as the case may be, from time to time, upon request by such Bank (with a copy of such request to be provided to the Agent) or the Agent, additional amounts sufficient to compensate such Bank or the Agent, as the case may be, for such increased cost or reduced sum receivable to the extent, in the case of any Eurodollar Rate Loan, such Bank or the Agent is not compensated therefor in the computation of the interest rate applicable to such Eurodollar Rate Loan. A statement as to the amount of such increased cost or reduced sum receivable, prepared in good faith and in reasonable detail by such Bank or the Agent, as the case may be, and submitted by such Bank or the Agent, as the case may be, to the Company, shall be conclusive and binding for all purposes absent manifest error in computation.



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         (B)         In the event that any applicable law, treaty or other international agreement, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank or the Agent, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank or the Agent with any guideline, request or directive of any such authority (whether or not having the force of law), including any risk-based capital guidelines, affects or would affect the amount of capital required or expected to be maintained by such Bank or the Agent (or any corporation controlling such Bank or the Agent) and such Bank or the Agent, as the case may be, reasonably determines that the amount of such capital is increased by or based upon the existence of such Bank’s or the Agent’s obligations hereunder and such increase has the effect of reducing the rate of return on such Bank’s or the Agent’s (or such controlling corporation’s) capital as a consequence of such obligations hereunder to a level below that which such Bank or the Agent (or such controlling corporation) could have achieved but for such circumstances (taking into consideration its policies with respect to capital adequacy), then the Company shall pay to such Bank or the Agent, as the case may be, from time to time, upon request by such Bank (with a copy of such request to be provided to the Agent) or the Agent, additional amounts sufficient to compensate such Bank or the Agent (or such controlling corporation) for any increase in the amount of capital and reduced rate of return which such Bank or the Agent reasonably determines to be allocable to the existence of such Bank’s or the Agent’s obligations hereunder. A statement as to the amount of such compensation, prepared in good faith and in reasonable detail by such Bank or the Agent, as the case may be, and submitted by such Bank or the Agent to the Company, shall be conclusive and binding for all purposes absent manifest error in computation.

        3.8     Illegality and Impossibility. In the event that any applicable law, treaty or other international agreement, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any guideline, request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, shall make it unlawful or impossible for any Bank to maintain any Loan under this Agreement, or shall make it impracticable, unlawful or impossible for, or shall in any way limit or impair ability of, the Company to make or any Bank to receive any payment under this Agreement at the place specified for payment hereunder, the Company shall upon receipt of notice thereof from such Bank, repay in full the then outstanding principal amount of each Loan so affected, together with all accrued interest thereon to the date of payment and all amounts owing to such Bank under Section 3.8, (a) on the last day of the then current Interest Period applicable to such Loan if such Bank may lawfully continue to maintain such Loan to such day, or (b) immediately if such Bank may not continue to maintain such Loan to such day.



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        3.9     Indemnification. If the Company makes any payment of principal with respect to any Eurodollar Rate Loan on any other date than the last day of an Interest Period applicable thereto (whether pursuant to Section 3.1(C), Section 3.7, Section 6.2 or otherwise), or if the Company fails to borrow any Eurodollar Rate Loan after notice has been given to the Banks in accordance with Section 2.4, or if the Company fails to make any payment of principal or interest in respect of a Eurodollar Rate Loan when due, the Company shall reimburse each Bank on demand for any resulting loss or expense incurred by each such Bank, including without limitation any loss incurred in obtaining, liquidating or employing deposits from third parties, whether or not such Bank shall have funded or committed to fund such Loan. A statement as to the amount of such loss or expense, prepared in good faith and in reasonable detail by such Bank and submitted by such Bank to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. Calculation of all amounts payable to such Bank under this Section 3.9 shall be made as though such Bank shall have actually funded or committed to fund the relevant Eurodollar Rate Loan through the purchase of an underlying deposit in an amount equal to the amount of such Loan in the relevant market and having a maturity comparable to the related Interest Period and, through the transfer of such deposit to a domestic office of such Bank in the United States; provided, however, that such Bank may fund any Eurodollar Rate Loan in any manner it sees fit and the foregoing assumption shall be utilized only for the purpose of calculation of amounts payable under this Section 3.9.

ARTICLE IV:    REPRESENTATIONS AND WARRANTIES

        The Company represents and warrants to the Banks and the Agent that:

        4.1     Existence and Power. Each of the Company and the Guarantors is a corporation or a limited liability company duly organized, validly existing and in good standing under the laws of the state of its jurisdiction of incorporation or organization, as the case may be, and is duly qualified to do business, and is in good standing in all additional jurisdictions where such qualification is necessary under applicable law and the failure to qualify could reasonably be expected to have a Material Adverse Effect. Each of the Company and the Guarantors has all requisite corporate or limited liability company power to own or lease the properties used in its business and to carry on its business as now being conducted and as proposed to be conducted, and to execute and deliver this Agreement, the Notes and the Security Documents to which it is a party and to engage in the transactions contemplated by this Agreement.



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        4.2    Authority. The execution, delivery and performance by the Company and each Guarantor of this Agreement, the Notes and the Security Documents to which it is a party have been duly authorized by all necessary corporate or limited liability company action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of the Company’s or the Guarantor’s charter, by-laws, articles of organization or operating agreement or of any contract or undertaking to which the Company or any Guarantor is a party or by which the Company or any Guarantor or any of their respective property may be bound or affected and will not result in the imposition of any Lien on any of their property or of any of their Restricted Subsidiaries except for Permitted Liens.

        4.3     Binding Effect. This Agreement is, and the Notes and the Security Documents to which the Company or any Guarantor is a party when delivered hereunder will be, legal, valid and binding obligations of the Company and the Guarantor, respectively, enforceable against the Company and the Guarantor in accordance with their respective terms, except as enforceability may be limited by (i) bankruptcy, insolvency, fraudulent conveyances, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally; (ii) general equitable principles (whether considered in a proceeding in equity or at law); and (iii) requirements of reasonableness, good faith and fair dealing.

        4.4    Restricted and Unrestricted Subsidiaries. Schedule 4.4 hereto correctly sets forth the name, jurisdiction of incorporation or organization and ownership of each Subsidiary of the Company, and whether it is a Restricted Subsidiary or an Unrestricted Subsidiary. Each such Subsidiary and each corporation or limited liability company becoming a Subsidiary of the Company or any Guarantor after the date hereof is and will be a corporation or limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization and is and will be duly qualified to do business in each additional jurisdiction where such qualification is necessary under applicable law and the failure to qualify could reasonably be expected to have a Material Adverse Effect. Each Subsidiary of the Company and each Guarantor has and will have all requisite corporate or limited liability company power to own or lease the properties used in its business and to carry on its business as now being conducted and as proposed to be conducted. All outstanding shares of Capital Stock of each class of each Subsidiary, the Company and each Guarantor have been and will be validly issued and are and will be fully paid and nonassessable, and, except as otherwise indicated in Schedule 4.4 hereto or disclosed in writing to the Agent and the Banks from time to time, all ownership interests in the company’s subsidiaries, are and will be owned, beneficially and of record, by the Company or another Subsidiary of the Company free and clear of any Liens.



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        4.5    Litigation.

 
         (i)         Except as set forth in Schedule 4.5 hereto, there is no action, suit or proceeding pending or, to the best of the Company’s and the Guarantors’ knowledge, threatened against or affecting the Company, any Guarantor or any of their respective Subsidiaries before or by any court, governmental authority or arbitrator, which if adversely decided could reasonably be expected to result in liability equal to $1,000,000 or more and, to the best of the Company’s and the Guarantor’s knowledge, neither the Company nor any Guarantor has received any notice of any such action, suit or proceeding.

 
         (ii)         Since the Effective Date, no judgment, order or settlement of a dispute, claim or other action, in either case, in an aggregate amount of $5,000,000 or more has been rendered against or entered into by the Company or any Restricted Subsidiary.

        4.6    Financial Condition. The Consolidated financial statements of the Company and its Restricted Subsidiaries for the fiscal year ended on March 31, 2002 and reported on by Arthur Andersen LLP, certified public accountants, and the interim Consolidated balance sheet and interim statements of income, retained earnings and cash flows of the Company and its Restricted Subsidiaries as of or for the nine-month period ended on December 31, 2002, copies of which have been furnished to the Banks, fairly present the Consolidated financial position of the Company and its Restricted Subsidiaries as at the respective dates thereof, and the Consolidated results of operations of the Company and its Restricted Subsidiaries for the respective periods indicated, all in accordance with Generally Accepted Accounting Principles consistently applied (subject, in the case of said interim statements, to year-end audit adjustments and the lack of footnotes and other presentation items). Except as set forth in the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission prior to the Effective Date, there has been no event or development which has had or could reasonably be expected to have a Material Adverse Effect since March 31, 2002. To the knowledge of the Company, there is no material Contingent Liability of the Company or any of its Restricted Subsidiaries that is not reflected in such financial statements or in the notes thereto.

        4.7     Corporate Restructuring and Future Financial Statements. The financial statements of the Company and its Restricted Subsidiaries delivered pursuant to Section 5.1(D) fairly present the Consolidated financial position of the Company and its Restricted Subsidiaries as at the respective dates thereof and the Consolidated results of operations of the Company and its Restricted Subsidiaries for the respective periods indicated, all in accordance with Generally Accepted Accounting Principles consistently applied (subject, in the case of interim statements, to year-end audit adjustments and the lack of footnotes and other presentation items).

        4.8     Regulation U. Neither the Company nor any Guarantor nor any of their respective Restricted Subsidiaries extends or maintains, in the ordinary course of business, credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any such margin stock or maintaining or extending credit to others for such purpose. After applying the proceeds of each Advance, such margin stock will not constitute more than 25% of the value of the assets (either of the Company or any Guarantor alone or of the Company and the Guarantors and their respective Restricted Subsidiaries on a consolidated basis) that are subject to any provisions of this Agreement or any Security Document that may cause the Advances to be deemed secured, directly or indirectly, by margin stock.



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        4.9     Consents, Etc. Except for such consents, approvals, authorizations, declarations, registrations or filings delivered by the Company and the Guarantors pursuant to Section 2.5(E)(i) and (I), if any, each of which is in full force and effect, no consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental Person or entity, including without limitation any creditor, lessor or stockholder of the Company or any Guarantor or any of their respective Restricted Subsidiaries, is required on the part of the Company or any Guarantor in connection with the execution, delivery and performance of this Agreement, the Notes, the Security Documents or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Agreement, the Notes or any of the Security Documents.

        4.10     Taxes. The Company and the Guarantors and their respective Restricted Subsidiaries have filed all income tax returns (federal, state and local) required to be filed and have paid all taxes shown thereon to be due, including interest and penalties, or have established adequate financial reserves on their respective books and records for payment thereof in accordance with Generally Accepted Accounting Principles, except where the failure to so file or to so pay could not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Guarantor nor any of their respective Restricted Subsidiaries knows of any actual or proposed assessment for taxes based on income or any basis therefor, and no extension of time for the assessment of deficiencies in any such federal or state tax has been granted by the Company, any Guarantor or any such Subsidiary.

        4.11     Title to Properties. Except as otherwise disclosed in the latest balance sheet delivered pursuant to Section 4.6 or 5.1(D) of this Agreement, the Company, the Guarantors or one or more of their respective Restricted Subsidiaries have a valid ownership interest in all of their respective properties and assets (including, without limitation, the collateral subject to the Security Documents to which any of them is a party) reflected in said balance sheet or subsequently acquired by the Company, any Guarantor or any such Subsidiary. All of such properties and assets are free and clear of any Lien, except for Permitted Liens.

        4.12     Borrowing Base. All trade accounts receivable and inventory of the Company represented or reported by the Company to be, or are otherwise included in, Eligible Accounts Receivable and Eligible Inventory comply in all respects with the requirements therefor set forth in the definition thereof, and the computation of the Borrowing Base set forth in each Borrowing Base Certificate is true and correct.



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        4.13     ERISA. The Company, the Guarantors, their respective Restricted Subsidiaries, their ERISA Affiliates and their respective Plans are in compliance in all material respects with those provisions of ERISA and of the Code which are applicable with respect to any Plan. No Prohibited Transaction and no Reportable Event has occurred with respect to any such Plan. Since the Effective Date, none of the Company, any Guarantor, any of their respective Restricted Subsidiaries or any of their ERISA Affiliates has incurred, or is reasonably expected to incur, pursuant to Section 4201 of ERISA, any withdrawal liability to Multiemployer Plans. The Company, the Guarantors, their respective Restricted Subsidiaries and their ERISA Affiliates have met the minimum funding requirements under ERISA and the Code with respect to each of their respective Plans, if any, and have not incurred any liability to the PBGC or any Plan. The execution, delivery and performance of this Agreement, the Notes and the Security Documents do not constitute a Prohibited Transaction.

        4.14     Disclosure. No report or other information furnished in writing and prepared by, or, to the knowledge of the Company, on behalf of, the Company or any Guarantor to any Bank or the Agent in connection with the negotiation or administration of this Agreement contains any material misstatement of fact or omits to state any material fact or any fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. Neither this Agreement, the Notes, the Security Documents nor any other document, certificate, or report or statement or other information furnished to any Bank or the Agent and prepared by, or, to the knowledge of the Company, on behalf of, the Company or any Guarantor in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading in light of the circumstances in which they were made. There is no fact known to the Company or any Guarantor which has or which in the future could reasonably be expected to have (so far as the Company or any Guarantor can now foresee) a Material Adverse Effect, which has not been set forth in this Agreement or in the other documents, certificates, statements, reports and other information furnished in writing to the Banks by or on behalf of the Company or any Guarantor in connection with the transactions contemplated hereby.

        4.15     No Default. Neither the Company nor any Subsidiary is in default or has received any written notice of default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.

ARTICLE V:    COVENANTS

        5.1    Affirmative Covenants. The Company covenants and agrees that, until the Termination Date and thereafter until payment in full of the principal of and accrued interest on the Notes and the performance of all other obligations of the Company and the Guarantors under this Agreement and the other Loan Documents to which it is a party, unless the Required Banks shall otherwise consent in writing, it shall, and shall cause its Restricted Subsidiaries to:



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         (A)         Preservation of Corporate Existence, Etc. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, and its qualification as a foreign corporation or limited liability company in good standing in each jurisdiction in which such qualification is necessary under applicable law and the failure to qualify could reasonably be expected to have a Material Adverse Effect, and the rights, licenses, permits (including those required under Environmental Laws), franchises, patents, copyrights, trademarks and trade names material to the conduct of its businesses; and defend all of the foregoing against all claims, actions, demands, suits or proceedings at law or in equity or by or before any governmental instrumentality or other agency or regulatory authority.

 
         (B)         Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, whether federal, state, local or foreign (including without limitation ERISA, the Code and Environmental Laws), in effect from time to time; and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income, revenues or property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might give rise to Liens upon the collateral subject to the Security Documents or any portion thereof, except to the extent that payment of any of the foregoing is then being contested in good faith by appropriate legal proceedings and with respect to which adequate financial reserves have been established on the books and records of the Company, any Guarantor or any of their respective Restricted Subsidiaries in accordance with Generally Accepted Accounting Principles.

 
         (C)         Maintenance of Properties; Insurance. Maintain, preserve and protect all property that is material to the conduct of the business of the Company, any Guarantor or any of their respective Restricted Subsidiaries and keep such property in good repair, working order and condition and from time to time make, or cause to be made all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times in accordance with customary and prudent business practices for similar businesses; and, in addition to that insurance required under the Security Documents, maintain in full force and effect insurance with responsible and reputable insurance companies or associations in such amounts, on such terms and covering such risks, including fire and other risks insured against by extended coverage, as is usually carried by companies engaged in similar businesses and owning similar properties similarly situated and maintain in full force and effect public liability insurance, insurance against claims for personal injury or death or property damage occurring in connection with any of its activities or any properties owned, occupied or controlled by it, in such amount as it shall reasonably deem necessary, and maintain such other insurance as may be required by law or as may be reasonably requested by the Required Banks for purposes of assuring compliance with this Section 5.1(C).



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         (D)         Reporting Requirements. Furnish to the Banks and the Agent the following:

 
         (i)         Promptly and in any event within three Business Days after becoming aware of the occurrence of (A) any Default or Event of Default, (B) the commencement of any material litigation against the Company, any Guarantor or any of their respective Restricted Subsidiaries, and any material developments therein, or (C) entering into any material contract or undertaking that is not entered into in the ordinary course of business or (D) any development in the business or affairs of the Company, any Guarantor or any of their respective Subsidiaries which has resulted in or which is likely in the reasonable judgment of the Company or any Guarantor, to result in a Material Adverse Effect, a statement of a duly authorized officer of the Company or the Guarantor, as the case may be setting forth details of each such Default or Event of Default or such litigation, material contract or undertaking or development and the action which the Company, such Guarantor or such Subsidiary, as the case may be, has taken and proposes to take with respect thereto, except to the extent any such event in clauses (B) through (D) shall have been described in any publicly-available filing made by the Company or any Guarantor or any of their respective Restricted Subsidiaries with the Securities and Exchange Commission or any successor agency thereof within such applicable period;

 
         (ii)         As soon as available and in any event within 45 days after the end of each month of the Company, the Consolidated and consolidating balance sheet of the Company and its Restricted Subsidiaries, and of the Company and its Subsidiaries, as of the end of such month, and the related Consolidated and consolidating statements of income, retained earnings and cash flows for the period commencing at the end of the previous fiscal year and ending with the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, all in reasonable detail and duly certified (subject to year-end audit adjustments and the lack of footnotes and other presentation items) by the chief financial officer of the Company as having been prepared in accordance with Generally Accepted Accounting Principles, together with, in the case of the financial statements for the last month of each fiscal quarter, a certificate of a duly authorized officer of the Company stating (A) that no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement setting forth the details thereof and the action which the Company has taken and proposes to take with respect thereto, and (B) at the end of each fiscal quarter, that a computation (which computation shall accompany such certificate and shall be in reasonable detail) showing compliance with Section 5.2(A), (B) and (C) hereof is in conformity with the terms of this Agreement;



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         (iii)         As soon as available and in any event within 90 days after the end of each fiscal year of the Company, a copy of the Consolidated balance sheet of the Company and its Restricted Subsidiaries, and of the Company and its Subsidiaries, as of the end of such fiscal year and the related consolidated statements of income, retained earnings and changes in financial position of the Company and its Restricted Subsidiaries, and of the Company and its Subsidiaries, for such fiscal year, with a customary audit report of Deloitte & Touche LLP, or other independent certified public accountants selected by the Company and acceptable to the Required Banks, without qualifications unacceptable to the Required Banks, together with a certificate of such accountants stating (A) that they have reviewed this Agreement and stating further whether, in the course of their review of such financial statements, they have become aware of any Default or Event of Default and, if such a Default or Event of Default exists and is continuing, a statement setting forth the nature and status thereof, and (B) that a computation by the Company (which computation shall accompany such certificate and shall be in reasonable detail) showing compliance with Section 5.2 (A), (B), and (C) hereof is in conformity with the terms of this Agreement;

 
         (iv)         Promptly after the sending or filing thereof, copies of all reports, proxy statements and financial statements which the Company or any Guarantor or any of their respective Restricted Subsidiaries sends to or files with any of their respective security holders or any securities exchange or the Securities and Exchange Commission or any successor agency thereof;

 
         (v)         Promptly and in any event within 10 calendar days following last day of each month, or within one Business Day following the last day of each week at any time when the Borrowing Base selected by the Company is equal to the sum of 80% of the value of Eligible Accounts Receivable plus 60% of the value of Eligible Inventory, a Borrowing Base certificate prepared as of the close of business on such last day, together with supporting schedules, in form and detail satisfactory to the Agent, setting forth such information as the Agent may request with respect to the aging, value, location, and ownership of such Eligible Accounts Receivable and Eligible Inventory, and other information relating to the computation of the Borrowing Base and the eligibility of any property or assets included in such computation, certified as true and correct by the chief financial officer of the Company;

 
         (vi)         Promptly and in any event within 10 calendar days after receiving or becoming aware thereof (A) a copy of any notice of intent to terminate any Plan of the Company, any Guarantor, their respective Restricted Subsidiaries or any ERISA Affiliate filed with the PBGC, (B) a statement of the chief financial officer of the Company or any Guarantor, as the case may be; setting forth the details of the occurrence of any Reportable Event with respect to any such Plan, (C) a copy of any notice that the Company, any Guarantor, any of their respective Restricted Subsidiaries or any ERISA Affiliate may receive from the PBGC relating to the intention of the PBGC to terminate any such Plan or to appoint a trustee to administer any such Plan, or (D) a copy of any notice of failure to make a required installment or other payment within the meaning of Section 412(n) of the Code or Section 302(f) of ERISA with respect to any such Plan;



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         (vii)         As soon as available and in any event within 15 days after the end of each month, a report with respect to the Company and its Restricted Subsidiaries, listing their accounts receivable and accounts payable and the age thereof, and setting forth in summary form their inventory and its value, in form and detail satisfactory to the Agent, certified as true and correct by a duly authorized officer of the Company;

 
         (viii)         As soon as practicable and in any event not later than June 30 of each fiscal year, commencing with the fiscal year beginning April 1, 2003, a copy of the projected Consolidated income statement of the Company and the Restricted Subsidiaries for such fiscal year prepared in such detail as shall be reasonably satisfactory to the Agent; and

 
         (ix)         Promptly, such other information respecting the business, properties, operations or condition, financial or otherwise, of the Company, any Guarantor or any of their respective Restricted Subsidiaries as any Bank or the Agent may from time to time reasonably request.

 
         (E)         Accounting; Access to Records, Books, Etc. Maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in accordance with Generally Accepted Accounting Principles and to comply with the requirements of this Agreement and, at any reasonable time and from time to time, (i) permit any Bank or the Agent or any agents or representatives thereof to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Company, the Guarantors and their respective Restricted Subsidiaries, and to discuss the affairs, finances and accounts of the Company, the Guarantors and their respective Restricted Subsidiaries with their respective directors, officers, employees and independent auditors, and by this provision each of the Company and the Guarantors hereby authorizes such Persons to discuss such affairs, finances and accounts with any Bank or the Agent, and (ii) (a) during any fiscal quarter that the Borrowing Base is equal to the sum of 80% of the value of Eligible Accounts Receivable plus 60% of the value of Eligible Inventory, permit the Agent or any of its agents or representatives to conduct a comprehensive field audit of its books, records, properties and assets, including without limitation all collateral subject to the Security Documents, at any one time during such quarter, at the expense of the Company, and (b) if a different Borrowing Base level is in effect permit the Agent to do so at any time, at the expense of the Banks unless an Event of Default shall be continuing in which event such field audit shall be at the expense of the Company.

 
         (F)         Loans by the Company to the Restricted Subsidiaries. In the event that the Company makes loans or other advances to or for the benefit of a Restricted Subsidiary after the Effective Date that are not evidenced by an Intercompany Note delivered to the Agent, the Company will obtain an Intercompany Note from the borrowing Restricted Subsidiary to evidence such loans and advances and shall deliver it to the Agent pursuant to the Pledge Agreement.



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         (G)         Additional Security and Collateral. Promptly (i) execute and deliver and cause each Restricted Subsidiary of the Company and the Guarantors to execute and deliver, additional Security Documents, within 30 days after request therefor by the Banks and the Agent, sufficient to grant to the Agent for the benefit of the Banks liens and security interests in any after acquired property of the type described in Section 2.11, and (ii) cause each Person becoming a Restricted Subsidiary of the Company or any Guarantor from time to time to execute and deliver to the Banks and the Agent, within 30 days after such Person becomes a Restricted Subsidiary, a Guaranty and Security Documents, together with other related documents described in Section 2.5, sufficient to grant to the Agent for the benefit of the Banks liens and security interests in all collateral of the type described in Section 2.11. The Company shall notify the Banks and the Agent, within 10 Business Days after the occurrence thereof, of the acquisition of any property by the Company or any Guarantor that is not subject to the existing Security Documents, any Person’s becoming a Restricted Subsidiary and any other event or condition that may require additional action of any nature in order to preserve the effectiveness and perfected status of the liens and security interests of the Banks and the Agent with respect to such property pursuant to the Security Documents.

 
         (H)         Addition of Covenants; Incorporation by Reference. If at any time the Company shall enter into or be a party to any instrument or agreement, including all such instruments or agreements in existence as of the date hereof and all such instruments or agreements entered into after the date hereof, relating to or amending any terms or conditions applicable to any of its Indebtedness of the type described in clauses (a), (b), (f) or (g) of the definition of “Indebtedness”, or any issuance or placement of its equity which includes covenants, terms, conditions or defaults not substantially provided for in this Agreement or more favorable to the holder or holders thereof than those provided for in this Agreement, then the Company shall promptly so advise the Agent and the Banks. Thereupon, if the Agent shall request, upon notice to the Company, the Agent and the Banks shall enter into with the Company an amendment to this Agreement or an additional agreement (as the Agent may request), providing for substantially the same covenants, terms, conditions and defaults as those provided for in such instrument or agreement to the extent required and as may be selected by the Agent.

 
         (I)         Further Assurances. Will, and will cause each Guarantor to, execute and deliver within 30 days after request therefor by the Banks and the Agent, all further instruments and documents and take all further action that the Agent may reasonably request as necessary to give effect to, and to aid in the exercise and enforcement of the rights and remedies of the Banks under, this Agreement, the Notes and the Security Documents, including without limitation causing each lessor of real property to the Company or any Guarantor in which inventory is located to execute and deliver to the Agent, prior to or upon the commencement of any such tenancy, an agreement in form and substance reasonably acceptable to the Banks and the Agent duly executed on behalf of such lessor waiving any distraint, lien and similar rights with respect to any property subject to the Security Documents and agreeing to permit the Banks and the Agent to enter such premises in connection therewith.



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         (J)         Use of Proceeds. The Company will use the proceeds of the Advances for its general corporate purposes and, subject to the requirements of Section 5.1(F), to make loans to the Guarantors for their general corporate purposes. The Company will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances to purchase or carry any “margin stock” (as defined in Regulation U of the Board of Governors of the Federal Reserve System).

        5.2     Negative Covenants. Until the Termination Date and thereafter until payment in full of the principal of and accrued interest on the Notes and the performance of all other obligations of the Company and the Guarantors under this Agreement, the Company agrees that, unless the Required Banks shall otherwise consent in writing it shall not, and shall not permit any of its Restricted Subsidiaries to:

 
         (A)         Interest Coverage Ratio. Permit or suffer the Interest Coverage Ratio for any 12-month period ending on the last day of any fiscal quarter to be less than 1.75 to 1.0.

 
         (B)         Funded Debt Coverage Ratio. Permit or suffer the Funded Debt Coverage Ratio to be greater than (i) 6.0 to 1.0 at any time during the period ending on March 31, 2004 and (ii) 5.5 to 1.0 at any time thereafter.

 
         (C)         Capital Expenditures. Acquire or contract to acquire any fixed asset or make any other capital expenditure if the aggregate purchase price and other acquisition costs of all such fixed assets acquired and contracted to be acquired and other capital expenditures made by the Company or any of its Restricted Subsidiaries during any fiscal year of the Company would exceed, on a Consolidated basis, an amount equal to $10,000,000 in any fiscal year.

 
         (D)         Indebtedness. Create, incur, assume or in any manner become liable in respect of, or suffer to exist, any Indebtedness other than:

 
         (i)         The Advances;

 
         (ii)         The Indebtedness described in Schedule 5.2(D) hereto, having the same terms as those existing on the date of this Agreement;

 
         (iii)         Indebtedness of any Restricted Subsidiary of the Company owing to the Company or to any other Restricted Subsidiary of the Company;

 
         (iv)         Senior Unsecured Debt;



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         (v)         Subordinated Debt of the Company or any of its Restricted Subsidiaries; and

 
         (vi)         Indebtedness owing to any Bank that constitutes Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Agreement to be outstanding (valued in an amount equal to the highest termination payment, if any, that would be payable upon termination for any reason on the date of determination) not exceeding in aggregate amount $25,000,000;

 
         (vii)         Indebtedness in aggregate principal amount at any time outstanding not exceeding $5,000,000 which is secured by one or more liens permitted by Section 5.2(E)(viii) hereof; and

 
         (viii)         Additional Indebtedness not to exceed $5,000,000 in aggregate principal amount at any time outstanding.

 
         (E)         Liens. Create, incur or suffer to exist any Lien on any of the assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether now owned or hereafter acquired, of the Company or any of its Restricted Subsidiaries, other than:

 
         (i)         Liens for taxes not delinquent or for taxes being contested in good faith by appropriate proceedings and as to which adequate financial reserves have been established on its books and records in accordance with Generally Accepted Accounting Principles;

 
         (ii)         Liens (other than any Lien imposed by ERISA or any Environmental Law) created and maintained in the ordinary course of business which are not material in the aggregate, and which would not have a Material Adverse Effect and which constitute (A) pledges or deposits under worker’s compensation laws, unemployment insurance laws or similar legislation, (B) good faith deposits in connection with bids, tenders, contracts or leases to which the Company or any of its Restricted Subsidiaries is a party for a purpose other than borrowing money or obtaining credit, including rent security deposits, (C) liens imposed by law, such as those of carriers, warehousemen and mechanics, if payment of the obligation secured thereby is not yet due, (D) Liens securing taxes, assessments or other governmental charges or levies not yet subject to penalties for nonpayment, and (E) pledges or deposits to secure public or statutory obligations of the Company or any of its Restricted Subsidiaries, or surety, customs or appeal bonds to which the Company or any of its Restricted Subsidiaries is a party;

 
         (iii)         Liens affecting real property which constitute minor survey exceptions or defects or irregularities in title, minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of such real property, provided that all of the foregoing, in the aggregate, do not at any time materially detract from the value of said properties or materially impair their use in the operation of the businesses of the Company or any of its Restricted Subsidiaries;



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         (iv)         Liens created pursuant to the Security Documents and Liens expressly permitted by the Security Documents;

 
         (v)         Each Lien described in Schedule 5.2(E) hereto so long as such Lien shall have the same terms as those existing on the date hereof;

 
         (vi)         Liens in favor of the Company or any of its Restricted Subsidiaries as security for Indebtedness permitted by Section 5.2(D)(iii);

 
         (vii)         The interest or title of a lessor under any lease otherwise permitted under this Agreement with respect to the property subject to such lease to the extent performance of the obligations of the Company or its Restricted Subsidiary thereunder is not delinquent by more than 30 days or is being contested in good faith; and

 
         (viii)         Any lien created to secure payment of a portion of the purchase price of any tangible fixed asset, including, without limitation, real estate (including improvements thereto) and vehicles, acquired by the Company or any of its Restricted Subsidiaries created or suffered to exist upon such fixed asset if the outstanding principal amount of the Indebtedness secured by such Lien does not at any time exceed the purchase price paid by the Company or such Subsidiary for such fixed asset and the aggregate principal amount at any time outstanding of all Indebtedness secured by such Liens does not exceed $5,000,000, provided that such Lien does not encumber any other asset at any time owned by the Company or such Restricted Subsidiary, and provided, further, that not more than one such Lien shall encumber such fixed asset at any one time.

 
         (F)         Merger; Acquisitions; Etc. Subject to the limitations and exceptions contained in Section 5.2(K), purchase or otherwise acquire, whether in one or a series of transactions, all or a substantial portion of the business, assets, rights, revenues or property, real, personal or mixed, tangible or intangible, of any Person (other than a Restricted Subsidiary), or all or a substantial portion of the Capital Stock of any other Person (other than a Restricted Subsidiary); nor merge or consolidate or amalgamate with any other Person or take any other action having a similar effect (other than the Glazer’s Transaction), provided, however, that this Section 5.2(F) shall not prohibit any merger or acquisition, including but not limited to those in which the consideration paid by the Company or a Restricted Subsidiary consists of its Capital Stock, if (i) the Company shall be the surviving or continuing corporation thereof, (ii) immediately before and after such merger or acquisition, no Default or Event of Default shall exist or shall have occurred and be continuing and the representations and warranties contained in Article IV shall be true and correct on and as of the date thereof (both before and after such merger or acquisition is consummated) as if made on the date such merger or acquisition is consummated, (iii) the purchase is consummated pursuant to a negotiated acquisition agreement on a non-hostile basis and approved by the target company’s board of directors (and shareholders, if necessary) prior to the consummation of the acquisition, and (iv) the Company shall have provided to the Agent before such merger or acquisition pro forma financial statements reflecting the occurrence of such merger or acquisition demonstrating compliance with the covenants contained in this Agreement, certified by a duly authorized officer of the Company.



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         (G)         Disposition of Assets; Etc. Sell, lease, license, transfer, assign or otherwise dispose of all or a substantial portion of its business, assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether in one or a series of transactions, other than inventory sold in the ordinary course of business upon customary credit terms and sales of obsolete material or equipment, provided, however, that this Section 5.2(G) shall not prohibit any such sale, lease, license, transfer, assignment or other disposition if (i) the aggregate book value (disregarding any write-downs of such book value other than ordinary depreciation and amortization) of all of the business, assets, rights, revenues and property disposed of (excluding the value of any Capital Stock of U.S. Beverage Company disposed of) after the date of this Agreement shall be less than three percent (3%) of such aggregate book value of the total assets of the Company or such Restricted Subsidiary, as the case may be, or (ii) with respect to a Restricted Subsidiary at least seventy-five percent (75%) of the consideration therefor received by such Restricted Subsidiary is either cash or the assumption of liabilities that are assumed by the transferee of any such assets pursuant to a novation agreement that releases the Restricted Subsidiary from further liability, and the cash proceeds are paid to the Company in reduction of such Restricted Subsidiary’s Indebtedness to the Company; and (iii) in the case of both (i) and (ii) above, immediately before and after such transaction no Default or Event of Default shall exist or shall have occurred and be continuing. Notwithstanding the above, the Company or any of its Subsidiaries may (a) sell the Capital Stock of U.S. Beverage Company; (b) transfer its assets primarily used in its U.S. Beverage division to USB-LLC, (c) sell beer franchises, brand labels and distribution rights, and its ownership rights, trademarks, trademark registrations, brand names and other rights with respect to its rectified products, for fair market value including cash royalty payments or cash payments over time and (d) sell the Capital Stock of any of Commonwealth Wine & Spirits, LLC, Goose Island Beer Co. and Extreme Beverage Company, LLC.

 
         (H)         Nature of Business. Make any substantial change in the nature of its business from that engaged in on the date of this Agreement or engage in any other businesses other than those in which it is engaged on the date of this Agreement, other than businesses reasonably related thereto.



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         (I)         Restricted Payments. Make, pay, declare or authorize any Restricted Payment, provided, however, that (i) the Company may make Restricted Payments with respect to any taxable year of the Company in the total amount not exceeding the federal, state and local income taxes incurred by attribution to the Company’s shareholders of the S corporation taxable income of the Company for such taxable year, so long as there shall not then exist a Default or Event of Default, and so long as prior to such distribution the chief financial officer of the Company shall deliver to the Agent a certificate in form acceptable to the Agent stating that such distribution is in compliance with this Section 5.2(I), and (ii) the Company and the Restricted Subsidiaries may make (a) redemptions of the Capital Stock of the Company or any Restricted Subsidiary owned by (1) Martin H. Bart and Joseph J. Fisch, Jr. as of the Effective Date so long as no Default or Event of Default has occurred and is continuing and (2) Norma M. Johnston as of the Effective Date, in an aggregate amount for clauses (1) and (2) not to exceed $15,000,000 plus the aggregate amount of all life insurance proceeds received by the Company to the extent used to fund such repurchase, (b) Restricted Payments otherwise permitted under Sections 5.2(E) or (K), and (c) additional Restricted Payments, provided that the aggregate of such additional Restricted Payments made after the Effective Date shall be less than the sum of (A) 50% of Consolidated Net Income for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after January 25, 1999 to the end of the Company’s most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (B) 100% of the aggregate net cash proceeds received by the Company from the issue or sale since January 25, 1999 of Capital Stock of the Company (other than Capital Stock sold to a Subsidiary of the Company) and 100% of the capital contributions received by the Company after January 25, 1999 in cash, plus (C) one year and one day after the date of such receipt, 100% of the cash payments received by the Company after January 25, 1999 on a Company Shareholder Note Receivable, plus (D) to the extent that any Investment permitted under Section 5.2(K) hereof that was made after January 25, 1999 is sold for cash or otherwise liquidated or repaid for cash, the lesser of (x) the cash return of capital with respect to such Investment (less the cost of disposition, if any) and (y) the initial amount of such Investment, plus (E) 50% of any dividends received by the Company or a Restricted Subsidiary after January 25, 1999 from an Unrestricted Subsidiary, to the extent that such dividends were not otherwise included in Consolidated Net Income for such period, plus (F) provided that no Default or Event of Default has occurred and is continuing, $2,500,000.

 
         (J)         Capital Leases. Permit or suffer the aggregate outstanding capitalized amount of all obligations under Capital Leases of the Company and its Restricted Subsidiaries at any time to exceed $5,000,000, excluding from this amount obligations on Capital Leases existing on the Effective Date and described on Schedule 5.2(J).



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         (K)         Investments. Make any Investments other than (i) Investments by the Company or any Restricted Subsidiary in any Restricted Subsidiary; (ii) extensions of trade credit made in the ordinary course of business on customary credit terms and commission, travel and similar advances made to officers and employees in the ordinary course of business; (iii) Investments in commercial paper of any United States issuer having the highest rating then given by Moody’s Investors Service, Inc., or Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., direct obligations of and obligations fully guaranteed by the United States of America or any agency or instrumentality thereof, or certificates of deposit of any commercial bank which is a member of the Federal Reserve System and which has capital, surplus and undivided profit (as shown on its most recently published statement of condition) aggregating not less than $100,000,000, provided, however, that each of the foregoing Investments has a maturity date not later than one year after the acquisition thereof by the Company or any of its Restricted Subsidiaries; (iv) Investments in joint venture or similar arrangements, exclusive of Investments described in subsection (iii) above, and (except for loans and advances of credit) Unrestricted Subsidiaries in which the aggregate of all such Investments does not exceed, at any one time outstanding, an amount equal to 10% of Consolidated Tangible Assets; (v) those Investments described in Schedule 5.2(K) hereto, having the same terms as existing on the date of this Agreement, but no extension or renewal thereof shall be permitted; (vi) redemptions of the Capital Stock of the Company or any Restricted Subsidiary owned on the Effective Date by Martin H. Bart, Norma M. Johnston and Joseph J. Fisch, Jr. as of the Effective Date to the extent permitted under Section 5.1(I); (vii) Investments permitted under Section 5.2(F); and (viii) Investments consisting of purchases of Senior Unsecured Debt permitted under Section 5.2(O).

 
         (L)         Transactions with Affiliates. Enter into, become a party to, or become liable in respect of, any contract or undertaking with any Affiliate except in the ordinary course of business and on terms not less favorable to the Company or such Restricted Subsidiary than those which could be obtained if such contract or undertaking were an arm’s length transaction with a Person other than an Affiliate.

 
         (M)         Sale and Leaseback Transactions. Become or remain liable in any way, whether directly or by assignment or as a guarantor or other contingent obligor, for the obligations of the lessee or user under any lease or contract for the use of any real or personal property if such property is owned on the date of this Agreement or thereafter acquired by the Company or any of its Restricted Subsidiaries and has been or is to be sold or transferred to any other Person and was, is or will be used by the Company or any such Restricted Subsidiary for substantially the same purpose as such property was used by the Company or such Restricted Subsidiary prior to such sale or transfer.



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         (N)         Payments and Modification of Subordinated Debt. Make any optional payment, prepayment or redemption of any Subordinated Debt, nor amend or modify, or consent or agree to any amendment or modification, which would shorten any maturity or increase the amount of any payment of principal or increase the rate (or require earlier payment) of interest on any such Subordinated Debt, nor amend the subordination provisions of any agreement under which any Subordinated Debt is issued or created or otherwise related thereto, nor enter into any agreement or arrangement providing for the defeasance of any Subordinated Indebtedness.

 
         (O)         Payments and Modification of Senior Unsecured Debt. Make any optional payment, prepayment or any optional or mandatory redemption of, or purchase, any Senior Unsecured Debt, nor amend or modify, or consent or agree to any amendment or modification, which would shorten any maturity or increase the amount of any payment of principal or increase the rate (or require earlier payment) of interest on any such Senior Unsecured Debt, nor enter into any agreement or arrangement providing for the defeasance of any Senior Unsecured Debt; provided, that the Company may (A) make redemptions of Senior Unsecured Debt that are (1) permitted or required by the terms of the indenture governing the Senior Unsecured Debt from the cash proceeds of a sale of common stock of the Company or (2) required by the terms of the indenture governing the Senior Unsecured Debt from the cash proceeds of a sale of assets of the Company or any of its Restricted Subsidiaries (other than assets subject to a Lien in favor of the Agent) to the extent such cash proceeds are not reinvested in the Company’s and its Restricted Subsidiaries’ assets and (B) purchase in one or more transactions up to $20,000,000 in aggregate principal amount of Senior Unsecured Debt at par or less than par, if (i) immediately before and after such purchase or redemption, no Default or Event of Default shall exist or shall have occurred and be continuing, (ii) except as may be set forth in any periodic report filed by the Company with the Securities and Exchange Commission, the representations and warranties contained in Article IV shall be true and correct on and as of the date thereof (both before and after such purchase or redemption is consummated) as if made on the date such purchase or redemption is consummated, (iii) the Company shall have provided to the Agent before such purchase or redemption pro forma financial statements reflecting the occurrence of such purchase or redemption demonstrating compliance with the covenants contained in this Agreement, certified by a duly authorized officer of the Company, and (iv) after giving effect to such purchase or redemption, Availability shall be greater than or equal to $15,000,000. For purposes of this Section 5.1(O), “Availability” shall mean an amount equal to (a) the lesser of the Aggregate Commitment and the Borrowing Base then in effect, minus (b) the aggregate outstanding principal amount of all Advances.

 
         (P)         Negative Pledge Limitation. Enter into any agreement with any Person other than the Banks pursuant hereto which prohibits or limits the ability of the Company or any Subsidiary to create, incur, assume or suffer to exist any Lien in favor of the Agent and the Banks upon any of its assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether now owned or hereafter acquired, except for any such prohibitions or limitations contained in the indenture governing the Senior Unsecured Debt as in effect on the Effective Date.



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         (Q)         Inconsistent Agreements. Enter into any agreement containing any provision which would be violated or breached by this Agreement or any of the transactions contemplated hereby or by performance by the Company or any of its Restricted Subsidiaries of its obligations in connection therewith.

 
         (R)         Accounting Changes. The Company shall not change its fiscal year or make any significant changes (i) in accounting treatment and reporting practices except as permitted by generally accepted accounting principles and disclosed to the Banks, or (ii) in tax reporting treatment except as permitted by law and disclosed to the Banks.

ARTICLE VI:    DEFAULT

        6.1     Events of Default. The occurrence of any one of the following events or conditions shall be deemed an “Event of Default” hereunder unless waived pursuant to Section 8.1:

 
         (A)         Nonpayment. The Company shall fail to pay (i) any principal of the Notes or any reimbursement obligation under Section 3.3 (whether by deemed disbursement of a Loan or otherwise) when due and payable hereunder, or (ii) interest on the Notes or any fees or any other amount within five days after such interest, fee or other amount becomes due and payable hereunder; or

 
         (B)         Misrepresentation. Any representation or warranty made by the Company in Article IV hereof or by the Company or any Guarantor in any Security Document or any other certificate, report, financial statement or other document furnished by or on behalf of the Company or any Guarantor in connection with this Agreement, shall prove to have been incorrect in any material respect when made or deemed made; or

 
         (C)         Certain Covenants. The Company or any Guarantor shall fail to perform or observe any term, covenant or agreement contained in (i) subsection (J) of Section 5.1 or Section 5.2, (ii) subsection (D) of Section 5.1 and such failure under this clause (ii) shall remain unremedied for 5 Business Days after the occurrence thereof, or (iii) any other subsection of Section 5.1 and any such failure under this clause (iii) shall remain unremedied for 30 calendar days after written notice thereof shall have been given to the Company or such Guarantor, as the case may be, by the Agent; or

 
         (D)         Other Defaults. The Company or any Guarantor shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or in any Security Document, and any such failure shall remain unremedied for 30 calendar days after notice thereof shall have been given to the Company or such Guarantor, as the case may be, by the Agent (or such longer or shorter period of time as may be specified in such Security Document); or



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         (E)        Cross Default. The Company or any Restricted Subsidiary shall fail to pay any part of the principal of, the premium, if any, or the interest on, or any other payment of money due under any of its Indebtedness (other than Indebtedness hereunder), beyond any period of grace provided with respect thereto, which individually or together with other such Indebtedness as to which any such failure exists has an aggregate outstanding principal amount in excess of $1,000,000; or if the Company or any Restricted Subsidiary fails to perform or observe any other term, covenant or agreement contained in, or if any other event or condition occurs or exists under, any agreement, document or instrument evidencing or securing any such Indebtedness having such aggregate outstanding principal amount, or under which any such Indebtedness was incurred, issued or created, beyond any period of grace, if any, provided with respect thereto if the effect of such failure is either (i) to cause, or permit the holders of such Indebtedness (or a trustee on behalf of such holders) to cause, any payment in respect of such Indebtedness to become due prior to its due date or (ii) to permit the holders of such Indebtedness (or a trustee on behalf of such holders) to elect a majority of the board of directors of the Company; or

 
         (F)         Judgments. One or more judgments or orders for the payment of money in an aggregate amount of $1,000,000 or more shall be rendered against the Company or any Restricted Subsidiary, or any other judgment or order (whether or not for the payment of money) shall be rendered against or shall affect the Company or any Restricted Subsidiary which could reasonably be expected to have a Material Adverse Effect, and either (i) such judgment or order shall have remained unsatisfied and the Company or such Restricted Subsidiary shall not have taken action necessary to stay enforcement thereof by reason of pending appeal or otherwise, prior to the expiration of the applicable period of limitations for taking such action or, if such action shall have been taken, a final order denying such stay shall have been rendered, or (ii) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order; or

 
         (G)         ERISA. The occurrence of a Reportable Event that results in or could result in liability of the Company, any Restricted Subsidiary or their ERISA Affiliates to the PBGC or to any Plan, individually or in the aggregate in excess of $1,000,000, and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof; or the occurrence of any Reportable Event which could constitute grounds for termination of any Plan of the Company, any Restricted Subsidiary or their ERISA Affiliates by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof; or the filing by the Company, any Restricted Subsidiary or any of their ERISA Affiliates of a notice of intent to terminate a Plan or the institution of other proceedings to terminate a Plan; or the Company, any Restricted Subsidiary or any of their ERISA Affiliates shall fail to pay when due any liability to the PBGC or to a Plan individually or in the aggregate in excess of $1,000,000; or the PBGC shall have instituted proceedings to terminate, or to cause a trustee to be appointed to administer, any Plan of the Company, any Guarantor, Restricted Subsidiary or any of their ERISA Affiliates; or any Person engages in a Prohibited Transaction with respect to any Plan which results in or could result in liability of the Company, Restricted Subsidiary, any of their ERISA Affiliates, any Plan of the Company, any Restricted Subsidiary or their ERISA Affiliates or fiduciary of any such Plan, individually or in the aggregate in excess of $1,000,000; or failure by the Company, any Restricted Subsidiary or any of their ERISA Affiliates to make a required installment or other payment to any Plan within the meaning of Section 302(f) of ERISA or Section 412(n) of the Code that results in or could result in liability of the Company, any Restricted Subsidiary or any of their ERISA Affiliates to the PBGC or any Plan, individually or in the aggregate in excess of $1,000,000; or the withdrawal of the Company, any Restricted Subsidiary or any of their ERISA Affiliates from a Plan during a plan year in which it was a “substantial employer” as defined in Section 4001(9a)(2) of ERISA; or, since the Effective Date, the Company, any Restricted Subsidiary or any of their ERISA Affiliates has incurred, or is reasonably expected to incur, pursuant to Section 4201 of ERISA, any withdrawal liability to Multiemployer Plans; or



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         (H)         Insolvency, Etc. The Company or any Restricted Subsidiary shall be dissolved or liquidated (or any judgment, order or decree therefor shall be entered), or shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or shall institute, or there shall be instituted against the Company or any Restricted Subsidiary, any proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order for relief, or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its assets, rights, revenues or property, and, if such proceeding is instituted against the Company or such Restricted Subsidiary and is being contested by the Company or such Restricted Subsidiary, as the case may be, in good faith by appropriate proceedings, such proceeding shall remain undismissed or unstayed for a period of 60 days; or the Company or such Restricted Subsidiary shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection; or

 
         (I)         Loan Documents. Any event of default described in any Loan Document (other than this Agreement) shall have occurred and be continuing, or any Loan Document shall at any time for any reason cease to be valid and binding and enforceable against any obligor thereunder, or the validity, binding effect or enforceability thereof shall be contested by any Person, or any obligor shall deny that it has any or further liability or obligation thereunder, or any Loan Document shall be terminated, invalidated or set aside, or be declared ineffective or inoperative or in any way cease to give or provide to the Banks and the Agent the benefits purported to be created thereby; or



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         (J)         Control. James LaCrosse, his spouse, and trusts established by him or his spouse for the benefit of his spouse or descendants, shall cease to own directly or indirectly free and clear of all Liens at least 65% of the securities of the Company of each class having ordinary voting power for the election of directors (other than securities which have such power only by reason of the happening of a contingency); or any Person other than James LaCrosse, his spouse, trusts established by him or his spouse for the benefit of his spouse or descendants, and Norma Johnston shall possess, directly or indirectly, the power to direct or cause the direction of the management and policies of the Company, whether through the ownership of voting securities or by contract or otherwise.

        6.2    Remedies.

 
         (A)         Upon the occurrence and during the continuance of any Event of Default, the Agent may and, upon being directed to do so by the Required Banks, shall by notice to the Company (i) terminate the Commitments or (ii) declare the outstanding principal of, and accrued interest on, the Notes, all unpaid reimbursement obligations in respect of drawings under Letters of Credit and all other amounts owing under this Agreement to be immediately due and payable, or (iii) demand immediate delivery of cash collateral, and the Company agrees to deliver such cash collateral upon demand, in an amount equal to the maximum amount that may be available to be drawn at any time prior to the stated expiry of all outstanding Letters of Credit, or any one or more of the foregoing, whereupon the Commitments shall terminate forthwith and all such amounts, including such cash collateral, shall become immediately due and payable, provided that in the case of any event or condition described in Section 6.1(H) with respect to the Company or any Restricted Subsidiary, the Commitments shall automatically terminate forthwith and all such amounts, including such cash collateral, shall automatically become immediately due and payable without notice; in all cases without demand, presentment, protest, diligence, notice of dishonor or other formality, all of which are hereby expressly waived. Such cash collateral delivered in respect of outstanding Letters of Credit shall be deposited in a special cash collateral account to be held by the Agent as collateral security for the payment and performance of the Company’s obligations under this Agreement to the Banks and the Agent.

 
         (B)         The Agent may and, upon being directed to do so by the Required Banks, shall, in addition to the remedies provided in Section 6.2(A), exercise and enforce any and all other rights and remedies available to it, whether arising under this Agreement, the Notes or any Security Document or under applicable law, in any manner deemed appropriate by the Agent, including suit in equity, action at law, or other appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or in the Notes or any Security Document or in aid of the exercise of any power granted in this Agreement, the Notes or any Security Document.



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         (C)         Upon the occurrence and during the continuance of any Event of Default, each Bank may at any time and from time to time, without notice to the Company or any Guarantor (any requirement for such notice being expressly waived by the Company and each Guarantor) set off and apply against any and all of the obligations of the Company and each Guarantor now or hereafter existing under this Agreement, whether owing to such Bank or any other Bank or the Agent, any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Company or any Guarantor and any property of the Company or any Guarantor from time to time in possession of such Bank, irrespective of whether or not such Bank shall have made any demand hereunder and although such obligations may be contingent and unmatured. Each of the Company and the Guarantors hereby grants to the Banks and the Agent a lien on and security interest in all such deposits, indebtedness and property as collateral security for the payment and performance of the obligations of the Company and each Guarantor under this Agreement. The rights of such Bank under this Section 6.2(C) are in addition to other rights and remedies (including, without limitation, other rights of setoff) which such Bank may have.

ARTICLE VII:    THE AGENT AND THE BANKS

        7.1     Appointment and Authorization. Each Bank hereby irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement, the Notes and the Security Documents as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. The provisions of this Article VII are solely for the benefit of the Agent and the Banks, and neither the Company nor any Guarantor shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Company.

        7.2     Agent and Affiliates. LaSalle Bank National Association in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent. LaSalle Bank National Association and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business with the Company, any Guarantor or any of their respective Restricted Subsidiaries as if it were not acting as Agent hereunder, and may accept fees and other consideration therefor without having to account for the same to the Banks.

        7.3     Scope of Agent’s Duties. The Agent shall have no duties or responsibilities except those expressly set forth herein, and shall not, by reason of this Agreement, have a fiduciary relationship with any Bank, and no implied covenants, responsibilities, duties, obligations or liabilities shall be read into this Agreement or shall otherwise exist against the Agent. As to any matters not expressly provided for by this Agreement (including, without limitation, collection and enforcement action under the Notes and the Security Documents), the Agent shall not be required to exercise any discretion or take any action, but the Agent shall take such action or omit to take any action pursuant to the reasonable written instructions of the Required Banks and may request instructions from the Required Banks. The Agent shall in all cases be fully protected in acting, or in refraining from acting, pursuant to the written instructions of the Required Banks (or all of the Banks, as the case may be, in accordance with the requirements of this Agreement), which instructions and any action or omission pursuant thereto shall be binding upon all of the Banks; provided, however, that the Agent shall not be required to act or omit to act if, in the judgment of the Agent, such action or omission may expose the Agent to personal liability or is contrary to this Agreement, the Notes or the Security Documents or applicable law.



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        7.4     Reliance by Agent. The Agent shall be entitled to rely upon any certificate, notice, document or other communication (including any cable, telegram, telex, facsimile transmission or oral communication) believed by it to be genuine and correct and to have been sent or given by or on behalf of a proper Person. The Agent may treat the payee of any Note as the holder thereof unless and until the Agent receives written notice of the assignment thereof pursuant to the terms of this Agreement signed by such payee and the Agent receives the written agreement of the assignee that such assignee is bound hereby to the same extent as if it had been an original party hereto. The Agent may employ agents (including without limitation collateral agents) and may consult with legal counsel (who may be counsel for the Company), independent public accountants and other experts selected by it and shall not be liable to the Banks, except as to money or property received by it or its authorized agents, for the negligence or misconduct of any such agent selected by it with reasonable care or for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts.

        7.5     Default. The Agent shall not be deemed to have knowledge of the occurrence of any Default or Event of Default, unless the Agent has received written notice from a Bank or the Company or any Guarantor specifying such Default or Event of Default and stating that such notice is a “Notice of Default”. In the event that the Agent receives such a notice, the Agent shall give written notice thereto to the Banks.

        7.6     Liability of Agent. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable to the Banks for any action taken or not taken by it or them in connection herewith with the consent or at the request of the Required Banks or in the absence of its or their own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any recital, statement, warranty or representation contained in this Agreement, any Note or any Security Document, or in any certificate, report, financial statement or other document furnished in connection with this Agreement, (ii) the performance or observance of any of the covenants or agreements of the Company or any Guarantor, (iii) the satisfaction of any condition specified in Article II hereof, or (iv) the validity, effectiveness, legal enforceability, value or genuineness of this Agreement, Notes or the Security Documents or any collateral subject thereto or any other instrument or document furnished in connection herewith.



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        7.7     Nonreliance on Agent and Other Banks. Each Bank acknowledges and agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and the Guarantors and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decision in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Company or any Guarantor of this Agreement, the Notes or the Security Documents or any other documents referred to or provided for herein or to inspect the properties or books of the Company or any Guarantor and, except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any information concerning the affairs, financial condition or business of the Company, any Guarantor or any of their respective Restricted Subsidiaries which may come into the possession of the Agent or any of its affiliates.

        7.8     Indemnification. The Banks agree to indemnify the Agent (to the extent not reimbursed by the Company or any Guarantor, but without limiting any obligation of the Company or any Guarantor to make such reimbursement), ratably according to the respective principal amounts of the Advances then outstanding made by each of them (or if no Advances are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever (including, without limitation, fees and disbursements of counsel) which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or the transactions contemplated hereby or any action taken or omitted by the Agent under this Agreement, provided, however, that no Bank shall be liable for any portion of such claims, damages, losses, liabilities, costs or expenses resulting from the Agent’s gross negligence or willful misconduct. Without limitation of the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including without limitation fees and expenses of counsel) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Company or any Guarantor, but without limiting the obligation of the Company or any Guarantor to make such reimbursement. Each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any amounts owing to the Agent by the Banks pursuant to this Section. If the indemnity furnished to the Agent under this Section shall, in the judgment of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity from the Banks and cease, or not commence, to take any action until such additional indemnity is furnished.



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        7.9     Successor Agent. The Agent may resign as such at any time upon ten days’ prior written notice to the Company and the Banks. In the event of any such resignation, the Required Banks shall, by an instrument in writing delivered to the Company and the Agent, appoint a successor, which shall be a commercial bank organized under the laws of the United States or any State thereof and having a combined capital and surplus of at least $500,000,000. If a successor is not so appointed or does not accept such appointment before the Agent’s resignation becomes effective, the retiring Agent may appoint a temporary successor to act until such appointment by the Required Banks is made and accepted or if no such temporary successor is appointed as provided above by the retiring Agent, the Required Banks shall thereafter perform all the duties of the Agent hereunder until such appointment by the Required Banks is made and accepted. Any successor to the Agent shall execute and deliver to the Company and the Banks an instrument accepting such appointment and thereupon such successor Agent, without further act, deed, conveyance or transfer shall become vested with all of the properties, rights, interests, powers, authorities and obligations of its predecessor hereunder with like effect as if originally named as Agent hereunder. Upon request of such successor Agent, the Company and the retiring Agent shall execute and deliver such instruments of conveyance, assignment and further assurance and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor Agent all such properties, rights, interests, powers, authorities and obligations. The provisions of this Article VII shall thereafter remain effective for such retiring Agent with respect to any actions taken or omitted to be taken by such Agent while acting as the Agent hereunder.

        7.10     Sharing of Payments. The Banks agree among themselves that, in the event that any Bank shall obtain payment in respect of any Advance or any other obligation owing to the Banks under this Agreement through the exercise of a right of set-off, banker’s lien, counterclaim or otherwise in excess of its ratable share of payments received by all of the Banks on account of the Advances and other obligations (or if no Advances are outstanding, ratably according to the respective amounts of the Commitments), such Bank shall promptly purchase from the other Banks participations in such Advances and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all of the Banks share such payment in accordance with such ratable shares. The Banks further agree among themselves that if payment to a Bank obtained by such Bank through the exercise of a right of set-off, banker’s lien, counterclaim or otherwise as aforesaid shall be rescinded or must otherwise be restored, each Bank which shall have shared the benefit of such payment shall, by repurchase of participations theretofore sold, return its share of that benefit to each Bank whose payment shall have been rescinded or otherwise restored. Each of the Company and the Guarantors agrees that any Bank so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including set-off, banker’s lien or counterclaim, with respect to such participation as fully as if such Bank were a holder of such Advance or other obligation in the amount of such participation. The Banks further agree among themselves that, in the event that amounts received by the Banks and the Agent hereunder are insufficient to pay all such obligations or insufficient to pay all such obligations when due, the fees and other amounts owing to the Agent in such capacity shall be paid therefrom before payment of obligations owing to the Banks under this Agreement. Except as otherwise expressly provided in this Agreement, if any Bank or the Agent shall fail to remit to the Agent or any other Bank an amount payable by such Bank or the Agent to the Agent or such other Bank pursuant to this Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Agent or such other Bank at a rate per annum equal to the rate at which borrowings are available to the payee in its overnight federal funds market. It is further understood and agreed among the Banks and the Agent that if the Agent shall engage in any other transactions with the Company and shall have the benefit of any collateral or security therefor which does not expressly secure the obligations arising under this Agreement except by virtue of a so-called dragnet clause or comparable provision, the Agent shall be entitled to apply any proceeds of such collateral or security first in respect of the obligations arising in connection with such other transaction before application to the obligations arising under this Agreement.



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ARTICLE VIII:    MISCELLANEOUS

8.1    Amendments, Etc.

 
         (A)         No amendment, modification, termination or waiver of any provision of this Agreement nor any consent to any departure therefrom shall be effective unless the same shall be in writing and signed by the Company and Required Banks and, to the extent any rights or duties of the Agent may be affected thereby, the Agent, provided, however, that no such amendment, modification, termination, waiver or consent shall, without the consent of the Agent and all of the Banks, (i) authorize or permit the extension of time for, or any reduction of the amount of, any payment of the principal of, or interest on, the Notes or any Letter of Credit reimbursement obligation, or any fees or other amount payable hereunder, (ii) except as set forth in Section 2.5(C), amend, extend or terminate the respective Commitments of any Bank set forth on the signature pages hereof, or modify the provisions of this Section regarding the taking of any action under this Section or the definition of Required Banks or any provision of this Agreement requiring the consent of all of the Banks, (iii) provide for the discharge of any Guarantor or the release of any collateral subject to any Security Document, or (iv) modify any other provision of this Agreement which by its terms requires the consent of all of the Banks.

 
         (B)         Any such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

 
         (C)         Notwithstanding anything herein to the contrary, no Bank that is in default of any of its obligations, covenants or agreements under this Agreement shall be entitled to vote (whether to consent or to withhold its consent) with respect to any amendment, modification, termination or waiver of any provision of this Agreement or any departure therefrom or any direction from the Banks to the Agent, and, for purposes of determining the Required Banks at any time when any Bank is in default under this Agreement, the Commitments and Advances of such defaulting Banks shall be disregarded.



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         (D)         If any Bank refuses to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement requiring the consent of all Banks (or all affected Banks) pursuant to this Section 8.1 and the same have been approved by the Required Banks, the Company may designate another bank which is acceptable to the Agent in its reasonable discretion (such other bank being called a “Replacement Bank”) to purchase the Loans of such Bank and such Bank’s rights hereunder, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the outstanding principal amount of the Loans payable to such Bank plus any accrued but unpaid interest on such Loans and all accrued but unpaid fees owed to such Bank and any other amounts payable to such Bank under this Agreement, and to assume all the obligations of such Bank hereunder, and, upon such purchase and assumption (pursuant to an Assignment and Acceptance), such Bank shall no longer be a party hereto or have any rights hereunder (other than rights with respect to indemnities and similar rights applicable to such Bank prior to the date of such purchase and assumption) and shall be relieved from all obligations to the Company hereunder, and the Replacement Bank shall succeed to the rights and obligations of such Bank hereunder.

        8.2    Notices.

 
         (A)         Except as otherwise provided in Sections 2.4(A), 2.7 and 8.2(C) hereof or any other provision of this Agreement, all notices and other communications hereunder shall be in writing and shall be sent to the Company, and the Guarantors c/o the Company, at P.O. Box 1602, Indianapolis, IN 46206-1602, or by facsimile to facsimile No. 317/685-8810, or delivered to the Company, and the Guarantors c/o the Company, at 700 West Morris Street, Indianapolis, IN 46225, in all the above cases to the attention of James LaCrosse, President; and to the Agent and the Banks at the respective addresses for notices set forth on the signatures pages hereof, or to such other address as may be designated by the Company, any Guarantor, the Agent or any Bank by notice to the other parties hereto. All notices and other communications shall be deemed to have been given at the time of actual delivery thereof to such address, or, unless sooner delivered, (i) if sent by certified or registered mail, postage prepaid, to such address, on the third day after the date of mailing, (ii) if sent by telex, upon receipt of the appropriate answerback, or (iii) if sent by facsimile transmission, upon confirmation of receipt by telephone at the number specified for confirmation, provided, however, that notices to the Agent shall not be effective until received.

 
         (B)         Notices by the Company to the Agent with respect to terminations, reductions or increases of the Aggregate Commitment pursuant to Section 2.2, requests for Advances pursuant to Section 2.4, requests for continuations or conversions of Loans pursuant to Section 2.7 and notices of prepayment pursuant to Section 3.1 shall be irrevocable and binding on the Company.



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         (C)         Any notice to be given by the Company to the Agent pursuant to Sections 2.4, 2.7 or 3.1 and any notice to be given by the Agent to any Bank or by any Bank to the Agent or any Bank hereunder, may be given by telephone, and all such notices given by the Company must be immediately confirmed in writing in the manner provided in Section 8.2(A). Any such notice given by telephone shall be deemed effective upon receipt thereof by the party to whom such notice is to be given. The Company and the Guarantors shall indemnify and hold harmless the Banks and the Agent from any and all losses, damages, liabilities and claims arising from their good faith reliance on any such telephone notice by the Company or any Guarantor.

        8.3     No Waiver By Conduct; Remedies Cumulative. No course of dealing on the part of the Agent or any Bank, nor any delay or failure on the part of the Agent or any Bank in exercising any right, power or privilege hereunder shall operate as a waiver of such right, power or privilege or otherwise prejudice the Agent’s or such Bank’s rights and remedies hereunder; nor shall any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other right, power or privilege. No right or remedy conferred upon or reserved to the Agent or any Bank under this Agreement, the Notes or any Security Document is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy granted thereunder or now or hereafter existing under any applicable law. Every right and remedy granted by this Agreement, the Notes or any Security Document or by applicable law to the Agent or any Bank may be exercised from time to time and as often as may be deemed expedient by the Agent or any Bank and, unless contrary to the express provisions of this Agreement, the Notes or any Security Document, irrespective of the occurrence or continuance of any Default or Event of Default.

        8.4     Reliance on and Survival of Various Provisions. All terms, covenants, agreements, representations and warranties of the Company or any Guarantor made herein or in any Security Document or in any certificate, report, financial statement or other document furnished by or on behalf of the Company or any Guarantor in connection with this Agreement shall be deemed to be material and to have been relied upon by the Banks, notwithstanding any investigation heretofore or hereafter made by any Bank or on such Bank’s behalf, and those covenants and agreements of the Company set forth in Section 3.7, 3.9 and 8.5 hereof shall survive the repayment in full of the Advances and the termination of the Commitments.

        8.5    Expenses; Indemnification.

 
         (A)         Company agrees to pay, or reimburse the Agent for the payment of, on demand, (i) the reasonable fees and expenses of counsel to the Agent, including without limitation the fees and expenses of Sidley Austin Brown & Wood, in connection with the preparation, execution and delivery of this Agreement, the Notes, the Security Documents and in connection with advising the Agent as to its rights and responsibilities with respect thereto, and in connection with any amendments, waivers or consents in connection therewith, and (ii) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing or recording of this Agreement, Notes, the Security Documents (or the verification of filing, recording, perfection or priority thereof) or the consummation of the transactions contemplated hereby, and any and all liabilities with respect to or resulting from any delay in paying or omitting to pay such taxes or fees, and (iii) all reasonable costs and expenses of the Agent and the Banks (including reasonable fees and expenses of counsel and whether incurred through negotiations, legal proceedings or otherwise)) in connection with any Default or Event of Default or the enforcement of, or the exercise or preservation of any rights under, this Agreement or the Notes or any Security Document or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement and (iv) all reasonable costs and expenses of the Agent and the Banks (including reasonable fees and expenses of counsel) in connection with any action or proceeding relating to a court order, injunction or other process or decree restraining or seeking to restrain the Agent from paying any amount under, or otherwise relating in any way to, any Letter of Credit and any and all costs and expenses which any of them may incur relative to any payment under any Letter of Credit.



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         (B)         The Company hereby indemnifies and agrees to hold harmless the Banks and the Agent, and their respective officers, directors, employees and agents, harmless from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever (“Losses”) which the Banks, the Agent or any such Person may incur or which may be claimed against any of them by reason of or in connection with any Letter of Credit, and neither any Bank nor the Agent or any of their respective officers, directors, employees or agents (each an “Indemnified Party”) shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or for any acts or omissions of any beneficiary in connection therewith; (ii) the validity, sufficiency or genuineness of documents or of any endorsement thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by the Agent to the beneficiary under any Letter of Credit issued by it against presentation of documents which do not comply with the terms of any Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (iv) any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit; or (v) any other event or circumstance whatsoever arising in connection with any Letter of Credit; provided, however, that the Company shall not be required to indemnify the Indemnified Parties, and the Agent and the Banks shall be liable to the Company to the extent, but only to the extent, of any Losses incurred by the Company which were caused by (A) the Agent’s wrongful dishonor of any Letter of Credit issued by it after the presentation to it by the beneficiary thereunder of a draft or other demand for payment and other documentation strictly complying with the terms and conditions of such Letter of Credit, or (B) the Agent’s payment to the beneficiary under any Letter of Credit issued by it against presentation of documents which do not comply with the terms of the Letter of Credit to the extent, but only to the extent, that such payment constitutes gross negligence of willful misconduct of such Indemnified Party. It is understood that in making any payment under a Letter of Credit issued by it the Agent will rely on documents presented to it under such Letter of Credit as to any and all matters set forth therein without further investigation and regardless of any notice or information to the contrary, and such reliance and payment against documents presented under a Letter of Credit substantially complying with the terms thereof shall not be deemed gross negligence or willful misconduct of the Agent in connection with such payment. It is further acknowledged and agreed that the Company may have rights against the beneficiary or others in connection with any Letter of Credit with respect to which the Banks or the Agent are alleged to be liable and it shall be a precondition of the assertion of any liability of the Banks or the Agent under this Section that the Company shall first have exhausted all reasonable remedies in respect of the alleged loss against such beneficiary and any other parties obligated or liable in connection with such Letter of Credit and any related transactions.



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         (C)         The Company hereby indemnifies and agrees to hold harmless the Banks and the Agent, and their respective officers, directors, employees and agents, from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever (including reasonable attorneys fees and disbursements incurred in connection with any investigative, administrative or judicial proceeding whether or not such Person shall be designated as a party thereto) which the Banks or the Agent or any such Person may incur or which may be claimed against any of them by reason of or in connection with entering into this Agreement or the transactions contemplated hereby, including without limitation those arising under Environmental Laws; provided, however, that the Company shall not be required to indemnify any such Bank and the Agent or such other Person, to the extent, but only to the extent, that such claim, damage, loss, liability, cost or expense is attributable to the gross negligence or willful misconduct of such Bank or the Agent or their employees or agents, as the case may be.

 
         (D)         Neither the Agent nor any Bank shall have any liability with respect to, and the Company hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by the Company or any Subsidiary in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby.

        8.6    Successors and Assigns.

 
         (A)         This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that the Company may not, without the prior consent of the Banks, assign its rights or obligations hereunder or under the Notes or any Security Document and the Banks shall not be obligated to make any Advance hereunder to any entity other than the Company.



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         (B)         Each Bank may, with the prior consent of the Company (which shall not be unreasonably withheld and which is not required if there should then exist a Default or Event of Default or if the sale is to an Affiliate of such Bank) may sell to any financial institution or institutions, and such financial institution or institutions may further sell, a participation interest (undivided or divided) in, the Advances and such Bank’s rights and benefits under this Agreement, the Notes and the Security Documents, and to the extent of that participation interest such participant or participants shall have the same rights and benefits against the Company under Section 3.7, 3.9 and 6.2(C) as it or they would have had if such participant or participants were the Bank making the Advances to the Company hereunder, provided, however, that (i) such Bank’s obligations under this Agreement shall remain unmodified and fully effective and enforceable against such Bank, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of its Notes for all purposes of this Agreement, (iv) the Company, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement, and (v) such Bank shall not grant to its participant any rights to consent or withhold consent to any action taken by such Bank or the Agent under this Agreement other than action requiring the consent of all of the Banks hereunder.

 
         (C)         The Agent from time to time in its sole discretion may appoint agents for the purpose of servicing and administering this Agreement and the transactions contemplated hereby and enforcing or exercising any rights or remedies of the Agent provided under this Agreement, the Notes, any Security Documents or otherwise. In furtherance of such agency, the Agent may from time to time direct that the Company and the Guarantors provide notices, reports and other documents contemplated by this Agreement (or duplicates thereof) to such agent. The Company and each Guarantor hereby consents to the appointment of such agent and agrees to provide all such notices, reports and other documents and to otherwise deal with such agent acting on behalf of the Agent in the same manner as would be required if dealing with the Agent itself.

 
         (D)         Each Bank may, with the prior consent of the Company (which shall not be unreasonably withheld and which is not required if there should then exist a Default or Event of Default) and the Agent, assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note held by it); provided, however, that (i) each such assignment shall be of a uniform, and not a varying, percentage of all rights and obligations, (ii) except in the case of an assignment of all of a Bank’s rights and obligations under this Agreement, (A) the amount of the Commitment of the assigning Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000, and in integral multiples of $5,000,000 thereafter, or such lesser amount as the Company and the Agent may consent to and (B) after giving effect to each such assignment, the amount of the Commitment of the assigning Bank shall in no event be less than $5,000,000, (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance in the form of Exhibit H hereto (an “Assignment and Acceptance”), together with the Note subject to such assignment and a processing and recordation fee of $3,500, and (iv) any Bank may without the consent of the Company or the Agent, and without paying any fee, assign to any Affiliate of such Bank that is a bank or financial institution or to any other Bank all or any portion of its rights and obligations under this Agreement. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (y) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Bank’s rights and obligations under this Agreement, such Bank shall cease to be a party hereto).



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         (E)         By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.6 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank.



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         (F)         The Agent shall maintain at its address designated on the signature pages hereof a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Advances owing to, each Bank from time to time (the “Register”). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Company, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice.

 
         (G)         Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee, together with the Note subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. Within five Business Days after its receipt of such notice, the Company, at its own expense, shall execute and deliver to the Agent in exchange for the surrendered Note a new Note to the order of such assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Bank has retained a Commitment hereunder, a new Note to the order of the assigning Bank in an amount equal to the Commitment retained by it hereunder. Such new Note shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit C hereto.

 
         (H)         The Company shall not be liable for any costs or expenses of any Bank in effectuating any participation or assignment under this Section 8.6.

 
         (I)         The Banks may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.6, disclose to the assignee or participant or proposed assignee or participant any information relating to the Company, provided, that disclosures to proposed assignees or participants the assignments or sales of participations to which are subject to the consent of the Company may only be made with the consent of the Company, which consent shall not be unreasonably withheld.

 
         (J)         Notwithstanding any other provision set forth in this Agreement, any Bank may at any time create a security interest in, or assign, all or any portion of its rights under this Agreement (including, without limitation, the Loans owing to it and the Note held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System; provided, that such creation of a security interest or assignment shall not release such Bank from its obligations under this Agreement.



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        8.7     Counterparts and Telefacsimile Signatures. This Agreement may be executed in any number of counterparts, and by telefacsimile signature, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart.

        8.8     Governing Law. This Agreement is a contract made under, and shall be governed by and construed in accordance with, the law of the State of Illinois applicable to contracts made and to be performed entirely within such State and without giving effect to choice of law principles of such State. Each of the Company and the Guarantors and the Banks further agrees that any legal or equitable action or proceeding with respect to this Agreement, the Notes or any Security Document or the transactions contemplated hereby shall be brought in any court of the State of Illinois, or in any court of the United States of America sitting in Illinois, and the Company and each Guarantor and the Banks hereby submits to and accepts generally and unconditionally the jurisdiction of those courts with respect to its person and property, and, in the case of the Company and each Guarantor irrevocably appoints NWS-Illinois, whose address in Illinois is 2600 West 35th Street, Chicago, Illinois 60632, as its agent for service of process and irrevocably consents to the service of process in connection with any such action or proceeding by personal delivery to such agent or to the Company or such Guarantor, as the case may be, or by the mailing thereof by registered or certified mail, postage prepaid to the Company or such Guarantor at its address for notices pursuant to Section 8.2. The Company shall at all times maintain such an agent in Illinois for such purpose and shall notify the Banks and the Agent of such agent’s address in Illinois within ten days of any change of address. Nothing in this paragraph shall affect the right of the Banks and the Agent to serve process in any other manner permitted by law or limit the right of the Banks or the Agent to bring any such action or proceeding against the Company or any Guarantor or property in the courts of any other jurisdiction. The Company and each Guarantor and the Banks hereby irrevocably waives any objection to the laying of venue of any such action or proceeding in the above described courts.

        8.9     Table of Contents and Headings. The table of contents and the headings of the various subdivisions hereof are for the convenience of reference only and shall in no way modify any of the terms or provisions hereof.

        8.10     Construction of Certain Provisions. If any provision of this Agreement refers to any action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person, whether or not expressly specified in such provision.

        8.11     Integration and Severability. This Agreement, the Notes, and the Security Documents embody the entire agreement and understanding between the Company, the Guarantors and the Agent and the Banks, and supersede all prior agreements and understandings, relating to the subject matter hereof. In case any one or more of the obligations of the Company or any Guarantor under this Agreement, the Notes or any Security Document shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Company and the Guarantors shall not in any way be affected or impaired thereby, and such invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Company or any Guarantor under this Agreement, the Notes or any Security Document in any other jurisdiction.



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        8.12     Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or such condition exists.

        8.13     Interest Rate Limitation. Notwithstanding any provisions of this Agreement, the Notes or any Security Document, in no event shall the amount of interest paid or agreed to be paid by the Company exceed an amount computed at the highest rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Agreement, the Notes or any Security Document at the time performance of such provision shall be due, shall involve exceeding the interest rate limitation validly prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligations to be fulfilled shall be reduced to an amount computed at the highest rate of interest permissible under applicable law, and if for any reason whatsoever any Bank shall ever receive as interest an amount which would be deemed unlawful under such applicable law such interest shall be automatically applied to the payment of principal of the Advances outstanding hereunder (whether or not then due and payable) and not to the payment of interest, or shall be refunded to the Company if such principal and all other obligations of the Company to the Banks have been paid in full.

        8.14     Waiver of Jury Trial. The Banks, the Agent, the Company and the Guarantors, after consulting or having had the opportunity to consult with counsel, knowingly, voluntarily and intentionally waive any right any of them may have to a trial by jury in any litigation based upon or arising out of this Agreement or any related instrument or agreement or any of the transactions contemplated by this Agreement or any course of conduct, dealing, statements (whether oral or written) or actions of any of them. Neither any Bank, the Agent, any Guarantor nor the Company shall seek to consolidate, by counterclaim or otherwise, any such action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. These provisions shall not be deemed to have been modified in any respect or relinquished by any party hereto except by a written instrument executed by such party.

[THE REST OF THE PAGE INTENTIONALLY LEFT BLANK]



- - 67 -

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

Address for Notices



700 West Morris Street
Indianapolis, Indiana 46225
Attention:  James E. LaCrosse
Facsimile No.:  (317) 685-8810
NATIONAL WINE & SPIRITS, INC.



By:  
        Its:



- - 68 -

  LASALLE BANK NATIONAL
ASSOCIATION, Individually as a
Bank and as Agent



By:  
        Its



Address for Notices:
135 South LaSalle Street
Chicago, IL 60603
Attention: Michael S. Barnett
Facsimile No.:  (312) 904-0522



Commitment Amount:  $25,000,000



Percentage of Aggregate Commitment:  62.50%



Aggregate Commitment:  $40,000,000



- - 69 -

  NATIONAL CITY BANK OF INDIANA



By:  
Its



Address for Notices:
One National City Center
Indianapolis, IN 46225
Attention: John Lichtle
Facsimile No.:  (317) 267-7441



Commitment Amount:  $15,000,000



Percentage of Aggregate Commitment:  37.50%



Aggregate Commitment:  $40,000,000



- - 70 -

EX-12 4 exhibit12.htm Exhibit 12 - National Wine & Spirits, Inc.

Statement regarding computation of ratios
Exhibit (12)


  Years Ended March 31,
(in thousands)
  2003 2002 2001 2000 1999
 
Consolidated pretax income                        
   from continuing  
   operations   $ 15,789   $ 7,460   $ 14,125   $ 4,420   $ 987  
 
Interest    11,307    11,934    13,214    13,274    11,037  
 
Net amortization of debt  
   discount and premium  
   and issuance  
   expense    612    628    629    628    385  
 
Interest portion of rental  
   expense    1,424    1,440    1,422    1,251    1,122  
 
 
 
 
 
 
 
Earnings   $ 29,132   $ 21,462   $ 29,390   $ 19,573   $ 13,531  
 
 
 
 
 
 
 
Interest   $ 11,307   $ 11,934   $ 13,214   $ 13,274   $ 11,037  
 
Net amortization of debt  
   discount and premium  
   and issuance  
   expense    612    628    629    628    385  
 
Interest portion of rental  
   expense    1,424    1,440    1,422    1,251    1,122  
 
 
 
 
 
 
 
Fixed Charges   $ 13,343   $ 14,002   $ 15,265   $ 15,153   $ 12,544  
 
 
 
 
 
 
 
Ratio of earnings to fixed charges    2.2    1.5    1.9    1.3    1.1  
EX-21 5 exhibit21.htm Exhibit 21 - National Wine & Spirits, Inc.

List of subsidiaries
Exhibit (21)


Companies Doing business as State of Incorporation

National Wine & Spirits Corporation
35-0540650
700 West Morris Street
Indianapolis, IN 46225
(317) 636-6092
Same Indiana

National Wine & Spirits, Inc.
35-2064429
700 West Morris Street
Indianapolis, IN 46225
(317) 636-6092
Same Indiana

NWS - Illinois, LLC
36-4266415
2600 West 35th Street
Chicago, IL 60632
(773) 254-9000
Union Beverage Company Illinois

NWS, Inc.
36-3784235
2600 West 35th Street
Chicago, IL 60632
(773) 254-9000
Same Illinois

NWS Michigan, Inc.
38-3319025
17550 Allen Road
Brownstown, MI 48192
(734) 324-3000
Same Michigian

United States Beverage, LLC
36-4150241
700 Canal
Stamford, CT 06902
(203) 961-8215
Same Illinois

National Wine & Spirits, LLC
38-3467586
17550 Allen Road
Brownstown, MI 48192
(734) 324-3000
National Wine & Spirits of
Michigan, LLC
Michigan

EX-99.1 6 exhibit991.htm Exhibit 99.1 - National Wine & Spirits, Inc.

Forward-Looking Statements
Exhibit 99.1


        From time to time, the Company may make or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, and similar matters. Such statements are necessarily estimates reflecting the Company’s best judgment based on current information. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Such statements are usually identified by the use of words or phases such as “believes,” “anticipates,” “expects,” “estimates,” “planned,” “outlook,” and “goal.” Because forward-looking statements involve risks and uncertainties, the Company’s actual results could differ materially from those described in the forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experiences to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements.

        While it is impossible to identify all such factors, the risks and uncertainties that may affect the operations, performance and results of the Company’s business include the following:

(1)
economic and competitive conditions in the markets in which the Company operates;

(2)
strikes or other work stoppages affecting the Company or its major customers or suppliers;

(3)
the Company’s ability to continue to control and reduce its costs of storage and distribution;

(4)
the level of consumer demand in the states in which the Company operates for the Company’s line of alcohol-based beverages;

(5)
supplier consolidation could result in brand realignment and the loss of certain products and customers;

(6)
the risks associated with the reliance on one or a few significant suppliers, including the loss of revenue from any such supplier upon any termination of a supply relationship;

(7)
the impact of significant price increases or decreases in availability of certain alcohol-based beverages distributed by the Company;

(8)
the nature and extent of any current or future state and federal regulations regarding the distribution of alcohol-based beverages;

(9)
changes in financial markets affecting the Company’s financial structure and the Company’s costs of capital and borrowed money;

(10)
any other factors which may be identified from time to time in the Company’s periodic SEC filings and other public announcements.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements. The Company does not intend to update forward-looking statements.

EX-99.2 7 exhibit992.htm Exhibit 99.2 - National Wine & Spirits, Inc.

Exhibit 99.2

CERTIFICATIONS


I, James E. LaCrosse, certify that:

1.
I have reviewed this annual report on Form 10-K of National Wine & Spirits, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
As the registrant’s certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:

  a)
designed such disclosure controls and procedures 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 annual report is being prepared;

  b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

  c)
presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;

5.
I have disclosed, based on my most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

  b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.
I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  June 30, 2003



By:  /s/  James E. LaCrosse
James E. LaCrosse
Chief Executive Officer and
Chief Financial Officer
 
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